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, 1999 Commission File No. 1-12575
UTAH MEDICAL PRODUCTS, INC.
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(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
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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
12, 1999: 6,453,000
<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
June 30, 1999 and December 31, 1998 1
Consolidated Condensed Statements of Income for the
three and six months ended June 30, 1999 and June 30, 1998 2
Consolidated Condensed Statements of Cash Flows for the
six months ended June 30, 1999 and June 30, 1998 3
Notes to Consolidated Condensed 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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF
JUNE 30, 1999 AND DECEMBER 31, 1998
(in thousands - unaudited)
ASSETS JUNE 30, 1999 DECEMBER 31, 1998
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CURRENT ASSETS:
Cash $ 1,077 $ 1,367
Accounts receivable - net 4,114 4,531
Inventories 3,343 4,048
Other current assets 624 597
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Total current assets 9,158 10,543
PROPERTY AND EQUIPMENT - NET 11,462 12,489
INTANGIBLE ASSETS - NET 8,630 8,936
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TOTAL $29,250 $31,968
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $469 $525
Accrued expenses 1,511 1,886
Deferred revenue 0 2
Total current liabilities 1,980 2,413
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NOTES PAYABLE 1,752 3,098
DEFERRED INCOME TAXES 359 440
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Total liabilities 4,091 5,951
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STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value;
authorized - 5,000 shares; no
shares issued or outstanding
Common stock - $.01 par value;
authorized - 50,000 shares;
issued - June 30, 1999, 7,596
shares December 31, 1998, 8,046
shares 76 80
Cumulative foreign currency (1,155) (509)
translation adjustment
Retained earnings 26,238 26,446
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Total stockholders' equity 25,159 26,017
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TOTAL $29,250 $31,968
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see notes to consolidated condensed financial statements
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UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(in thousands - unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------
1999 1998 1999 1998
--------- --------- ---------- --------
NET SALES $ 7,320 $ 6,786 $ 14,338 $ 13,161
COST OF SALES 3,450 3,366 6,781 6,553
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GROSS MARGIN 3,870 3,420 7,557 6,608
------- ------- ------- --------
EXPENSES:
Selling, general and 1,722 1,602 3,434 3,212
administrative
Research & development 141 256 362 465
------- ------- ------- --------
Total 1,863 1,858 3,796 3,677
------- ------- ------- --------
INCOME FROM OPERATIONS 2,008 1,562 3,761 2,931
OTHER INCOME 106 171 221 627
------- ------- ------- --------
INCOME BEFORE INCOME 2,114 1,733 3,982 3,558
TAX EXPENSE
INCOME TAX EXPENSE 765 606 1,434 1,272
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NET INCOME $ 1,349 $ 1,127 $ 2,548 $ 2,286
======= ======= ======= ========
BASIC EARNINGS PER
SHARE $ 0.18 $ 0.14 $ 0.33 $ 0.27
======= ======= ======= ========
DILUTED EARNINGS PER
SHARE $ 0.18 $ 0.14 $ 0.33 $ 0.27
======= ======= ======= ========
SHARES OUTSTANDING -
BASIC 7,651 8,313 7,794 8,551
======= ======= ======= ========
SHARES OUTSTANDING -
DILUTED 7,662 8,342 7,796 8,622
======= ======= ======= ========
see notes to consolidated condensed financial statements
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UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(in thousands - unaudited)
JUNE 30,
------------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,548 $ 2,286
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Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,042 979
Provision for (recovery of) losses on (31) 26
accounts receivable
Loss on disposal of assets 1 40
Deferred income taxes (60) 64
Tax benefit attributable to exercise and
disposition of incentive stock options
and stock purchase rights 1 0
Changes in operating assets and liabilities:
Accounts receivable - trade 90 227
Accrued interest and other receivables 285 (119)
Inventories 743 1,180
Prepaid expenses (48) 3
Accounts payable (64) (93)
Accrued expenses (389) (434)
Deferred revenue (2) (43)
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Total adjustments 1,568 1,830
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Net cash provided by operating activities 4,116 4,116
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (281) (225)
Intangible assets (3) (235)
Proceeds from sale of property and equipment 0 11
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Net cash used in investing activities (284) (449)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 22 58
Common stock purchased and retired (2,784)
Decrease in note payable (1,343) (2,271)
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Net cash used in financing activities (4,105) (2,213)
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Effect of exchange rate changes on cash (17) 0
NET INCREASE (DECREASE) IN CASH (290) 1,454
CASH AT BEGINNING OF PERIOD 1,367 951
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CASH AT END OF PERIOD $1,077 $2,405
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $1,683 $1,106
Interest $76 $157
see notes to consolidated condensed financial statements
<PAGE>
UTAH MEDICAL PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED 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, 1998.
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, 1999 and December 31, 1998 (in thousands)
consisted of the following:
June 30, December 31,
1999 1998
--------- ---------
Finished goods $ 785 $ 1,041
Work-in-process 830 771
Raw materials 1,728 2,236
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Total $ 3,343 $ 4,048
(3) In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. UM believes that the adoption of
SFAS 133 will not have a material effect on the financial statements of the
Company.
(4) Effective June 4, 1999, UM modified its unsecured revolving line-of-credit
with First Security Bank, N.A. to modify certain financial covenants, which now
include maintaining a minimum amount of cash flow and a maximum leverage ratio.
Other terms remain the same.
(5) On May 26, 1999 UM announced a tender offer under which it would purchase
up to 800,000 of its shares at a price of $8.00 per share from shareholders who
tendered and did not withdraw their shares prior to July 9, 1999. (See Note
(8), Events Subsequent to June 30, 1999)
(6) 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 and six months ending June
30, 1999 was, respectively (in thousands) $1,115 and $1,902.
(7) 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,
year 2000 problems, 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,
third party reimbursement, and access to U.S. hospital customers, as that access
is increasingly constrained by group purchasing decisions.
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.
(8) Events subsequent to June 30, 1999:
On July 6, 1999 UM extended the expiration date of its tender offer from July
9, 1999 to July 23, 1999 and increased the number of shares it was seeking in
the offer from 800,000 to 1,000,000. The price per share remained at $8.00.
On August 9, 1999 UM reported final results of its tender offer. A total of
1,273,322 shares were validly tendered and not withdrawn, and 1,153,945 of those
shares were purchased by the Company at a price of $8.00 per share. The shares
purchased represent about 15% of shares outstanding prior to the tender offer.
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. Dollar amounts
are in thousands, except per-share amounts and where noted.
a) Overview
All key measures of UM's financial performance were positive in 2Q 1999
compared to 2Q 1998. Sales in 2Q 1999 increased 8% from 2Q 1998, due to the
contribution from GescoR neonatal products. Gross margins improved as
manufacturing costs increased at less than half the rate of the sales increase.
Further leverage in operating margins was obtained in 2Q 1999 as a result of
holding operating expenses flat as sales increased, compared to 2Q 1998.
Earnings per share (EPS) increased 30% in 2Q 1999 compared to 2Q 1998. Over the
same period, EPS grew faster than operating profits, despite a decrease in other
income, because there were 680,000 fewer shares outstanding in 2Q 1999. Results
for the first half (1H) of 1999 compared to 1H 1998 in a similar way with the
quarterly results comparisons detailed above, except EPS did not increase as
much. Other income declined $406 in 1H 1999 compared to 1H 1998, mainly due to
UM's receipt of a $321 payment for use of its technology in 1Q 1998, which did
not recur in 1H 1999. With a strong cash flow, UM was able to reduce its long
term debt balance by $1.3 million as well as repurchase 452,000 shares of its
stock for $2.8 million in 1H 1999.
b) Revenues
Following the acquisition of the Gesco neonatal product line from CR Bard in
third quarter 1998, UM divides its sales into four product-line categories: 1)
obstetrics, comprised of labor and delivery management tools for monitoring
fetal and maternal well-being, for improving clinician safety and for ease in
performing delivery procedures; 2) gynecology/electrosurgery/urology, comprised
of tools for gynecological office/clinician practices, including LETZ,
endometrial sampling, diagnostic laparoscopy, and other MIS procedures;
specialty excision and incision tools; conservative urinary incontinence therapy
devices; and urology tools; 3) neonatal, comprised of devices for gaining
vascular access, administering vital fluids, maintaining a neutral thermal
environment, and other specialized tools used in the care of critically-ill
infants; and 4) blood pressure monitoring/accessories/other, comprised of
transducer systems for invasively monitoring blood pressure on a continuous
basis, along with products sold on an OEM basis to other companies. UM's
primary revenue contributors generally enjoy a dominant market share and
typically have important product features protected by patents.
Sales in the obstetrics product category were $3,426 in 2Q 1999, compared to
$3,633 in 2Q 1998. First half 1999 sales of obstetrics products were $6,828
compared to $7,031 in 1H 1998. The decline was due to weakness in vacuum-
assisted delivery system (VADS) sales. In April 1999, UM introduced a mushroom
shaped soft rubber cup, the Secure Cup , designed to provide a balance between
holding power and safety.
Gynecology/electrosurgery/urology product sales were up 2% in 2Q 1999 over
2Q 1998, and represented 15% of total revenues. Sales in this category were
$1,081 in 2Q 1999, compared to $1,059 in 2Q 1998. Comparing 1H 1999 to 1H 1998,
gynecology/electrosurgery/urology sales were $2,118 and $2,082, respectively.
Gains in sales of LibertyR, Pathfinder , and loop electrodes were offset
somewhat by lower sales of OEM vacuum erection pumps. With the recent
completion of an independent study concluding that UM's patented EpitomeR
scalpel provides a significant improvement over standard electrosurgical blades
in wound healing and patient comfort, UM looks to improve sales of its
electrosurgical electrodes during the remainder of 1999. Marketing this group
of products requires multiple sales call points and extensive clinical training
and familiarization time with users, among other economic challenges.
In late July 1998, a significant UM initiative was the acquisition of the
neonatal product line of Gesco International. Because of the acceptance of the
renowned Gesco products and their growth potential, UM now separates neonatal
product sales and BPM product sales. Compared to 2Q 1998 and 1H 1998, UM's 2Q
1999 and 1H 1999 neonatal product sales grew 374% and 366%, respectively.
Neonatal product sales were $940 in 2Q 1999, compared to $198 in 2Q 1998, and
represented 13% of total revenues in 2Q 1999. Sales in this product category
were $1,766 in 1H 1999, compared to $379 in 1H 1998. UM's growth throughout
1999 is expected to be primarily driven by the neonatal product line.
BPM and accessories sales represented 26% of 2Q 1999 sales, declining 2%
from the same quarter of the prior year. Sales of BPM products in 2Q 1999 were
$1,873, compared to $1,897 in 2Q 1998, and were $3,626 in 1H 1999 compared to
$3,665 in 1H 1998. In this category, UM depends heavily on the marketing
efforts of other medical device companies (the OEM channel), both in the U.S.
and overseas. Global OEM sales declined 7% in 2Q 1999 from 2Q 1998 and 8% in 1H
1999 compared to the same period of 1998. Global OEM sales in 2Q 1999 were 15%
of total sales, compared to 17% in 2Q 1998 and 14% of 1H 1999 sales compared to
16% of 1H 1998 sales. UM projects demand for its well-accepted BPM products
will remain stable for the foreseeable future.
Foreign sales were $1,375 and $2,571 in 2Q and 1H 1999, respectively,
compared to $1,235 and $2,477 in 2Q and 1H 1998, respectively. Foreign sales
represented 19% of global sales in 2Q 1999 compared to 18% in the same quarter
of 1998. The increase is due to higher direct foreign sales, across all four
product categories. Ireland operations shipped 58% and 61% of foreign sales in
2Q and 1H 1999, respectively, compared with 66% and 63% in the same periods of
1998, respectively. Ob/Gyn and neonatal foreign sales increased 30% to $312 in
2Q 1999 compared to $240 in 2Q 1998. Ob/Gyn and neonatal product sales were 23%
of 2Q 1999 foreign sales, compared to 19% in 2Q 1998. UM expects to continue to
increase foreign sales as it recruits effective international distributors.
c) Gross Profit
The average gross profit margin (GPM), the surplus remaining after
subtracting costs of manufacturing products from net revenues, in 2Q and 1H 1999
was 53% compared to 50% in 2Q and 1H of 1998. Manufacturing operations in all
locations (Ireland, Oregon and Utah) performed very well in 2Q and 1H 1999. UM
management believes that achieving an average GPM above 50% is necessary to
successfully cover the significant sales and marketing, research and
development, and administrative expenses associated with a growth company in a
highly complex and competitive marketplace. The improving average GPM trend is
explained by observing that UM has become less dependent on lower margin OEM
sales, has developed its own direct sales force to replace lower margin sales
through distributors, and has increased revenues without a comparable increase
in manufacturing overhead.
d) Income from Operations
Operating profit, or income from operations, is the surplus remaining after
subtracting operating expenses from gross profits. 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). In both 2Q and 1H 1999, operating profits increased about 28%, more than
three times the growth rate in sales for both periods, and about two times the
growth rate in gross profits over the same periods. Total operating expenses
were 25.5% and 26.5% of sales in 2Q and 1H 1999, respectively, compared to 27.4%
and 27.9% of sales in 2Q and 1H 1998, respectively.
SG&A expenses in 2Q 1999 decreased to 23.5% of revenues from 23.6% of 2Q
1998 revenues, and were 24.0% on 1H 1999 revenues compared to 24.4% of 1H 1998
revenue. The G&A expenses portion increased to $758 in 2Q 1999 from $633 in 2Q
1998, and to $1,497 in 1H 1999 from $1,299 in 1H 1998, due mostly to increased
expenses from goodwill amortization (GWA) associated with recent acquisitions.
GWA was $284 in 1H 1999, compared to $168 in 1H 1998. Since the result of the
acquisitions were marketable new products for UM, these expenses can be regarded
as a surrogate to R&D expenses although they are captured in G&A.
S&M expenses are the costs of promoting, selling and providing customer
support of UM's products. Although sales and GPMs improve when sales are made
through directly employed sales representatives in lieu of independent
distributors or OEM customers, S&M operating expenses increase as an offset.
Global sales in 2Q and 1H 1999 increased 8% and 9%, respectively, while S&M
expenses decreased slightly in 2Q 1999 and increased just 1% in 1H 1999,
improving the productivity of S&M resources. The majority of UM's S&M expenses
pertain to the U.S. "direct sales" portion of its business. U.S. direct sales
increased 12% in 1H 1999 from the same period of 1998. At the end of 1998, UM
terminated all former Gesco distributors and one other U.S. distributor
previously representing about 3% of domestic direct sales.
R&D expenses in 2Q and 1H 1999 were 1.9% and 2.5% of sales, respectively,
compared to 3.8% and 3.5% of sales in 2Q and 1H 1998, respectively. For the
last six quarters, UM's fetal tissue pH project has consumed about 60% of total
R&D expenses. During that time, UM has not achieved some important milestones
relating to the calibration of the device in living tissue. Because of that, UM
has focused it's efforts and reduced spending on this project. Other key R&D
projects receiving funding include development of the Fowler Endocurette,
enhancements to both CMI VADS and Gesco neonatal product lines, and continuing
improvements to Liberty, Deltran Plus and Cordguard. A number of important
improvements in materials and configuration of components were also achieved
which will reduce manufacturing costs and/or increase product quality. At UM,
R&D resources are kept involved in the support of manufacturing processes, as UM
finds it makes long term sense to keep its most technical people involved with
products throughout their life cycles.
e) Non-operating (Other) income.
Non-operating income includes primarily royalties from licensing UM's
technology to other companies, but also interest and capital gains from
investing the Company's cash offset by interest expenses and bank fees on the
revolving line of credit, and gains or losses from the sale of assets.
Non-operating income in 2Q 1999 was $106, compared to $171 in 2Q 1998. For
first half 1999, non-operating income was $221 compared to $627 in 1H 1999.
There was an unusual payment received in 1Q 1998 for the use of UM's pressure
monitoring technology, which is subject to a confidentiality agreement.
Royalties received in 2Q 1999 were $61 less than in 2Q 1998, and were $80 less
in 1H 1999 than in 1H 1998. Interest expenses and bank fees associated with the
line of credit were $40 in 2Q 1999 compared to $68 in 2Q 1998. Assuming no
change in current interest rates and no new borrowing to finance an unusual
capital requirement, total 1999 net non-operating income, after completion of
the tender offer, is expected to be about $212. Royalties received vary from
period to period depending on the desire and/or success of other companies in
selling products licensed by UM, and the remaining life of UM's patents.
f) Earnings Before Income Taxes
Earnings before income taxes (EBT) result from adding UM's non-operating
income to its operating profits. Second quarter and first half 1999 EBT, as a
percentage of sales, was 28.9% and 27.8%, respectively, compared to 25.2% and
27.0% in 2Q and 1H 1998, respectively. These profits are comparable to profits
generated by well-performing companies with twice or more the sales of UM. EBT
in 2Q and 1H 1999 were up 22.0% and 11.9%, respectively, relative to the same
periods of prior year.
g) Net Income and EPS
Net Income is EBT minus income taxes. UM's Net Income expressed as a
percentage of sales ranks in the top tier of all U.S. publicly-traded companies
at 18% and 17% for 1H 1999 and 1998, respectively. Net Income in 2Q 1999 was up
19.7% from 2Q 1998. The effective income tax rate in 2Q 1999 was 36.2% compared
to 35.0% in 2Q 1998. The first half 1999 tax rate was 36.0% compared to 35.8%
in 1H 1998. Fluctuations in the tax rate result from 1) the use of a foreign
sales corporation, 2) differences in distribution of state income taxes, 3)
differences in profitability of the Ireland subsidiary which is taxed at a 10%
rate on manufactured products, 4) changes in the amount of non-deductible
goodwill expense resulting from a new acquisition, and 5) other factors such as
R&D tax credits and actual litigation costs versus accrued expenses. The
amortization of goodwill associated with the 1997 Columbia Medical, Inc.
acquisition is not tax deductible.
Earnings per share 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 2Q 1999 EPS were up
30% compared to 2Q 1998, and 1H 1999 EPS increased 19% compared to the same
period of 1998. Second quarter 1999 weighted average diluted common shares (the
number used to calculate diluted EPS) (in thousands) were down 8.2% compared to
2Q 1998. First half 1999 diluted shares decreased 9.6% from 1H 1998. Actual
outstanding common shares as of June 30, 1999 (in thousands) were 7,596,
compared to 8,313 shares at June 30, 1998. As of early August 1999, UM is
completing a tender offer under which it is purchasing about 1.15 million
shares, about 15% of shares outstanding at June 30, 1999. Future EPS can be
increased by investing current Net Income to increase future net profits through
expanded product offerings and profitable business operations, or by
repurchasing stock, thereby reducing the number of outstanding shares. UM
believes that shareholder value is improved by consistently increasing EPS.
h) Return on shareholders' equity (ROE).
Return On Shareholders' Equity (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 equity financing that would dilute
shareholder interests. For example, a 20% ROE will support 20% growth in
revenues. Achieving growth in revenues and EPS without diluting shareholder
interests maximizes shareholders' value. ROE in 2Q 1999 was 21%, compared to
19% in 1Q 1998.
First half 1999 ROE was 20% compared 19% in 1H 1998.
i) Cash Flows
EBITDA (EBT, adjusted for non-cash depreciation and amortization expenses,
asset dispositions, and interest expense and bank fees associated with the line
of credit) is a good measure of UM's ability to generate cash. First half 1999
EBITDA were $5,108, up 8% from $4,737 in 1H 1998, or as a ratio of sales, 36% in
both periods. EBITDA has averaged 35% of sales over the last five years. The
extraordinarily strong cash generation performance resulted from a combination
of excellent operating earnings, depreciation of existing assets greatly
exceeding replacement assets, and receipt of payments for the use of UM's
technology. Because of EBITDA performance, UM was able to reduce its long term
revolving line of credit balance at the same time it repurchased its own stock.
Cash (and equivalent) balances were $1,077 at the end of 1H 1999, a
reduction of $290 from December 31, 1998. The decrease was primarily due to the
exercise and expiration of put contracts which required UM to set aside the full
purchase price of the stock under contract. UM effectively maintains zero-
balance "sweep" cash account balances that minimize the line of credit balance,
except for amounts held to meet operating requirements in Ireland and separate
physical reserves set aside for litigation expenses.
Net cash provided by operating activities, including adjustments for
depreciation and other non-cash operating expenses, along with changes in
working capital, was essentially the same in both 1H 1999 and 1998. Net working
capital changes provided $614 to 1H 1999 cash, with the largest contributions
(adjusted for exchange rate changes) being a $743 reduction in inventories and a
$285 decrease in accrued interest and other receivables, offset partially by a
$390 decrease in accrued expenses.
Investing activities in 1H 1999 were comprised almost entirely in
improvements to property and equipment. Financing activities in 1H 1999 used
cash of $1,343 to reduce the line of credit balance. In addition, 452,000
shares of stock were repurchased at an average cost, including commissions, of
$6.15 per share. UM received $22 in 1H 1999 compared to $58 in 1H 1999 from
issuing stock (on exercise of employee options).
Planned future 1999 capital expenditures, will keep facilities, equipment
and tooling in good working order. In addition to the capital expenditures, UM
plans to use cash for selective infusions of technological, marketing or product
manufacturing rights to broaden the Company's product offerings, for continued
share repurchases while the price of the stock remains extremely undervalued,
and, if available for a reasonable price, acquisitions that strategically fit
UM's business and are accretive to performance.
j) Assets and Liabilities
First half-ending total assets were lower primarily because of stock
repurchases, from reductions in inventories and other current assets, and
because purchases of new property and equipment and intangibles were less than
one-half depreciation and amortization rates. Inventory turns increased to 3.9
in 2Q 1999 from 2.7 in 2Q 1998 due to higher sales together with lower inventory
levels.
The working capital decline of $952 in 1H 1999 was primarily the result of
reductions in accounts receivable and inventories. Through its excellent
profitability, UM expects to internally finance any working capital growth that
is needed to support growth in sales activity. In 1Q 1999, UM's total debt
ratio dropped to 14% of total assets from 19% at the end of 1998, due mainly to
reductions in the line of credit.
k) Management's Outlook
UM now has a focus in two special areas of hospitals in the U.S., L&D
departments and NICU's, where it can supply a robust line of well-accepted and
differentiated products. The success of the Gesco neonatal product line will be
most responsible for UM's short-term growth.
Access to U.S. hospital customers is increasingly constrained by group
purchasing decisions. To be successful in its marketing programs, UM must
provide clinicians with the information they need to make important judgments
about using certain products in obtaining optimal clinical outcomes, which
include minimizing risk of complications. UM must also be able to provide
support for physicians to explain those needs to hospital administrators who are
primarily focused on reducing current operating costs.
UM's growing number of gynecology practice tools are intended to leverage
UM's activity with physicians outside the hospital. The niche markets for which
UM's gynecology/electrosurgery/urology products are targeted have proven to
require many and varied marketing initiatives. They require individual user
training together with clear evidence of improved outcomes. UM's financial
strength and stability allows it to patiently investigate economic ways to
increase the rate of adoption of its newer products.
UM will continue to maintain a long-term perspective and seek to strengthen
its disease management focus with physicians who it believes are ultimately
responsible for their patients' well-being.
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 in all of its operations globally. UM has developed a 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 known internal systems (both Information
Technology and Non-IT), along with testing of those systems has been completed.
Following upgrade or replacement, along with subsequent testing of systems
initially identified as non-compliant, UM now believes its internal systems are
Y2K compliant. The version of the integrated manufacturing control software
(Dataworks) UM uses has been upgraded and successfully tested.
UM has 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 expected to continue throughout 1999.
Costs
UM does not expect its Y2K costs to be material. UM's products are all
compliant and all significant replacements or upgrades to internal systems are
complete. Total cost expected to be less than (in thousands) $75.
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 been
confirmed compliant, the risk of these systems failing also appears to be low.
However, although considered unlikely, it is possible that a major Y2K 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.
UM believes external Y2K problems constitute a higher magnitude of risk to its
business. 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 deal adequately with major external
infrastructure failures such as in communications, transportation, or utilities.
However, such failures would likely not impact UM any more 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:
During the quarter ended June 30, 1999, the Company filed no reports on
Form 8-K.
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: 8/12/99 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 JUNE 30, 1999, AND STATEMENTS OF OPERATIONS FOR THE
QUARTER ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,077,000
<SECURITIES> 0
<RECEIVABLES> 3,976,000
<ALLOWANCES> (37,000)
<INVENTORY> 3,343,000
<CURRENT-ASSETS> 9,158,000
<PP&E> 21,736,000
<DEPRECIATION> (10,275,000)
<TOTAL-ASSETS> 29,250,000
<CURRENT-LIABILITIES> 1,980,000
<BONDS> 0
<COMMON> 0
0
76,000
<OTHER-SE> 25,083,000
<TOTAL-LIABILITY-AND-EQUITY> 29,250,000
<SALES> 14,338,000
<TOTAL-REVENUES> 14,338,000
<CGS> 6,781,000
<TOTAL-COSTS> 3,796,000
<OTHER-EXPENSES> (221,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,982,000
<INCOME-TAX> 1,434,000
<INCOME-CONTINUING> 2,548,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,548,000
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.33
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