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: March 31, 1999 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
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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 May
12, 1999: 7,638,000.
<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
March 31, 1999 and December 31, 1998 1
Consolidated Condensed Statements of Income for the
three months ended March 31, 1999 and March 31, 1998 2
Consolidated Condensed Statements of Cash Flows for the
three months ended March 31, 1999 and March 31, 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
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF
MARCH 31, 1999 AND DECEMBER 31, 1998
(in thousands - unaudited)
ASSETS MARCH 31, DECEMBER
1999 31, 1998
--------- --------
CURRENT ASSETS:
Cash $ 595 $ 1,367
Accounts receivable - net 4,421 4,531
Inventories 3,767 4,048
Other current assets 617 597
---------- ---------
Total current assets 9,400 10,543
PROPERTY AND EQUIPMENT - NET 11,934 12,489
INTANGIBLE ASSETS - NET 8,783 8,936
---------- ---------
TOTAL $ 30,117 $ 31,968
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 636 $ 525
Accrued expenses 2,060 1,886
Deferred revenue 0 2
---------- ---------
Total current liabilities 2,696 2,413
NOTES PAYABLE 1,713 3,098
DEFERRED INCOME TAXES 359 440
---------- ---------
Total liabilities 4,768 5,951
---------- ---------
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 - March 31, 1999,
7,806 shares December 31, 1998, 8,046 shares 78 80
Cumulative foreign currency translation
adjustment (922) (509)
Retained earnings 26,193 26,446
---------- ---------
Total stockholders' equity 25,349 26,017
---------- ---------
TOTAL $ 30,117 $ 31,968
========== =========
see notes to consolidated condensed financial statements
<PAGE> 1
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------- ------------
NET SALES $ 7,018 $ 6,375
COST OF SALES 3,331 3,187
--------- ---------
GROSS MARGIN 3,687 3,188
--------- ---------
EXPENSES:
Selling, general and administrative 1,712 1,610
Research & development 222 209
--------- ---------
Total 1,934 1,819
--------- ---------
INCOME FROM OPERATIONS 1,753 1,369
OTHER INCOME 115 456
--------- ---------
INCOME BEFORE INCOME TAX EXPENSE 1,868 1,825
INCOME TAX EXPENSE 668 666
--------- ---------
NET INCOME $ 1,200 $ 1,159
========= =========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.15 $ 0.14
========= =========
EARNINGS PER COMMON SHARE
ASSUMING FULL DILUTION $ 0.15 $ 0.14
========= =========
SHARES OUTSTANDING - BASIC 7,939 8,305
========= =========
SHARES OUTSTANDING - DILUTED 7,939 8,313
========= =========
see notes to consolidated condensed financial statements
<PAGE> 2
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,200 $ 1,159
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 526 486
(Recovery of)/Provision for losses on (3) 38
accounts receivable
(Gain)/Loss on disposal of assets 1 (9)
Deferred income taxes (39) 0
Changes in operating assets and liabilities:
Accounts receivable - trade (142) 166
Accrued interest and other receivables 216 (267)
Inventories 291 299
Prepaid expenses (63) (62)
Accounts payable 108 172
Accrued expenses 164 169
Deferred revenue (2) (21)
--------- ---------
Total adjustments 1,057 971
--------- ---------
Net cash provided by operating activities 2,257 2,130
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (178) (75)
Intangible assets (1) (227)
Proceeds from sale of property and equipment 0 9
--------- ---------
Net cash used in investing activities (179) (291)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock purchased and retired (1,455) 0
Decrease in note payable (1,384) (1,525)
--------- ---------
Net cash used in financing activities (2,839) (1,525)
--------- ---------
Effect of exchange rate changes on cash (11) (11)
NET INCREASE (DECREASE) IN CASH (772) 303
CASH AT BEGINNING OF PERIOD 1,367 951
--------- ---------
CASH AT END OF PERIOD $ 595 $ 1,254
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
income taxes $ 375 $ 59
Interest $ 40 $ 91
see notes to consolidated condensed financial statements
<PAGE> 3
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 March 31, 1999 and December 31, 1998 (in thousands)
consisted of the following:
March 31, December 31,
1999 1998
--------- ---------
Finished goods $ 922 $ 1,041
Work-in-process 832 771
Raw materials 2,013 2,236
------- -------
Total $ 3,767 $ 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 March 25, 1999, UM modified its unsecured revolving line-of-
credit with First Security Bank, N.A. to extend the date of the note by one
year, now March 25, 2001. Other terms remain the same.
(5) 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 March 31, 1999 was
(in thousands) $786.
(6) 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.
<PAGE> 4
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.
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. Dollar amounts are
in thousands, except per-share amounts and where noted.
a) First Quarter (1Q) Overview
All key measures of UM's financial performance were positive in 1Q 1999
compared to 1Q 1998. Sales in 1Q 1999 increased 10% from 1Q 1998, due to the
contribution from GescoR neonatal products. Gross margins improved as UM
reduced manufacturing overhead costs while sales and production increased.
Further leverage in operating margins was obtained in 1Q 1999 as a result of
holding operating expenses to a 6% increase while sales increased 10%, compared
to 1Q 1998. Earnings per share (EPS) were up 8% compared to 1Q 1998. EPS grew
less than operating profits because in 1Q 1998, UM received a $321 payment for
use of its technology, which did not recur in 1Q 1999. With a strong cash flow,
UM was able to reduce its long term debt balance by $1.4 million as well as
repurchase another 239,500 shares of its stock for $1.5 million in 1Q 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.
<PAGE> 5
Sales in the obstetrics product category were $3,402 in 1Q 1999, compared
to $3,398 in 1Q 1998. Sales of the market-leading IUP catheter, INTRANR Plus,
increased modestly in 1Q 1999 compared to 1Q 1998 while vacuum-assisted delivery
systems (VADS) sales decreased 12% over the same period. In May 1998, the FDA
issued an advisory which warned of increases in reported injuries in the use of
VADS. The advisory appears to have caused a slow-down in usage as hospitals
evaluated their protocols. UM responded by providing additional written
instructions for use to all its users, and offering assistance in training. In
September 1998, The American College of Obstetricians and Gynecologists issued a
formal Committee Opinion that strongly recommended continued use of VADS, when
used by appropriately trained physicians. 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 1% in 1Q 1999 over
1Q 1998, and represented 15% of total revenues. Sales in this category were
$1,036 in 1Q 1999, compared to $1,023 in 1Q 1998. 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 1Q 1998, UM's 1Q 1999 neonatal
product sales grew 356%. Neonatal product sales were $826 in 1Q 1999, compared
to $181 in 1Q 1998, and represented 12% of total revenues in 1Q 1999. UM's
growth throughout 1999 is expected to be primarily driven by the neonatal
product line.
BPM and accessories sales represented 25% of consolidated 1Q 1999 sales,
declining 1% from the same quarter of the prior year. Sales of BPM products in
1Q 1999 were $1,753, compared to $1,771 in 1Q 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 9% in 1Q
1999 from 1Q 1998. Global OEM sales in 1Q 1999 were 12% of total sales,
compared to 16% in 1Q 1998, confirming that UM is now depending less on the
marketing efforts of other medical device companies.
Foreign sales were $1,196 in 1Q 1999 compared to $1,242 in 1Q 1998, and
represented 17% of global consolidated sales in 1Q 1999 compared to 19% in the
same quarter of 1998. The downward trend is due to lower foreign OEM sales,
particularly for BPM products in the Far East. Historically, practically all
international sales have been BPM products. Ireland operations shipped 64% of
foreign sales in 1Q 1999, compared with 61% in 1Q 1998. Ob/Gyn and neonatal
foreign sales increased 36% to $272 in 1Q 1999 compared to $200 in 1Q 1998 due
to strong increases in both the neonatal and obstetrics categories. Ob/Gyn and
neonatal product sales were 23% of 1Q 1999 foreign sales, compared to 16% in 1Q
1998.
c) Gross Profit
The average gross profit margin (GPM), the surplus remaining after
subtracting costs of manufacturing products from net revenues, in 1Q 1999 was
52.5% compared to 50.0% in 1Q 1998. Manufacturing operations in all locations
(Ireland, Oregon and Utah) performed very well in 1Q 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
<PAGE> 6
developed its own direct sales force to replace lower margin sales through
distributors, and has reduced the percentage of its sales of low margin blood
pressure monitoring products. Offsetting influences are expected to result in
GPM of about 52% throughout 1999.
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 1Q 1999, operating profits increased 28%, exceeding the 10% increase
in sales and the 16% increase in gross profits over the same period. Total
operating expenses were 27.6% of sales in 1Q 1999 compared to 28.5% of sales in
1Q 1998.
SG&A expenses in 1Q 1999 decreased to 24.4% of revenues from 25.3% of 1Q
1998 revenues. The G&A expenses portion increased to $739 in 1Q 1999 from $666
in 1Q 1998 due mostly to increased expenses from goodwill amortization (GWA)
associated with recent acquisitions. GWA was $142 in 1Q 1999, compared to $84 in
1Q 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 1Q 1999 increased 10% while S&M expenses increased 3%, 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
14% in 1Q 1999 from the same quarter 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 1Q 1999 were 3.2% of sales compared to 3.3% of sales in 1Q
1998. Key R&D projects receiving funding include UM's novel fetal pH monitoring
program, the 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. UM expects to continue R&D expenses at approximately the same dollar
level during the remainder of 1999.
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 1Q 1999 was $115, compared to $456 in 1Q 1998. 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 1Q 1999 were $19 less than in the same quarter of the
prior year. Interest expenses and bank fees associated with the line of credit
were $43 in 1Q 1999 and $93 in 1Q 1998. Assuming no change in current interest
rates and no new borrowing to finance an unusual capital requirement, total 1999
net non-operating income is expected to be about $450. Royalties received vary
from period to period depending on the desire and/or success of other companies
in selling products licensed by UM.
f) Earnings Before Income Taxes
Earnings before income taxes (EBT) result from adding UM's non-operating
income to its operating profits. First quarter 1999 EBT, as a percentage of
sales, was 26.6% compared to 28.6% in 1Q 1998. These profit margins are all
<PAGE> 7
extremely high when compared with similar firms in the medical device industry,
or other industries. The resulting profit dollars are equivalent to profits
generated by well-performing companies with twice or more the sales of UM. EBT
in 1Q 1999 were up only 2.4% relative to the prior year, while sales were up
10.1%, because of the lower non-operating income in 1Q 1999.
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 17% and 18% for 1Q 1999 and 1998, respectively. Net Income in 1Q 1999 was up
3.5% from 1Q 1998. The effective income tax rate in 1Q 1999 was 35.8% compared
to 36.5% in 1Q 1998. Fluctuations in the tax rate resulted 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 1Q 1999 EPS were up 8%
compared to 1Q 1998. First quarter 1999-ending weighted average number of
diluted common shares (the number used to calculate diluted EPS) (in thousands)
were down 4.5% compared to 1Q 1998. Actual outstanding common shares as of
March 31, 1999 were 7,806, compared to 8,305 shares at March 31, 1998. 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 any external 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 1Q 1999 was 19%, compared to
20% in 1Q 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 quarter
1999 EBITDA was $2,438, up slightly from $2,395 in 1Q 1998, or as a ratio of
sales, 35% in 1Q 1999 and 38% in 1Q 1998. 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 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 aggressively purchased its own stock.
Cash (and equivalent) balances were $595 at the end of 1Q 1999, a
reduction of $772 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 $127 higher in 1Q 1999, compared to 1Q 1998. Net working
capital changes provided $572 to 1Q 1999 cash, with the largest contributions
(adjusted for exchange rate changes) being a $291 reduction in inventories, a
$216 decrease in accrued interest and other receivables, and a $164 increase in
accrued expenses.
Investing activities in 1Q 1999 were comprised almost entirely in
improvements to property and equipment. Financing activities in 1Q 1999 used
cash of $1,384 to reduce the line of credit balance. In addition, 239,500
shares of stock were repurchased at an average cost, including commissions, of
$6.07 per share. No stock was issued in the first quarter of either 1999 or
1998.
<PAGE> 8
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 quarter-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 3.4
in 1Q 1999 from 2.3 in 1Q 1998 due to higher sales together with lower inventory
levels.
The working capital decline of $1,426 in 1Q 1999 was primarily the result
of reductions in cash 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
less than 16% 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/electro-surgery/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 initial testing of those systems has been
completed. These efforts show that most, but not all of the systems UM relies
on to manufacture, test, assemble, and package its products are Y2K compliant.
The version of the integrated manufacturing control software (Dataworks) UM uses
was recently upgraded and is currently being tested to ensure it is Y2K
compliant. Other systems that were identified as non-compliant either have been
or are scheduled to be updated prior to May 31, 1999. Solutions to all
identified Y2K problems are expected to be in place, along with Company-wide Y2K
compliance, by July 31, 1999.
<PAGE> 9
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 ongoing.
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 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 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, 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.
<PAGE> 10
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 March 31, 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: 5/12/99 By: /s/ Kevin L. Cornwell
Kevin L. Cornwell
CEO and CFO
<PAGE> 11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF MARCH 31, 1999, AND STATEMENTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 595,000
<SECURITIES> 0
<RECEIVABLES> 4,239,000
<ALLOWANCES> (65,000)
<INVENTORY> 3,767,000
<CURRENT-ASSETS> 9,400,000
<PP&E> 21,981,000
<DEPRECIATION> (10,047,000)
<TOTAL-ASSETS> 30,117,000
<CURRENT-LIABILITIES> 2,696,000
<BONDS> 0
<COMMON> 0
0
78,000
<OTHER-SE> 25,271,000
<TOTAL-LIABILITY-AND-EQUITY> 30,117,000
<SALES> 7,018,000
<TOTAL-REVENUES> 7,018,000
<CGS> 3,331,000
<TOTAL-COSTS> 1,934,000
<OTHER-EXPENSES> (115,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,868,000
<INCOME-TAX> 668,000
<INCOME-CONTINUING> 1,200,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,200,000
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
