UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10‑K/ A
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019 |
| OR |
□ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ____________ to ___________ |
Commission File No. 001-12575 |
UTAH MEDICAL PRODUCTS INC.INC
(Exact name of registrantRegistrant as specified in its charter)
Utah | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
7043 South 300 West | |
84047 | |
| (Address of principal executive offices) |
(801) 566‑1200 | |
| (Registrant’s telephone number, including area | |
| Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each | Trading Symbol: | Name of each exchange on which |
| Common | NASDAQ | |
Securities registered pursuant to Section 12(g) of the Act: None | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐□ No ☒⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐□ No ☒⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 ☒⌧ No ☐□
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒⌧ No ☐□
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an. "emergingan emerging growth company"company. See the definitions of "large“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company"company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer □ | Accelerated filer ⌧ | |
Non-accelerated filer □ | Smaller reporting company □ | |
| Emerging growth company | □ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the SecuritiesExchange Act. ☐□
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐□ No ☒⌧
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. As of June 30, 2018,2019, the aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant was $376,542,268.$326,703,722.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of March 1, 2019,12, 2020, common shares outstanding were 3,722,610.
| The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: None. |
EXPLANATORY NOTE
This Amendment No. 1 to Form 10-K (this "Amendment") amends the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 originally filed with the Securities and Exchange Commission (the "SEC") on March 16, 2020 (the "Original Filing") by Utah Medical Products, Inc., a Utah corporation. As used herein, "UTMD," the "Company," "we," "our," and similar terms refer to Utah Medical Products, Inc. and, where appropriate, its wholly owned subsidiaries, unless the context indicates otherwise. We are filing this Amendment to present the information required by Part III of Form 10-K because we will not file UTMD’s definitive proxy statement within 120 days of the end of our fiscal year ended December 31, 2019. In particular, this Amendment amends the cover page, Items 10 through 14 of Part III and the Exhibit Index of the Original Filing and includes certifications as required by Section 302 of the Sarbanes-Oxley Act of 2002, as amended, as exhibits in accordance with Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
Except as described above, no other changes have been made to the Original Filing. The Original Filing continues to speak as of the date of the Original Filing, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Filing. Accordingly, this Amendment should be read in conjunction with the Original Filing and our other filings with the SEC.
2
Utah Medical Products, Inc.
Form 10-K/ A
Table of Contents
| Item 10 | Directors, Executive Officers and Corporate Governance | ||
| Item 11 | Executive Compensation | ||
| Item 12 | Security Ownership of Certain Beneficial Owners and Management | 12 | |
| Item 13 | Certain Relationships and Related Transactions and Director Independence | ||
| Item 14 | Principal Accounting Fees and Services | ||
| Item 15 | Exhibits | 17 | |
| Signatures | |||
3
ITEM 10
ITEM 11
2019 Summary Compensation TablePART I
ITEM 1 – BUSINESS
Currency amounts throughout this report are in thousands except per-share amounts and where noted.Narrative disclosure to the Summary Compensation Table:
Utah Medical Products, Inc. (“UTMD” or “the Company”) is in the business of producing high quality cost‑ effective medical devices that are predominantly proprietary, disposable and for hospital use. Success depends on 1) recognizing needs of clinicians and patients, 2) rapidly designing or acquiring economical solutions that gain premarketing regulatory concurrence, 3) reliably producing products that meet those clinical needs, and then 4) selling through
UTMD's success in providing reliable solutions comes from its proven ability to integrate a number of engineering and technical disciplines in electronics, software, mechanical packaging, instrumentation, plastics processing and materials. The resulting differentiated devices represent significant incremental improvements in patient safety, clinical outcomes and/or total cost over preexisting clinical tools. UTMD's experience is that, in the case of labor‑saving devices, the improvement in cost‑effectiveness of clinical procedures also leads to an improvement in overall healthcare including lower risk of complications. UTMD markets a broad range of medical devices used in critical care areas, especially the neonatal intensive care unit (NICU), the labor and delivery (L&D) department and the women’s health center in hospitals, as well as products sold to outpatient clinics and physician's offices.
The opportunity to apply solutions to recognized needs results from an excellent core of practicing clinicians who introduce ideas to the Company, and key employees who are both clinical applications savvy and development engineering adept.
Domestically, except for the FILSHIE® Clip System, UTMD’s medical devices are sold directly to clinical end user facilities or their appointed stocking distributor. In addition, some of UTMD’s devices are sold through specialty distributors, national hospital distribution companies and other medical device manufacturers. Outside the U.S. (OUS), products are sold directly to end users in Canada, the United Kingdom (UK), France, Ireland and Australia, and through other medical device companies and through independent medical products distributors in many other countries. UTMD has representation globally in the major developed countries as well as many underdeveloped countries through more than 270 distributors, 129 of which purchased at least five thousand dollars in UTMD medical devices during 2018.
UTMD was formed as a Utah corporation in 1978. UTMD sold stock to the public one time in 1982 for $1,750 (before offering costs of $321). Since 1992, UTMD has returned $117,474 in the form of share repurchases, and an additional $54,688 in cash dividends, to its public stockholders.
Utah Medical Products Ltd., a wholly-owned subsidiary with manufacturing located in Ireland, was formed in 1995 to better serve UTMD’s OUS customers. In 1997, UTMD purchased Columbia Medical, Inc. (CMI), a company specializing in silicone injection molding, assembly and marketing vacuum-assisted obstetrical delivery systems. In 1998, UTMD acquired the neonatal product line of Gesco International, a subsidiary of Bard Access Systems and C.R. Bard, Inc. In 2004, UTMD acquired Abcorp, Inc., its supplier of fetal monitoring belts. In 2011, UTMD purchased all of the common shares of Femcare Holdings Ltd (Femcare) of the United Kingdom, and its subsidiaries. The addition of Femcare provided product and distribution channel diversification and expansion. Sales of the products, or derivatives of the products, from the four acquisitions noted above, comprised 62% of UTMD’s consolidated 2018 sales. In late 2016, UTMD formed Utah Medical Products Canada Ltd (dba Femcare Canada) as a sales and distribution operation to directly serve Canadian medical facilities. In early 2019, UTMD acquired the remaining 4.75 year life of Femcare’s exclusive U.S. distribution agreement for the FILSHIE Clip System from CooperSurgical Inc.
UTMD's corporate headquarters are located at 7043 South 300 West, Midvale, Utah 84047 USA. The corporate office telephone number is 01 (801) 566‑1200. Ireland operations are located at Athlone Business and Technology Park, Athlone, County Westmeath, Ireland. The Ireland telephone number is 353 (90) 647-3932. United Kingdom operations are located at 32 Premier Way, Romsey, Hampshire SO51 9DQ, United Kingdom. The UK phone number is 44 (179) 452-5100. Australia operations are located at Unit 12, 5 Gladstone Road, Castle Hill, NSW 2154, Australia. The Australia phone number is 612 9045 4110. Canada operations are located at 6355 Kennedy Road #15, Mississauga, ON L5T 2L5, Canada. The Canada phone number is 01 (905) 795-1102.
1
PRODUCTS
More complete descriptions including part numbers and pictures of UTMD’s devices can be conveniently obtained at www.utahmed.com and www.femcare-nikomed.co.uk.
Labor and Delivery/ Obstetrics:Fetal Monitoring Accessories.Electronic Fetal Monitoring (EFM) is the standard of care in labor and delivery throughout the modern world. While not all pregnancies are high risk, fetal emergencies can occur suddenly in seemingly normal labors. The use of EFM allows conservation of nursing personnel and has virtually eliminated intrapartum fetal death. Accurate determination of contraction strength increases the safety of labor augmentation and reduces the need for Cesarean section for desultory labor. Infusion of fluid through an intrauterine catheter may cushion the umbilical cord and improve oxygenation of the fetus.
To assist the physician in controlling the effectiveness of administration of oxytocin and monitoring effects of amnioinfusion, contraction intensities, uterine resting tones and peak contraction pressures are closely monitored through the use of an invasive intrauterine pressure catheter system. In addition, to help identify the possible onset of fetal hypoxia, correlation of the changes in fetal heart rate (FHR) relative to the frequency and duration of contractions are often electronically monitored. UTMD’s intrauterine pressure (IUP) catheters provide for clinician choices from a traditional fluid-filled system to INTRAN® PLUS, for over twenty-five years the most widely accepted transducer-tipped system. In addition, adjunct toco belts and chart paper are provided by UTMD to provide a package of fetal monitoring supplies. UTMD’s IUP catheters include:
UTMD markets tocodynamometer belts, catheters2019 Grants of Equity Incentive Plan-Based Awards
Vacuum-Assisted Delivery Systems (VAD).2019 Grants of Non-Equity Incentive Plan-Based AwardsUTMD’s VAD Systems include CMI® soft silicone bell-shaped birthing cups
2
Other Labor & Delivery Tools.AROM-COT™ is a finger cover with a patented prong design to rupture maternal membranes with less patient pain and anxiety. MUC-X is an aspiration device used immediately after birth to clear neonatal respiratory passages and reduce exposure to potential infections. CORDGUARD® is a product which unifies the multiple stepsDirectors. In early 2020, all UTMD employees, including employees of clamping the neonate’s cord close to the umbilicus, severing the cord without splattering blood, drawing a clean cord blood sample and assisting in the removalits subsidiaries, received profit-sharing bonuses based on 2019 performance. The structure of the placenta. CORDGUARD’s sharpless, closed system reducesMB Plan remains the risk of exposure to potentially infected blood, and consequently reduces the high cost of exposure treatment under OSHA and CDC guidelines. In addition, CORDGUARD facilitates obtaining neonatal blood that is otherwise hard to obtain safely and cleanly. BT-CATH® is a patented uterine balloon tamponade cathetersame for controlling severe postpartum hemorrhage. Its benefits include the ease of rapid deployment and ability to monitor further bleeding after the tamponade has been placed. Abcorp toco belts and straps for fetal monitoring by an external tocodynamometer are provided in latex-free form in several configurations. In 2014, UTMD extended the product line to include Bari-Belts™ and Bari-Bands™, a series of abdominal belts designed specifically for bariatric patients and bands to accommodate patients of all shapes and sizes. In 2015, UTMD obtained FDA clearance to market a new mechanical cervical ripening device, the CVX-RIPE™ catheter, designed to mechanically improve the favorability of the cervix of pregnant patients at term gestation, for whom induction of labor is medically indicated. The CVX-Ripe utilizes two adjacent conical silicone balloons, similar to the shape of an hourglass. This design is intended to allow the clinician to gently apply internal pressure to the cervical canal, as well as both the internal and external os, to reduce the time needed to allow induction as well as the total time to achieve a successful vaginal delivery. 2020.
Neonatal Intensive Care:DISPOSA-HOOD™The DISPOSA-HOOD is an infant respiratory hood that is used in the NICU to administer oxygen to neonates and flush CO2 (carbon dioxide) while maintaining a neutral thermal environment (NTE) critical to proper physiologic responses. The DISPOSA-HOOD, placed over the infant's head, incorporates a round diffusor connection specifically designed to disperse the incoming gases along the inner surfaces of the hood, rather than allowing them to blow directly on the infant's head. The design allows more precise FIO2 (fractional inspired oxygen) control, minimizes convective heat loss from the head, provides optimum flows for elimination of CO2 by ventilation and allows for humidification. DISPOSA-HOOD, in contrast to an incubator, allows for excellent access to and visualization of the underdeveloped infant. Because it is a disposable product, it also prevents potential cross‑contamination that might occur with an incubator. Less invasive than nasal cannulae, DISPOSA-HOOD avoids potential damage to fragile premature neonatal nasal/ orotracheal tissues, as well as facial tissues as cannulae are often secured with tape. A nasal cannula by itself cannot provide a NTE.
DELTRAN® PLUSUTMD’s DELTRAN blood pressure monitoring system has been adapted specifically for use in the NICU. The streamlined version eliminates needles used for blood sampling, avoids the loss of scarce neonatal blood volume and provides a closed system that reduces the risk of infection. The system features excellent visualization of clearing volume, and one-handed use. UTMD continues its customization of Deltran kits for specific hospital applications.
GESCO®In the third quarter of 1998, UTMD acquired the neonatal product line of Gesco International. GESCO, best known for optimally biocompatible silicone catheters, gained an early distinctive reputation for its focus on the special developmental needs of tiny, critically-ill babies.
A class of catheters called umbilical vessel catheters (UVCs) are specially designed for administering vital medications and fluids immediately following birth through the infant’s umbilical vessel into the inferior vena cava. Because of the neonate’s small size and lack of vascular development, there is no better access to vital organs. The catheters are also called umbilical artery catheters (UACs) when placed in one of the umbilical arteries to measure blood pressure or monitor metabolic processes through blood analysis. In developing its UMBILI-CATH™ product line, Gesco pioneered the use of soft, biocompatible silicone catheters, helping to reduce the number of insertions required as well as other complications associated with invasive applications. UTMD has expanded the UVC product line to include catheters made from a proprietary thermosensitive polyurethane (Tecoflex®) that offers many of the flexibility and biocompatibility advantages of silicone after insertion, with the greater rigidity of polyurethane preferred by many clinicians for insertion. In addition, GESCO provides a convenient catheterization procedure tray of instruments and supplies necessary to place UVC catheters, as well as perform other similar procedures.3
The primary distinction of GESCO products is that they were developed with the special needs of the neonate in mind, not just cut-down or smaller versions of adult devices. For example, in the case of invasive catheters, the introducer, the soft rounded distal tip, mode of securing to the patient after insertion to avoid migration, luer-locking hub with minimal dead space, number of lumens, catheter radiopaque striping for visualization, variations in catheter lengths and diameters and special packaging are all features specially designed for neonates. UTMD continues to modify product features to incorporate current neonatal practitioner preferences.
The soft, biocompatible silicone catheter concept had important advantages in other applications including peripherally inserted central venous catheters (PICC lines), enteral feeding tubes, urinary drainage catheters and chest drainage tubes. GESCO developed and marketed initial versions of all of these neonatal products. In order to keep pace with the trend of caring for smaller babies, UTMD has added smaller diameter versions of its URI-CATH® and NUTRI-CATH® products. At the request of customers who prefer a stiffer catheter for insertion, UTMD added a Tecoflex polyurethane oral-connection only Nutri-Cath series in 2009.
In 2000, UTMD gained FDA premarketing clearance of a PICC family of products specifically designed to minimize trauma to the critically ill neonate, named PICC-NATE®. The PICC-NATE product line was designed with the input of experienced neonatal medical practitioners for use as a long-term indwelling catheter system for single-use, therapeutic central venous infusion of drug solutions, blood products or other fluids and for blood sampling. The soft, strong silicone PICC-Nate comes in two diameter sizes and two hub configurations. In early 2003, UTMD added a Tecoflex polyurethane version that offers many of the flexibility and biocompatibility advantages of silicone after insertion, with the greater rigidity of polyurethane preferred by many clinicians for insertion.
In 2006, UTMD developed a unique enteral feeding-only extension set named NUTRI-LOK® that addresses important safety risks in the NICU – inadvertent connections with IV lines and inadvertent disconnections of components of the system spanning the dispensing container through the infusion catheter. In October 2007, UTMD added dispensing syringes with interlocking connectors to its NUTRI-CATH/NUTRI-LOK family of enteral feeding devices. In 2008, UTMD expanded the NUTRI-LOK system with specialty extension sets for GI tubes and for continuous connection to a fluid pump. In 2009, UTMD added a Kangaroo bag for larger feeds along with other NUTRI-LOK accessories. In 2011, UTMD added variations in adapters and extension sets used with NUTRI-CATH. Recognizing the important need to prevent misadministration of enteral feeding or medication by the wrong route, the FDA in February 2015 released its final guidance, “Safety Considerations to Mitigate the Risks of Misconnections with Small Bore Connectors Intended for Enteral Applications.” The guidance includes compliance with ISO 80369-3 standard connectors. This new standard was released to create a universal connection that is not compatible with a luer connection or any other type of small bore medical connector. In 2016, UTMD introduced an alternative enteral feeding family of devices incorporating ENFit™ ISO 80369-3 compliant connectors. These purple connectors replace the current Nutri-Lok connectors on catheters and extension sets. UTMD also distributes ENFit oral syringes.
In 2006, UTMD completed the replacement of all DEHP plasticizer PVC materials in its Gesco product line that may come in contact with neonatal patients, addressing another safety concern related specifically to the possible maldevelopment of male neonates.
Other GESCO specialty products include a disposable peritoneal dialysis (PD) set that is a pre-assembled, sterile, closed system, called DIALY-NATE®. PD is an ideal method to aid compromised renal function in a neonate because critically-ill pediatric patients may not have sufficient blood volume to support hemodialysis. DIALY-NATE is provided in a form that allows timely PD implementation. In 2008, UTMD added a DIALY-NATE version that can be used with a variety of fluid warming systems. In 2010, UTMD introduced a bifurcated system that allows for higher volume manual PD applications. Since 2013, additional custom configurations have been added to satisfy specific clinical preferences.4
Other specialty NICU devices include a silicone oral protection device used to prevent palatal soft tissue injury by orotracheal tubes, called PALA-NATE®; a pre-assembled, closed urinary drainage system, called URI-CATH®, which reduces risk of infection and valuable nursing time, and a lumbar sampling kit with a tiny, specially-beveled needle for obtaining cerebral spinal fluid samples, called MYELO-NATE®.
GESCO’s first patented product, HEMO-NATE®, is a disposable filter designed to remove microaggregates from stored blood prior to transfusion into a neonate where any deficiency can have an overwhelmingly negative impact on a neonate’s chances for survival, given an under-developed vasculature and small total blood volume. In 2001, UTMD introduced a new filter and an improved blood bag spike for HEMO-NATE, and a needleless version.
UTMD expects to continue to improve and expand its neonatal product line, seeking to reinforce a reputation as having the most reliable and developmentally-friendly specialty products available for the NICU.
Gynecology /Urology /Electrosurgery:LETZ® SystemThe LETZ System (loop excision of the transformation zone) is used to excise cervical intraepithelial neoplasia (CIN) and other lower genital tract lesions related to human papilloma virus (HPV) infections. The electrosurgery procedure with hemostasis has become the standard of care for HPV cervical infection treatment, replacing cold knife scalpel, laser and cryotherapy procedural approaches because it is economical, safe, effective, quick and easy to perform, has fewer potential side effects and requires little physician training. A major incentive for performing the LETZ procedure is that it may be performed using local anesthetic in a physician's office, eliminating the time and expense of hospital or surgical center admittance. Most importantly clinically, in contrast to laser (tissue ablation) and cryotherapy (freezing of tissue), LETZ provides a fine tissue specimen for pathological assessment.
UTMD’s LETZ System includes disposable electrodes, the FINESSE® electrosurgical generator and other miscellaneous components. A disposable loop electrode used to excise the tissue specimen is a pencil‑like tube with a thin tungsten wire loop attached. The loop is available in varying sizes and includes a Safe‑T‑Gauge® that can be positioned so the physician can accurately monitor and control the amount of tissue being excised. Excising too much tissue can compromise fertility and result in premature birth. UTMD continues to augment its specialty electrodes. For example, the Company introduced a patented conization electrode for deep endocervical disease called C-LETZ®, designed to limit the removal of healthy tissue margins that might compromise adequate cervical function. UTMD also will continue to provide other components to augment the use of its market-leading specialty electrodes with other manufacturers’ electrosurgical generators.
After more than 20 years on the market, in 2012 UTMD completed a significant redesign, and achieved certification to the latest EN 60601 international safety standards, for a FINESSE+ electrosurgical generator. The FINESSE+ design includes dispersive pad contact monitoring for improved patient safety, improved circuitry for computer controlled-output that provides a precise tissue specimen for histopathology, a more efficient output stage resulting in less heat generation and longer electronic component life, an update to electronic components which reduces the number of required components and increases service life, and an easy change internal filter for integral smoke evacuation, a unique feature of FINESSE. UTMD obtained FDA premarketing clearance for FINESSE+ in January 2013.
FINESSE+ Generator; Specialty Loop, Ball, and Needle Electrodes; FILTRESSE® Evacuator; Other Specialty Electrodes; Other UTMD Supplies and Gynecologic Tools; Femcare Trocars and Cannulae; and Femcare Laparoscopic Instruments and accessories.
UTMD has FDA clearance to market its electrosurgical system and tools for use in general surgery applications, including dermatology, plastic surgery and otolaryngology. In 2002, UTMD introduced a product line of ultra-fine tipped microdissection needles, called OptiMicro™ Needles. These electrosurgical needles are particularly useful in small-scale plastic and reconstructive surgery applications. In 2009, UTMD added extended length OptiMicro needle versions useful in certain head and neck procedures. FILTRESSE is a stand-alone surgical smoke filtration system that combines high filtration efficiency, low cost and convenient use in a surgical office setting. Other electrosurgery tools and accessories include disposable electrosurgical pens, dispersive pads, footswitches, filter packs, speculums, retractors, forceps, tenacula and hooks. UTMD acquired the distribution rights to a unique reusable four-way expander system which facilitates access to, and visualization of, the cervix, eliminating the need for less effective specula and lateral retractors. In 2007, UTMD developed OptiSpec®, a patented ultra-bright light for cervical visualization without physician distraction during exams, pap smears and other vaginal procedures requiring direct cervical visualization without the use of a colposcope. In 2011, UTMD acquired Femcare’s single patient use trocars and cannulae available in shielded, bladeless, optical bladeless, blunt and thoracic designs. In addition, UTMD acquired Femcare’s laparoscopic instrument range and accessories which includes instruments suitable for all routine laparoscopic procedures requiring dissection, cutting, grasping and coagulation, e.g., monopolar scissors, various grasping forceps, dissecting forceps, L and J hooks, spatulae, Veress needles, suction and irrigation tubing, insufflation tubing and connectors, pressure infusor bags and control valves.5
EPITOME®EPITOME is an electrosurgical scalpel which delivers precise performance in surgical incision and excision with hemostasis while minimizing thermal side effects. Where rapid yet precise dissection of dense tissue is necessary, such as in mammaplasty or abdominoplasty, UTMD believes that EPITOME has no close substitute. Furthermore, an independent study concludes that the EPITOME scalpel provides a significant improvement over other devices in wound healing. EPITOME allows a rapid incision without countertraction, yielding limited morbidity, less post-surgical pain and cosmetically superior results. EPITOME is useful where minimization of thermal tissue injury is important but control of bleeding needed. A bendable version of EPITOME with a smaller active electrode was introduced in 1998. Designed to significantly reduce the chance of tissue burns due to inadvertent electrode contact and where a smaller, bent scalpel tip is needed, the bendable EPITOME is of particular value, e.g., to thoracic surgeons in harvesting the internal mammary artery during coronary artery bypass surgery, as well as to otolaryngologists for tonsillectomies or uvulopalatoplasties.
FILSHIE® Clip System UTMD acquired the FILSHIE Clip System as part of its acquisition of Femcare in March 2011. In 2018, sales of FILSHIE Clips, applicators and accessories represented 35% of UTMD’s total U.S. Dollar denominated sales. The FILSHIE Clip is a female surgical contraception device used for tubal ligation, i.e., placed on the fallopian tubes, generally laparoscopically, but also postpartum during a C-Section procedure. The FILSHIE Clip, implanted in over six million women worldwide during the last 37 years, has empirically been proven to be the safest and most effective tubal occlusive device, is as easy or easier to achieve occlusion as any of the alternative surgical techniques, and has a substantially higher probability of reversibility when compared to all of the other approaches for women who later decide that they might like to get pregnant. Femcare has obtained numerous regulatory approvals for the FILSHIE Clip System, which in 2018 was sold directly by UTMD to medical facilities in Canada, Ireland, France, the UK and Australia, and through specialty distributors in many other countries including by CooperSurgical Inc. (CSI) in the U.S. In February 2019, UTMD acquired the exclusive distribution rights from CSI, and will begin to sell the FILSHIE Clip System directly to medical facilities in the U.S.
There are several tubal ligation methods with varying degrees of effectiveness, safety and opportunity to be reversed. The traditional tubal ligation approach, informally known as “getting one’s tubes tied”, is a form of female sterilization in which the fallopian tubes are severed and sealed, permanently occluded or pinched shut. If the sterilization procedure is carried out postpartum, the Pomeroy technique is often adopted. During this procedure a small loop of the fallopian tube is tied with a suture and the top section removed by cutting. A traditional method for interval sterilization is with the use of Bipolar Cautery (electrocautery). With this method, a current flows between the tips of forceps when applied to the fallopian tube. This current then “burns” a portion of the fallopian tube shut. Bipolar diathermy has a higher rate of ectopic pregnancy, a life-threatening complication, compared to other tubal occlusion methods. Although these common methods are relatively easy to perform, the failure rate of these methods, defined as the percentage of patients having undergone the procedure who subsequently get pregnant, has been reported to be about 3%. The FILSHIE Clip, which can be used at either interval (between menstrual periods) or post-partum (following childbirth), is at least as easy to use and has a reported failure rate an order of magnitude less than Bipolar Cautery and the Pomeroy technique.
Apart from Bipolar Cautery and the Pomeroy technique, other mechanical devices have been the Falope Ring (or Yoon Ring) and the Hulka Clip. Both these older methods have a higher failure rate than the FILSHIE Clip, are associated with more post-operative pain and have generally been abandoned in favor of other sterilization techniques. Sterilization carried out with the Falope Ring also reduces the chances of a successful reversal being carried out.
In more recent years, hysteroscopic sterilization devices were introduced as an alternative to laparoscopic tubal ligation. The devices were the Adiana by Hologic Inc and the ESSURE by Conceptus, Inc. (acquired by Bayer AG in 2013). Both of these transcervically implanted devices are no longer being marketed; Adiana was stopped in 2012 and ESSURE was stopped in 2017. Prior to Bayer ceasing the distribution of ESSURE, the device had received a substantial amount of negative publicity regarding unwanted side effects, particularly from patients through social media. Unfortunately, because both the FILSHIE clip and ESSURE are surgically implanted devices designed to achieve sterilization by tubal occlusion, some readers of the media have incorrectly concluded that the negative side effects of ESSURE also apply to FILSHIE clips. UTMD would like to provide an explanation to stockholders why this association is incorrect.
Pain associated normally with any laparoscopic procedure generally resolves within 48 hours, and is not severe nor does it become chronic unless the resultevent of an infection. Sterile FILSHIE clips are provided toacquisition of UTMD would be $7,042,500. At the surgeontime of the execution of the agreement, the value per UTMD share was $7.75.
A well-known and clinically reported potential side effect of FILSHIE Clip tubal ligation is clip migration. A clip occluded Fallopian tube eventually separates into two permanently closed stubs after tissue necrosis under a closed clip. Peritoneal tissue usually encapsulates an implanted clip while still awarded options above the option exercise price (“in contact with the Fallopian tube. In some cases where tissue encapsulation is slow, migrationmoney”) in the event of a clip occurs after sterilization has been achieved. Although the silicone liningchange of control of the clip helps prevent clip migration and reducesCompany. The number of options outstanding as of December 31, 2019, was 51,689 at an average exercise price of $58.50/ share. At the riskyear-end 2019 per share closing price of tubal regeneration, one clinical journal publication indicated migration occurs 6%$107.90, the amount of the time. Dr. FILSHIE, the inventorchange of the clip, expressed his opinion in 2002 that over 25% of patients will experience a migration of one or more clips, typically within the abdominal cavity. Once detached, the clip becomes encompassed in dense adhesive tissue normally without any symptoms, only rarely causing any complication. However, a low grade inflammatory response can occur. Because clips are biologically inert and relatively small, physicians generally have concluded that removing a migrated clip represents more risk to long term well-being than leaving it in the body. UTMD recently retained a clinical expert who in 2010 had published the results of a twenty-year retrospective review ofcontrol pay due all reported FILSHIE clip migration events in the English literature, in order to independently review all reported complaints contained in the US FDA MAUDE website and the Australia TGA DAEN website over the most recent ten years. His February 2019 written report generally observed that “There were no serious clinical or life-threatening complications that related directly or indirectly to the FILSHIE clips or their migration.”optionees would be $2,553,385.
In summary, UTMD stockholders should be confident that FILSHIE clips are a very safe and effective method of tubal occlusion.
The U.S. FDA released the FILSHIE Clip for marketing in the U.S. in 1996 after a Femcare PMA submission which included a prospective clinical trial involving 5,454 women implanted with FILSHIE clips. In late 2016, the FDA approved the use of Femcare’s Sterishot single use applicator for applying FILSHIE clips. An applicator is a precision instrument which closes the implanted FILSHIE clip on the Fallopian tube to achieve proper permanent tubal ligation. Reused applicators require extra handling, cleaning, resterilization and storage which have the potential to damage or misalign the delicate mechanism. Timely periodic servicing and recalibration is needed. In addition, the reuse of a surgical instrument introduces the possibility of infection if not properly cleaned and resterilized between procedures. The precalibrated, single-use sterile Sterishot eliminates these safety, effectiveness and cost exposures. After more than eight years since being introduced outside the U.S. (OUS), the patented Sterishot is used in the majority of FILSHIE clip ligation procedures OUS, but was not effectively marketed by CSI. Beginning in February 2019, UTMD began directly marketing the FILSHIE Clip System in the U.S., preferably primarily in the form of Sterishot kits.
PATHFINDER PLUS™Outstanding Equity Awards at 2019 Fiscal Year EndPATHFINDER PLUS is
SUPRAPUBIC CATHETERIZATIONThe Add-a-Cath introducer is a Femcare device designed for easyAt the 2013 Annual Meeting, stockholders approved the 2013 Employees’ and safe suprapubic introductionDirectors’ Incentive Plan, under which up to 600,000 shares may be granted over the ten-year life of a catheter for bladder drainage. Suprapubic catheterization is generally well-recognizedthe plan. No options have been granted to outside Directors under the 2013 Plan. In 2014, prior to his retirement as a drainage method with fewer complications than with urethral catheterization. In 2013, UTMD introduced suprapubic catheterization procedure kits featuring the Add-a-Cath introducer,employee in 2018, Mr. Richins received a stock option award under which UTMD now distributes directly to end users in the U.S. under the trade name “Supra-Foley”.62 shares remain unexercised as of December 31, 2019.
LIBERTY® SystemLIBERTY is a device for the conservative treatment and effective control
In cooperation with Mayo Clinic, UTMD developed an advanced curette for uterine endometrial tissue sampling in the doctor’s office. The sampling procedure is intended primarily to rule out precancer or cancerous change of the uterus in premenopausal women with abnormal uterine bleeding, or women with postmenopausal bleeding. The device is part of a class of catheters designed to be used without dilatation of the cervix and without general anesthetic. The inherent weakness of this type of device, which is related to its small size, is that it may not remove enough tissue of the endometrium for an accurate histologic assessment, in contrast to a more invasive D&C hospital procedure. The tip of the EndoCurette was specially designed to obtain a more thorough tissue specimen compared to other catheters used without the need for dilatation, and without an increase in patient discomfort.
TVUS/HSG-Cath™In order to further assess persistent abnormal or dysfunctional uterine bleeding and other suspected abnormalities of the uterus, or as a next step after endometrial tissue sampling with an EndoCurette, gynecologists may utilize transvaginal ultrasound imaging of the uterus. UTMD’s TVUS/HSG-Cath was designed and released for marketing in 2007 to provide effective cervical occlusion that allows distention of the uterus to differentiate anterior and posterior endometrium, among other irregularities, together with minimal visual obstruction of the uterus near the internal os. In addition, the TVUS/HSG-Cath may be used in hysterosalpingography radiographic procedures to assess the patency of fallopian tubes. A related device acquired in 2011 is Femcare’s Spackman Style uterine cannula designed for the manipulation of the uterus and injection of fluid to test the patency of the fallopian tubes.
LUMIN®LUMIN® is a gynecological tool developed by UTMD for reliably and safely manipulating the uterus in laparoscopic procedures. LUMIN combines the strength, range of motion and versatility of the higher end reusable instruments with the lower cost and cleanliness of the inexpensive less functional disposable instruments presently on the market, while at the same time reducing the number of tools needed to move and secure the uterus.
1:14.
Blood Pressure Monitoring:DELTRAN® Disposable Pressure Transducer (DPT)In pressure monitoring, a transducer is used to convert physiological (mechanical) pressure into an electrical signal that is displayed on electronic monitoring equipment.To identify the median employee, UTMD developed and is now distributing its disposable transducer as a stand‑alone product, and as a component in sterile blood pressure monitoring kits through direct representatives and other medical companies in the U.S., as well as independent distributors and other medical device companies OUS.
The Company believes that the DELTRAN DPT which it designed over thirty years ago and currently manufactures, remains the standard in terms of accuracy, reliability and ease of use. Introduced in 1998, the DELTRAN PLUS provides a closed system for blood sampling, without the use of needles, reducing the risk of an unwanted infection for both the patient and the practitioner. In 2009, in conjunction with its other NICU devices, UTMD continued to configure neonatal Deltran custom kits which satisfy the special needs of conserving limited blood volume and protecting the neonate from infection.
Pressure Monitoring Accessories, Components and Other Molded Parts.Components included in blood pressure monitoring kit configurations include flush devices, stopcocks, fluid administration sets, caps, pressure tubing, interface cables and organizers. The Company sells similar components designed for other medical device company applications which incorporate UTMD’s technologies and designs. DELTA-CAL™ is a calibration device used to check proper functioning of an arterial pressure system. In addition, UTMD sells plastic molded parts on a subcontract basis to a number of medical and non-medical device companies. In addition, partly as a result of its excellent quality system and ISO13485 certification, UTMD performs subcontract assembly, testing and packaging of components that are proprietary to other medical device firms. UTMD believes that this practice helps better utilize its investment in fixed plant and equipment, and spreads overhead costs resulting in better gross profit margins on finished device sales.
MARKETING and COMPETITION
UTMD divides its sales into “domestic” U.S. sales and “outside the U.S.” sales, which are finished device and component sales to entities outside the U.S.
1) Domestic sales.For domestic sales to end-users of finished devices, marketing efforts are complex and fragmented. UTMD’s marketing focus is with clinicians who take responsibility for obtaining optimal patient care outcomes, primarily through clinical meetings, trade shows and the Internet. In competitive bidding processes, UTMD works primarily with administrators who are responsible for hospital purchasing decisions.
UTMD competes primarily on the basis of improved patient safety and reliable device performance in the hands of a trained clinician. A number of UTMD’s devices are strong brands because they are well-recognized by clinicians as clinically different and have been in use for decades. UTMD’s broad offering of finished devices is comprised of dozens of specialty device types. Although there may be only a few competitors for each type, in the aggregate UTMD has dozens of U.S. medical device competitors. There are at least two competitors with significant market share for each of UTMD’s device types.
As a general rule, because of UTMD’s differences in design and reliability, competitors’ devices represent substitutes rather than equivalent devices. The Company’s primary marketing challenge is to keep its customers focused on those differences and their important clinical benefits. In recent years, UTMD’s access to U.S. hospital clinicians has become increasingly restricted and the involvement of clinicians in medical device purchasing decisions, which is critical to the Company’s success, has declined. To the degree that U.S. hospitals become less focused on patient safety and clinical outcomes and more on out-of-pocket unit price, UTMD’s competitive position weakens.
In 2018, UTMD sold components and finished devices to 152 other companies in the U.S. (OEM sales). For over 40 years, the Company has utilized its manufacturing capabilities and engineering know-how to produce high quality components and finished devices for other companies. For U.S. companies which wish to distribute their products outside the U.S., UTMD’s maintenance of certification to current ISO 13485 medical device quality standards is an important benefit. UTMD’s website, which lists its capabilities, is often the basis for contacts for new OEM work.
Although there are other manufacturers in the U.S. with similar manufacturing capabilities, UTMD’s primary competition comes from East Europe, India and China device component manufacturers which have much lower wage rate structures. To the extent that the U.S. Dollar (USD) gains strength in any period of time against foreign currencies, UTMD’s ability to be cost-competitive with foreign manufacturers is diminished.9
2) Outside the U.S. (OUS) sales.OUS sales in 2018, as a percentage of consolidated total USD sales, represented 50% compared to 51% in 2017. Because UTMD’s subsidiaries distribute devices directly to medical facilities OUS, two thirds of OUS sales are invoiced in foreign currencies. In addition, foreign subsidiary expenses are in the native currency of the respective country. Therefore, changes in foreign currency exchange (FX) rates can have a significant impact on UTMD’s USD-reported financial results.
Prior to 2011, with only a few exceptions, UTMD’s OUS sales were to other medical device companies and distributors, not to clinical end user facilities. After the acquisition of Femcare in 2011, UTMD began a transition to marketing directly to end users in countries where the FILSHIE Clip System had achieved significant acceptance. This also allowed increased distribution opportunities for other UTMD devices which previously did not have significant third party distributor interest. In 2018, UTMD distributed directly to medical facilities in Canada, the UK, France, Ireland and Australia. In addition, the Company’s devices are sold in other countries OUS through over 270 independent regional distributors. UTMD’s website provides information that frequently results in unsolicited contacts from OUS entities.
DISTRIBUTION
An important success factor in the medical device industry is access to medical practitioners. In the U.S., the hospital supplier environment has consolidated as a result of group purchasing organizations (GPOs), or their equivalents. It is UTMD’s assessment that U.S. hospitals are not currently saving costs under GPO contracts when it comes to specialty medical devices that can reduce complications, utilization rates, clinician time and unwanted side effects, because administrators are focused purely on out-of-pocket costs and miss the broader total cost of care issues.
The longer term overall cost of care in the U.S. will continue to increase, with quality of care lower, as innovative suppliers are excluded from participating in the marketplace as a result of unnecessary regulatory and other purely administrative burdens. The length of time and number of administrative steps required in evaluating new products for use in hospitals has grown substantially. As a potential negative factor to future performance, as UTMD introduces new products it believes are safer and more effective, it may find itself excluded from certain customers because of the existence of long term supply agreements for existing products. UTMD may also be unable to establish viable relationships with other medical device companies that do have access to users but lack an interest in the Company’s approach or demand too great a financial or administrative burden.
When U.S. hospital customers request it, UTMD provides its devices through national distribution companies, also known as Med/Surg distributors. Sales to Med/Surg distributors in 2018 comprised 14% of total domestic direct sales (excluding FILSHIE Clip System sales to CSI).
In the U.S., Canada, Ireland, France, the UK and Australia, UTMD sells its products with the support of its own directly employed customer service and sales force, independent consultants and selective independent manufacturer representatives. Direct sales representatives focus on applications for UTMD devices where customer training and support may be important. The direct sales force is comprised both of “outside” representatives operating remotely in specific geographic areas, and “inside” representatives who operate primarily by telephone from corporate offices. Direct representatives are trained to understand the medical procedures being performed within UTMD’s clinical focus. Through the use of its one-on-one contacts with physicians and other clinical practitioners directly involved in patient care, the direct sales force positions UTMD to gain market leadership with specific solutions to clinical issues. In addition to its direct representatives, UTMD utilizes third party consulting clinical specialists to augment its customer training programs.10
Additionally, UTMD sells component parts as well as finished devices to other companies for use with their product lines. This OEM distribution channel is simply maximizing utilization of manufacturing capabilities that are otherwise needed for UTMD's primary business, and does not compete with or dilute UTMD’s direct distribution and marketing programs.
OUS, the Company distributes directly to end user facilities in Canada, the UK, France, Ireland and Australia, and sells to over 270 regional distributors and OEMs (other medical device manufacturers and/or distributors) in over a hundred countries. Ten percent of UTMD’s independent OUS distributors represented 79% of UTMD’s indirect OUS sales in the years of 2016 - 2018.
NEW PRODUCT DEVELOPMENT
New product development has been a key ingredient to UTMD’s market identity. Product development takes several interrelated forms: 1) improvements, enhancements and extensions of current product lines in response to clinical needs or clinician requests, 2) introduction of new or augmented devices that represent a significant improvement in safety, effectiveness and/or total cost of care, and 3) acquisitions of products or technology from others. Manufacturing process development is an equally important aspect that cannot be separated from the successful design and development of devices.
Because of UTMD’s reputation as a focused product developer, its financial strength and its established clinician user base, it enjoys a substantial inflow of new product development ideas. Internal development, joint development, product acquisitions and licensing arrangements are all included as viable options in the investigation of opportunities. Only a small percentage of ideas survive feasibility screening. For internal development purposes, projects are assigned to a project manager who assembles an interdisciplinary, cross-functional development team. The team’s objective is to have a clinically acceptable, manufacturable and regulatory-released product ready for marketing by a specific date. Several projects, depending on the level of resources required, are underway at UTMD at any given time. Only a few assigned projects succeed in attaining a product that meets all of the Company’s criteria. In particular, this includes a product that is highly reliable, easy to use, cost-effective, safe, useful and differentiated from the competition. Once a product is developed, tooled, fully tested and cleared for marketing by the applicable regulatory entity(ies) in the U.S. and/or other countries, there remains a reasonable probability it cannot be successfully marketed for any number of reasons, not the least of which is being beaten to the market by a competitor with a better solution, or not having access to users because of limitations in marketing and distribution resources or exclusionary contracts of GPOs.
UTMD’s current product and process development projects are in the following areas: 1) augmentation and internal manufacturing of existing UTMD devices, 2) neonatal intensive care, 3) specialized procedures for the assessment and treatment of cervical/uterine disease, 4) labor and delivery procedures, and 5) product and process development for OEM customers. Internal product development expenses are expected to remain in the range of 1-2% of sales.
EMPLOYEES AND OTHERS
At December 31, 2018, the Company had 173 employees, eight regular consultants, 21 independent manufacturer’s sales representatives and an additional eleven subcontract production employees in Utah. The subcontract employees represent UTMD’s desire to provide handicapped persons additional work opportunities, hired through the Utah state-supported Work Activity Center. The Company utilizes independent consultants, several of which were prior employees. Almost all of UTMD’s internally-manufactured devices are made either in Utah or in Ireland. The average tenure with the Company of the 154 employees in the U.S. and Ireland is fifteen years. This experience conveys an important benefit due to the level of training required to produce consistently high quality medical devices and appreciation of how UTMD’s devices provide unique benefits for clinicians and patients. The Company's continued success will depend to a large extent upon its ability to retain skilled and experienced employees and consultants. No assurances can be given that the Company will be able to retain or attract such people in the future, although management is committed to providing an environment in which reliable, creative and high achieving people wish to work.
None of the Company's officers or directors is bound by restrictive covenants from prior employers that limit their ability to contribute to UTMD’s programs. All professional employees agree to a code of conduct and sign a strict confidentiality agreement as a condition of employment, and as consideration for receipt of stock option awards and participation in the annual sales and management bonus program. All employees participate in contemporaneous performance‑based bonus programs. None of the Company's employees is represented by labor unions or other collective bargaining groups.11
PATENTS, TRADEMARKS AND TECHNOLOGY LICENSES
The Company currently owns eleven unexpired and one pending U.S. patents, numerous associated patents in sovereignties OUS and is the licensee of certain other technology. There can be no assurance, however, that patents will be issued with respect to any pending applications, that marketable products will result from the patents or that issued patents can be successfully defended in a patent infringement situation. The Company also owns thirty-two U.S. registered trademarks which have achieved significant brand recognition. The Company believes that its trademarks and tradenames, many of which have become well known in the global medical community through decades of successful use of the associated medical devices, likely have and will continue to have substantially more intangible value than its patents.
The ability of the Company to achieve commercial success depends in part on the protection afforded by its patents and trademarks. However, UTMD believes that the protections afforded by patents and trademarks are less important to UTMD’s business, taken as a whole, than a medical device’s established incremental clinical utility, which may be dominated by a number of other factors including relative cost, ease of use, ease of training/adoption, perceived clinical value of different design features, risk of use in applicable procedures, the reliability of achieving a desired outcome in the hands of different users and market access to potential users. In cases where competitors introduce products that may infringe on UTMD’s technology or trademarks, the Company has an obligation to its stockholders to defend its intangible property to the extent that it can afford to do so, and that it is material to the Company’s success. The Company must also defend itself when competitors allege that UTMD may be infringing their technologies.
As a matter of policy, UTMD has acquired and will continue to acquire the use of technology from third parties that can be synergistically combined with UTMD proprietary product ideas. During 2018, royalties included in cost of goods sold were $209. Other royalties have been previously paid as a lump sum, or were incorporated into the price of acquisitions or into the cost of purchased components which practice certain patents of third parties. Also as a matter of policy, UTMD licenses its proprietary technology to others in circumstances where licensing does not directly compete with UTMD's own marketing initiatives. UTMD’s future financial performance may also depend on the marketing ability of other companies that license UTMD’s technology. During 2018 the Company received $76 in royalty income, compared to $86 in 2017 and $91 in 2016.
GOVERNMENT REGULATION
UTMD's products and manufacturing processes are subject to regulation by the U.S. Food & Drug Administration (“FDA”), as well as other regulatory entities globally. The FDA has authority to regulate the marketing, manufacturing, labeling, packaging and distribution of medical devices in the U.S. In addition, requirements exist under other federal laws and under state, local and foreign statutes that may apply to the manufacturing and marketing of the Company's medical devices.
All manufacturers of medical devices must register with the FDA and list all medical devices produced by them. In addition, prior to commercial distribution of some devices for human use, a manufacturer must file a notice with the FDA, setting forth certain information regarding the safety and effectiveness of the device that is acceptable in content to the FDA.
Devices which are classified in Class I are subject only to the general controls concerning adulteration, misbranding, good manufacturing practices, record keeping and reporting requirements. Devices classified in Class II must, in addition, comply with special controls or performance standards promulgated by the FDA.
Except for the FILSHIE Clip System, all of UTMD’s present devices are unclassified, Class I or Class II devices. The FILSHIE Clip System is a Class III device which has more stringent regulatory controls. The Company is in compliance with all applicable U.S. regulatory standards including CFR Part 820, the FDA Quality System Regulation (QSR) effective in 1997, also known as cGMPs (current good manufacturing practices). The Company’s most recent FDA inspection was in July 2014, which did not result in the issuance of any FDA-483 observations.12
In 1994, UTMD received certification of its quality system under the ISO9001/EN46001 standards (“ISO” stands for “International Organization of Standardization”) which it maintained until December 2003. In October 2003, UTMD’s Utah facility was certified under the more stringent ISO13485 standard for medical devices. UTMD’s Ireland facility was certified under the concomitant ISO13488 standard. In July 2006, both facility ISO certifications were upgraded to the even more stringent ISO13485:2003 standard. Currently, UTMD’s facilities in the UK, Ireland and Utah are all certified under the most recent ISO13485:2012 standard. UTMD remains on a continuous periodic audit schedule by its independent notified body in order to stay current with international regulatory standards, and retain its certifications. UTMD has received CE Mark certifications (demonstrates proof of compliance with the European Community’s ISO standards) for essentially all of its products. The U.S. FDA QSR was developed in harmony with the ISO standards.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Most of the components which the Company purchases from various vendors are readily available from a number of sources. That notwithstanding, the Company maintains safety stocks that anticipate the time required to source and qualify new vendors. Alternative sourcing of various components is continually underway. Vendors are qualified by Corporate Quality Assurance. In the few cases where the Company has a sole source, it either maintains or has agreement with the supplier to maintain excess safety stocks that would cover the time required to develop and qualify a new source. The Company has a vendor quality monitoring program that includes routinely checking incoming material for conformance to specifications, as required per written procedures.
U.S. EXPORTS
UTMD regards the OUS marketplace as an important element of its growth strategy. UTMD is keenly aware that not only are OUS markets different from the U.S. market, but also that each country has its own set of driving influences that affects the dynamics of the nature of care given and medical devices used. The Company operates four OUS facilities; in Romsey, Hampshire, England; in Castle Hill, NSW, Australia; in Mississauga, Ontario, Canada and in Athlone, County Westmeath, Ireland. These facilities offer a number of advantages: 1) from a marketing point of view, better response to Europe, Asia, Africa and Australia customers, including a better understanding of customer needs, less costly distribution and, in the EU, duty-free access to 500 million patients; 2) from a regulatory point of view, faster new product introductions; and 3) from a manufacturing point of view, reduced dependence on one manufacturing site and increased capacity for meeting customer needs.
Total 2018 trade revenues in USD terms from customers OUS were $20,806 (50% of total sales), compared to $21,129 (51% of total sales) in 2017 and $19,809 (50% of total sales) in 2016. OUS trade sales (U.S. exports) from the U.S. to OUS customers were $5,427 in 2018, $5,357 in 2017 and $5,587 in 2016. U.S. exports represented 26%, 25% and 28% of total OUS trade sales in 2018, 2017 and 2016, respectively. The U.S. export numbers exclude Utah intercompany sales of components and finished devices to UTMD foreign subsidiaries, which then distribute U.S.-made components and finished devices as part of their sales to OUS customers.
For sales by OUS geographic area, please see note 11 to the Consolidated Financial Statements.
BACKLOG
Backlog is defined as orders received and accepted by UTMD which have not shipped yet. As a supplier of primarily disposable hospital products, the nature of UTMD’s non-distributor or non-OEM business requires fast response to customer orders. Virtually all direct shipments to end user facilities are accomplished within a few days of acceptance of purchase orders. Consequently, UTMD’s backlog at any point in time is comprised mainly of orders from OEM and independent distributors, which purchase in larger quantities at less frequent intervals. Backlog shippable in less than 90 days was $3,164 as of January 1, 2019, $3,140 as of January 1, 2018 and $1,774 as of January 1, 2017.13
SEASONAL ASPECTS
The Company's business is generally not affected by seasonal factors, but it is affected by uneven purchasing patterns of OEM customers and independent distributors.
PRODUCT LIABILITY RISK MANAGEMENT
The risk of product liability lawsuits is a negative factor in the medical device industry because devices are frequently used in inherently risky situations to help clinicians achieve a more positive outcome than what might otherwise be the case. In any lawsuit against a company where an individual plaintiff suffers permanent physical injury, a possibility of a large award for damages exists whether or not a causal relationship exists. However, no such damages have been awarded against UTMD in its 39-year history of shipping many millions of devices.
UTMD is self-insured for product liability risk, and reserves funds against its current performance on an ongoing basis to provide for its costs of defense should any lawsuits be filed. The Company’s average cost of defense over the last twenty-six years was $17 per year, well below the deductible level of product liability insurance policies. This experience validates that the most important aspect of product liability risk management is the safe design and reliable integrity of manufactured products, not a third party insurance contract.
The best defense the Company believes that it has is the consistent conformance to specifications of its proven safe and effective products. Over the time span of the last twenty-five years, UTMD has been named as a defendant in a total of eight lawsuits. Four lawsuits involved a patient injury related to operative vaginal deliveries where a UTMD VAD birthing cup or hand pump was used. The VADS devices in all four cases did conform to specifications. UTMD was ultimately dismissed as a defendant in all four VADS lawsuits, and legal costs were not material to performance. In the first of the other two lawsuits not involving a Femcare device, regarding the use of EndoCurette, there was no evidence of patient injury. The lawsuit was settled in 2010 for an immaterial amount to avoid the diversion of management time and substantial costs of litigation, even though UTMD was confident that the case was without merit. In the second, UTMD was brought into a lawsuit by a defendant physician, speculating a design deficiency in a Finesse electrosurgical generator (ESU) which had been in use for eighteen years before the injury event, and used successfully by the same physician in multiple procedures after the event. The injured patient did not allege any fault by UTMD. The case was settled in 2012 without any UTMD involvement or liability. Excluding the FILSHIE Clip System acquired in 2011, there have been no product liability lawsuits during the last seven years.
Since acquiring Femcare in 2011, UTMD has had to defend two U.S. claims for failed sterilizations (not serious injuries), during which time approximately two million clips were used. In 2014, a patient claimed damages for becoming pregnant eight years after the placement of FILSHIE Clips. Her medical record indicated that she chose to employ FILSHIE Clips after being advised by her physician that he believed there would be a 1% chance of pregnancy. The case was dismissed after the patient who was also a malpractice attorney declined to respond in discovery. In 2017, UTMD was served with a complaint by a patient who had experienced an uncomplicated pregnancy and childbirth. A malpractice lawsuit had been filed against the attending physician in 2015, but the physician’s insurance company subsequently went bankrupt. Discovery in the case is presently ongoing, as the plaintiff has not designated an expert to support its position yet. There is no evidence of defective clips. A claim of defective design doesn’t have merit, either, supported by the successful past use of millions of clips. A claim of failure to properly warn of a remote chance of pregnancy doesn’t have merit as UTMD’s IFU is clear that there is such a risk, which the patient has acknowledged knowing and accepting prior to the implantation. The Company expects that the case will eventually be resolved, consistent with its past experience, at an immaterial cost.
In summary, since 1995 during which time over one hundred million finished devices and OEM components were distributed by UTMD, there have been no judgments resulting from a claim of defect in UTMD’s design or manufacture of its products, or a fault in its informational materials. In the current tort system in the U.S., meritless product liability cases do get filed where aggressive attorneys calculate that a company will find it cheaper to settle for some nominal amount in lieu of potentially substantial defense costs of going to court.14
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 management based on information currently available. When used in this document, the words “anticipate,” “believe,” “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 stated 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. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results, and the Company assumes no obligation to update or disclose revisions to those estimates.
ITEM 1A – RISK FACTORS
Legislative healthcare reform in the United States, as embodied in The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (the Acts) added a substantial excise tax (MDET) in 2013-2015 that increased administrative costs and has led to decreased revenues in the U.S.:The voluminous Acts, administrative rules to enforce the Acts and promised efforts to reform the Acts, make the U.S. medical device marketplace unpredictable, particularly for the thousands of small medical device manufacturers including UTMD that do not have the overhead structure that the larger medical device companies can afford. Fortunately, the U.S. Congress suspended the MDET for the years of 2016-2019. To the extent that the Acts will in the future continue to place additional burdens on small medical device companies in the form of the excise tax on medical device sales, additional oversight of marketing and sales activities and new reporting requirements, the result is likely to continue to be negative for UTMD’s ability to effectively compete and support continued investments in new product development and marketing of specialty devices in the U.S.
Increasing regulatory burdens including premarketing approval delays may result in significant loss of revenue, unpredictable costs and loss of management focus on helping the Company proactively conform with requirements and thrive:The Company’s experience in 2001-2005, when the FDA improperly sought to shut it down, highlights the ongoing risk of being subject to a regulatory environment which can be arbitrary and capricious. The risks associated with such a circumstance relate not only to the substantial costs of litigation in millions of dollars, but also loss of business, the diversion of attention of key employees for an extended period of time, including new product development and routine quality control management activities, and a tremendous psychological and emotional toll on dedicated and diligent employees.
Since the FDA reserves to itself the interpretation of which vague industry standards comprise law at any point in time, it is impossible for any medical device manufacturer to ever be confident that it is operating within the Agency’s version of the law. The unconstitutional result is that all companies, including UTMD, are considered guilty prior to proving their innocence.
Premarketing submission administrative burdens and substantial increases in “user fees” increase product development costs and result in delays to revenues from new or improved devices. It recently took two and a half years to gain FDA approval of the use of a clearly safer single use FILSHIE Clip applicator, which had been in use for over seven years OUS, in lieu of a reused applicator approved in the U.S. since 1996, made of substantially equivalent materials for the same intended use applying the same implanted clip.
The growth of Group Purchasing Organizations (GPOs) adds non-productive costs, typically weakens the Company’s marketing and sales efforts and may result in lower revenues:GPOs, theoretically acting as bargaining agents for member hospitals, but actually collecting revenues from the companies that they are negotiating with, have made a concerted effort to turn medical devices that convey special patient safety advantages and better health outcomes, like UTMD’s, into undifferentiated commodities. GPOs have been granted an antitrust exemption by the U.S. Congress. Otherwise, their business model based on “kickbacks” would be a violation of law. These bureaucratic entities do not recognize or understand the overall cost of care as it relates to safety and effectiveness of devices, and they create a substantial administrative burden that is primarily related to collection of their administrative fees.15
The Company’s business strategy may not be successful in the future:As the level of complexity and uncertainty in the medical device industry increases, evidenced, for example, by the unpredictable regulatory environment, the Company’s views of the future and product/ market strategy may not yield financial results consistent with the past.
As the healthcare industry becomes increasingly bureaucratic it puts smaller companies like UTMD at a competitive disadvantage:An aging population is placing greater burdens on healthcare systems, particularly hospitals. The length of time and number of administrative steps required in adopting new products for use in hospitals has grown substantially in recent years. Smaller companies like UTMD typically do not have the administrative resources to deal with broad new administrative requirements, resulting in either loss of revenue or increased costs. As UTMD introduces new products it believes are safer and more effective, it may find itself excluded from certain clinical users because of the existence of long term supply agreements for preexisting products, particularly from competitors which offer hospitals a broader range of products and services. Restrictions used by hospital administrators to limit clinician involvement in device purchasing decisions makes communicating UTMD’s clinical advantages much more difficult.
A product liability lawsuit could result in significant legal expenses and a large award against the Company:UTMD’s devices are frequently used in inherently risky situations to help physicians achieve a more positive outcome than what might otherwise be the case. In any lawsuit where an individual plaintiff suffers permanent physical injury, the possibility of a large award for damages exists whether or not a causal relationship exists.
The Company’s reliance on third party distributors in some markets may result in less predictable revenues:UTMD’s distributors have varying expertise in marketing and selling specialty medical devices. They also sell other devices that may result in less focus on the Company’s products. In some countries, notably China, Pakistan and India not subject to similarly rigorous standards, a distributor of UTMD’s products may eventually become a competitor with a cheaper but lower quality version of UTMD’s devices.
The loss of one or more key employees could negatively affect UTMD performance:In a small company with limited resources, the distraction or loss of key personnel at any point in time may be disruptive to performance. The Company’s benefits programs are key to recruiting and retaining talented employees. An increase in UTMD’s employee healthcare plan costs, for example, may cause the Company to have to reduce coverages which in turn represents a risk to retaining key employees.
Fluctuations in foreign currencies relative to the USD can result in significant differences in period to period financial results:Since a significant portion of UTMD’s sales are invoiced in foreign currencies and consolidated financial results are reported in USD terms, a stronger USD can have negative revenue effects. Conversely, a weaker USD would increase foreign subsidiary operating costs in USD terms. For the portion of sales to foreign entities made in fixed USD terms, a stronger USD makes the devices more expensive and weakens demand. For the portion invoiced in a foreign currency, not only USD-denominated sales are reduced, but also gross profits may be reduced because finished distributed products and/or U.S. made raw materials and components are likely being purchased in fixed USD.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None
ITEM 2 ‑ PROPERTIES
Office and Manufacturing Facilities.UTMD is a vertically‑integrated manufacturing company. Capabilities include silicone and plastics-forming operations including injection molding, insert and over-molding, thermoforming and extrusion; sensor production; manual and automated assembly of mechanical, electrical and electronic components; parts printing; various testing modalities; advanced packaging in clean room conditions; and a machine shop for mold‑making and fabrication of assembly tools and fixtures. Capabilities also include an R&D laboratory for both electronic and chemical processes, software development resources, communications and computer systems networked real time OUS, and administrative offices.16
At the beginning of 2019, the Company's operations were located in 110,000 square feet of facilities in Midvale, Utah, a 77,000 square foot facility in Athlone, County Westmeath, Ireland, a 38,600 square foot facility in Romsey, Hampshire, England, a 3,200 square foot facility in Castle Hill NSW, Australia, and a 4,700 square foot facility in Mississauga, Ontario, Canada. Manufacturing is currently carried out primarily in the Utah and Ireland facilities, with some in the UK.
In late 2016 UTMD purchased a 38,600 square foot facility in Romsey and subsequently fitted-out the building in 2017. In November 2017, Femcare UK’s operations moved into the refurbished building. The prior UK lease and all associated potential liabilities have been terminated. UTMD owns all of its property and facilities with the exception of a long‑term lease with 13 years remaining on one section of its Midvale parking lot.
ITEM 3 ‑ LEGAL PROCEEDINGS
The Company may be a party from time to time in litigation incidental to its business. Presently, there is no litigation or threatened litigation for which the Company believes the outcome may be material to its financial results.
ITEM 4 ‑ RESERVED
PART II
ITEM 5 ‑ MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information.UTMD's common stock trades on the NASDAQ Global Market (symbol:UTMD). The following table sets forth the high and low sales price information as reported by NASDAQ for the periods indicated:
Stockholders.The number of beneficial stockholders of UTMD’s common stock as of March 7, 2019 was at least 2,500.
Dividends.The following sets forth cash dividends paid during the past two years:
*A dividend of $0.27 per share, with a record date of December 15, 2017, was paid on January 3, 2018.
Issuer Purchases of Equity Securities.UTMD purchased 15,000 shares of its common stock for $1,205 including commissions and fees in December 2018. UTMD did not purchase any of its own securities in 2017.
17
ITEM 6 ‑ SELECTED FINANCIAL DATADollar amounts are in thousands, except per share data.
The following selected consolidated financial data of UTMD and its subsidiaries for the five years ended December 31, 2018, are derived from the audited financial statements and notes of UTMD and its subsidiaries, certain of which are included in this report. The selected consolidated financial data should be read in conjunction with UTMD’s Consolidated Financial Statements and the notes included elsewhere in this report.
ITEM 7 ‑ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Currency amounts are in thousands except per-share amounts and where noted. Currencies are abbreviated as follows: the U.S. Dollar (USD or $), the Great Britain Pound (GBP or £), the Euro (EUR or €), the Australian Dollar (AUD or A$) and the Canadian Dollar (CAD or C$).
The following comments should be read in conjunction with the accompanying financial statements.
OverviewExcluding a large favorable third quarter (3Q) 2018 adjustment correcting the U.S. repatriation (REPAT) tax on foreign subsidiary cash and cumulative earnings (E&P) recognized in 2017, Utah Medical Products, Inc. (Nasdaq: UTMD) concluded a solid year in 2018 in which it was able to exceed its beginning of year projections. An estimate of the REPAT tax impact of the U.S. “Tax Cuts and Jobs Act” (TCJA), which was enacted in December 2017, was included in 4Q 2017 results according to U.S. Generally Accepted Accounting Principles (GAAP). A correction according to GAAP was included in 3Q 2018 results. In addition, a new Global Intangible Low-Taxed Income (GILTI) tax became applicable for 2018 that resulted from the TCJA, an estimate for which was included in both the 3Q and 4Q 2018 tax provision. All income statement categories of UTMD’s operating performance in 2018 and 2017 were unaffected by the REPAT tax except for provision for income taxes, Net Income (NI) and Earnings Per Share (EPS).
Income statement results in 2018 compared to 2017 were as follows:
The REPAT tax correction booked in 3Q 2018 was $3,230 (lower tax provision), and the estimated GILTI tax booked in 2H 2018 was $179. The estimated REPAT tax booked in the 2017 income statement tax provision according to GAAP was $6,288, offset by a $230 adjustment (lower tax provision) to UTMD’s long term deferred tax liability (DTL) as a result of the new combined Federal and Utah State tax rate of 25.95% compared to the 39% rate prior to enactment of the TCJA. In UTMD management’s view, comparing GAAP NI and EPS between 2018 and 2017 does not provide stockholders with meaningful insight about UTMD’s financial performance.18
The associated key 2018 profit margins (profits as a percentage of sales) compared to the 2017 calendar year follow:
The 2018 EBTM and non-GAAP NIM expansion was due to non-operating income from higher interest rates on higher cash balances, and a gain from a 3Q 2018 sale of an unneeded Utah storage facility. The lower GPM came from higher direct material costs, a portion of which was due to a change in sales mix toward devices with higher direct material content. Although loaded direct labor costs were higher, the labor productivity of UTMD’s manufacturing plants remained consistent with the prior year. The lower OPM resulted from the effect of the lower GPM plus 3% (+$224) higher Operating Expenses (OE) with only 1% higher revenues for the year. Although OE as a whole were up $224, both general and administrative (G&A) expenses, excluding the expense from amortizing Femcare Identifiable Intangible Assets (IIA), and product development (R&D) expenses in USD terms were about the same as in the prior year. The G&A expense of amortizing Femcare IIA in USD terms was up $75 (+4%), even though in GBP terms the amortization expense was the same in both years, because of the strength of the GBP compared to the USD in the 1H 2018. Sales and marketing (S&M) expenses were up $164 (+11%) as UTMD added some people.
Excluding the noncash effects of depreciation, amortization of intangible assets, remeasured value of foreign currency bank balances and non-cash stock option expense, 2018 consolidated earnings before taxes and interest expense (EBITDA) were $22,464 compared to $21,979 in 2017. The REPAT tax accrual in 2017 and adjustment in 2018, 2017 DTL adjustment and GILTI tax accrual in 2018 had no effect on this EBITDA metric. All things considered, the primary difference that led to higher EBITDA in 2018 was the net non-operating income (NOI) from sale of an unneeded storage facility in Utah.
GAAP NI in 2018 was $18,555 compared to $8,505 in 2017. Because the REPAT tax and net DTL adjustment were one-time tax events not related to normal operations, and the GILTI tax is new in 2018, UTMD management believes that the presentation of NI and EPS results excluding the estimated REPAT tax in 2017, the 2018 REPAT tax correction, the 2017 favorable adjustment in DTL and the 2018 GILTI tax provision, provides meaningful supplemental information to both management and investors that is more clearly indicative of UTMD’s operating results in 2018 compared to 2017.
The resulting non-GAAP NI and EPS follow:
In summary, UTMD achieved $4.14 in “normal” 2018 EPS compared to $3.90 in 2017 with a 1% increase in sales.19
Measures of the Company’s liquidity and overall financial condition improved as of the end of 2018 compared to the end of 2017 as the result of continued strong positive cash flow from normal operations. The Company’s continued excellent positive cash flow in 2018 allowed it to increase cash dividends paid to stockholders, repurchase 15,000 UTMD shares in the open market and use $0.4 million in cash for maintaining Property, Plant and Equipment (PP&E) in good working order. In addition, UTMD used $447 in cash to pay, 19% of its corrected REPAT tax by April 2018 instead of only the 8% due in the first year, based on the initial estimate that was substantially too high.
In spite of the above cash uses, UTMD increased its cash equivalent balances to $51 million at the end of 2018 compared to $40 million at the end of 2017. Current assets increased 24% and total assets increased 8%. Total liabilities decreased $3,847 primarily because of the change in REPAT tax payable. The Company remained without debt. As a result, UTMD’s total debt ratio (total liabilities to total assets) was 11% at the end of 2018 compared to 16% at the end of 2017. Stockholders’ Equity (SE) increased to $89.0 million from $78.1 million at the end of 2017, despite the 2018 payments of $4,026 in cash dividends to stockholders and use of $1,205 for share repurchases, both of which reduce SE. The return on average SE (ROE) prior to the payment of dividends was 22.2% in 2018 compared to 11.5% in 2017. Based on non-GAAP NI, ROE before dividends in 2018 was 18.6% compared to 19.8% in 2017.
Productivity of Assets and Working Capital Assets.Assets.Year-end 2018 total consolidated assets were $99,768 comprised of $60,903 in current assets, $10,359 in consolidated net PP&E and $28,506 in net intangible assets. This compares to $92,745 total assets at the end of 2017 comprised of $49,188 in current assets, $11,621 in consolidated net PP&E and $31,936 in net intangible assets. Total asset turns (total consolidated sales divided by average total assets for the year) in 2018 were 44%, compared to 49% in 2017. The 2018 increase in assets, primarily cash, was substantially greater than the increase in sales.
Current assets increased $11,715 due to a $11,157 increase in cash and investments, a $332 increase in accounts and other receivables and a $169 increase in year-end inventories. Year-end 2018 and 2017 cash and investment balances were $51,112 and $39,955, representing 51% and 43% of total assets, respectively. Net (after allowance for doubtful accounts) year-end trade accounts receivable (A/R) balances increased $333. This was due to average days in A/R from date of invoice on December 31, 2018 at 36 days based on 4Q 2018 shipments compared to 32 days at the end of 2017 based on 4Q 2017 shipments. The Company believes any older A/R will be collected or are within its reserve balances for uncollectible amounts. Average 2018 consolidated inventory turns were 2.9 compared to 3.1 in 2017 based on the applicable year’s cost of goods sold. The Company’s cash reserves allowed it to increase inventories to take advantage of quantity discounts from vendors.
Working capital (current assets minus current liabilities) at year-end 2018 was 27% higher at $55,643 compared to $43,909 at year-end 2017. Consistent with Federal and State rules, 2018 ending current liabilities included only $85 (8%) of the State REPAT tax liability because the 2019 Federal liability had been prepaid in 2018 due to the over-estimate of the total Federal REPAT tax liability. The REPAT tax current liability was $503 at the end of 2017. The end of 2018 working capital significantly exceeds UTMD’s needs for normal operations, funding future growth and timely payment of accrued REPAT tax liabilities, in addition to funding the subsequent 1Q 2019 $23 million repurchase of inventory and FILSHIE Clip System distribution rights in the U.S. from CooperSurgical Inc (CSI).
PP&E includes Utah, Ireland and England manufacturing molds, production tooling and equipment, test equipment, and product development laboratory equipment. In addition, PP&E includes computers and software, warehouse equipment, furniture and fixtures, facilities and real estate for all five locations in Utah, Ireland, UK, Canada and Australia, the fungible market value of which increases UTMD’s enterprise value relative to most of its industry peers. Manufacturing facilities in Utah, Ireland and the UK are standalone buildings, whereas the distribution facilities in Australia and Canada are part of larger industrial condominiums. Ending 2018 net consolidated PP&E (depreciated book value of all fixed assets) declined $1,262 as a result of the combination of capital expenditures of $402, depreciation of $765 and the effect of foreign currency exchange (FX) rates on year-end foreign subsidiary asset balances.
The following end-of-year FX rates in USD applied to assets and liabilities of each applicable foreign subsidiary:
20
The year-end 2018 net book value (after accumulated depreciation) of consolidated PP&E was 33% of purchase cost. End-of-year PP&E turns (Net Sales divided by Net PP&E) was 4.1 in 2018 compared to 3.6 in 2017 due to the higher 2018 sales, depreciation which exceeded new PP&E purchases and a stronger USD at 2018 year-end. The future leverage in productivity of fixed assets which will not have to be increased to support new business activity will be a source of future profitability. In 2019, PP&E purchases to support ongoing operations are not expected to exceed depreciation of fixed assets.
Net intangible assets (after accumulated amortization) are comprised of the capitalized costs of obtaining patents and other intellectual property, as well as the value of identifiable intangible assets (IIA) and goodwill resulting from acquisitions. Net intangible assets were $28,506 (29% of total assets) at the end of 2018 compared to $31,936 (34% of total assets) at the end of 2017. Per US GAAP, intangible assets are categorized as either 1) IIA, which are amortized over the estimated useful life of the assets, or 2) goodwill, which is not amortized or expensed until the associated economic value of the acquired asset becomes impaired. The two categories of Femcare intangibles at year-end 2018 were net IIA of $14,734 and goodwill of $6,511. The accumulated amortization of Femcare IIA as of December 31, 2018 since2019, for all of its employees excluding the March 18, 2011 acquisition was $15,992. UTMD’s goodwill balance was $13,703 at the end of 2018, 48% of total net intangibles. The goodwill portion of intangible assets resulting from the Femcare acquisition which is not amortized declined $389 due to a weaker GBP at year-end. The GBP FX rate at December 31, 2018 declined 5.6% from December 31, 2017.
Because the products associated with UTMD’s acquisitions of Columbia Medical in 1997, Gesco in 1998, Abcorp in 2004 and Femcare in 2011 continue to be viable parts of UTMD’s overall business, UTMD does not expect the current goodwill value associated with the four acquisitions to become impaired in 2019. Amortization of IIA was $2,191 in 2018 compared to $2,113 in 2017. The 2018 non-cash amortization expense of Femcare IIA was $2,130 (£1,595) compared to $2,055 (£1,595) in 2017. The USD difference was again due to the change in USD/GBP FX rate. The 2019 non-cash amortization expense of Femcare IIA will again be £1,595, or $2,058 if the USD/GBP average FX rate is 1.29. Looking forward, the 2019 operating expense associated with the amortization of $21,000 IIA resulting from the acquisition of CSI remaining FILSHIE Clip System U.S. distribution rights will be $4,053.
Liabilities.The remaining $2,526 balance of the corrected $3,058 total REPAT tax liability from the TCJA is 83% instead of 92% (after the allowed 8%CEO, wherever they reside in the first of eight years’ pay out), because the initial Federal payment was based on an initial estimate which was too high. UTMD’s only REPAT tax current liability at December 31, 2018 is the $85 due to the State in 2018. The initial $6,288 estimated REPAT tax liability resulting from the TCJA was divided into 8% in current liabilities and 92% in long term liabilities in UTMD’s December 31, 2017 balance sheet. The Federal and State REPAT tax payment requirement is 8% of the respective REPAT tax liability per year for the first five years, 15% in the sixth year, 20% in the seventh year and 25% in the eighth year. However, current IRS policy requires that any estimated tax overpayment of regular income taxes during the year, beginning with the estimated payments made in 2017, be applied first to the REPAT tax obligation rather than the ensuing year’s normal income taxes, based on some rationale only understood by IRS bureaucrats.
UTMD’s $179 estimate of the new 2018 GILTI tax is included in December 31, 2018 current liabilities. A discussion of the GILTI tax was included in UTMD’s Form SEC 10-Q dated September 30, 2018.
Year-end 2018 current liabilities were $20 lower than at the end of 2017. Total liabilities were $3,946 lower at the end of 2018 compared to the end of 2017. The resulting 2018 year-end total debt ratio was 11% compared to 16% at the end of 2017.
The year-end 2018 DTL balance created as a result of the fifteen year deferred tax consequence of the amortization of Femcare’s IIA was $2,541, down from $3,102 at the end of 2017. The larger decline in this DTL in addition to $2,130 in 2018 amortization of IIA, was due to a 6% weaker GBP compared to the USD at the end of 2018 compared to the end of 2017. In addition to liabilities stated on the balance sheet, UTMD has operating lease and purchase obligations described in Note 8 to the financial statements.
Results of Operations.a)Revenues.Under accounting standards applicable for 2018, the Company believed that revenue should be recognized at the time of shipment as title generally passes to the customer at the time of shipment, or completion of services performed under contract. Revenue recognized by UTMD is based upon documented arrangements and fixed contracts in which the selling price is fixed prior to acceptance and completion of an order. Revenue from product or service sales is generally recognized at the time the product is shipped or service completed and invoiced, and collectibility is reasonably assured. Over 99% of UTMD’s revenue is recognized at the time UTMD ships a physical device to a customer’s designated location, where the selling price for the item shipped was agreed prior to UTMD’s acceptance and completion of the customer order. There are no post-shipment obligations which have been or are expected to be material to financial results.
There are circumstances under which revenue may be recognized when product is not shipped, which have met the criteria of SAB 104: the Company provides engineering services, for example, design and production of manufacturing tooling that may be used in subsequent UTMD manufacturing of custom components for other companies. This revenue is recognized when UTMD’s service has been completed according to a fixed contractual agreement.21
Beginning on January 1, 2018, the Company adopted ASU 2014-09, a new revenue recognition accounting standard. Management completed an extensive assessment and implementation of the standard, including UTMD’s various contracts with customers and associated performance obligations and the Company’s conclusions regarding its revenue recognition practices and procedures. Other items like commissions and rights of return were also evaluated by the Company. Management is confident that the Company has properly evaluated the standard’s requirements and has arrived at appropriate conclusions in recognizing revenue in accordance with the new standard. Those practices and procedures the Company will use to recognize revenue under the new standard are not significantly different than the methods used previously since UTMD has traditionally recognized revenue upon shipping a physical device to a customer’s designated location, which is also when the Company has met its performance obligations under contracts it has with its customers that represent over 99% of its revenue. While the Company’s revenue not associated with shipping a physical product is immaterial, management believes the Company’s practices in recognizing that revenue is also in accordance with ASU 2014-09.
Terms of sale are established in advance of UTMD’s acceptance of customer orders. In the U.S., Ireland, UK, France and Australia since the beginning of 2017, UTMD has generally accepted orders directly from and shipped directly to end user clinical facilities, as well as third party medical/surgical distributors, under UTMD’s Standard Terms and Conditions (T&C) of Sale. About 14% of UTMD’s domestic end user sales, excluding Femcare’s FILSHIE Clip System sales to its exclusive U.S. distributor, CooperSurgical Inc. (CSI), went through third party med/surg distributors which contract separately with clinical facilities to provide purchasing, storage and scheduled delivery functions for the applicable facility. UTMD’s T&C of Sale to end user facilities are substantially the same in the U.S., Canada, Ireland, UK, France and Australia.
UTMD may have separate discounted pricing agreements with a specific clinical facility or group of affiliated facilities based on volume of purchases. Pricing agreements which are documented arrangements with clinical facilities, or groups of affiliated facilities, if applicable, are established in advance of orders accepted or shipments made. For existing customers, past actual shipment volumes typically determine the fixed price by part number for the next agreement period of one year. For new customers, the customer’s best estimate of volume is usually accepted by UTMD for determining the ensuing fixed prices for the agreement period. Prices are not adjusted after an order is accepted. For the sake of clarity, the separate pricing agreements with clinical facilities based on volume of purchases disclosure is not inconsistent with UTMD’s disclosure above that the selling price is fixed prior to the acceptance of a specific customer order.
UTMD’s global consolidated trade sales are comprised of domestic and outside the U.S. (OUS) sales. Domestic sales in 2018 and 2017 included 1) direct domestic sales, sales of finished devices to end-user facilities and med/surg distributors in the U.S.; 2) domestic OEM sales, sales of components or finished products, which may not be medical devices, to other companies for inclusion in their products; and 3) sales of the FILSHIE Clip System by Femcare UK to CSI. OUS sales are export sales from UTMD in the U.S. to customers outside the U.S. invoiced in USD, and all sales from UTMD subsidiaries in Ireland, Canada, Australia and the UK (other than Femcare UK sales to CSI) which may be invoiced in EUR, GBP, CAD, AUD or USD. The term “trade” means sales to customers which are not part of UTMD. Each UTMD entity except Femcare Australia and Femcare Canada also had 2018 intercompany sales of components and/or finished devices to other UTMD entities.
Global consolidated trade sales in 2018 were $41,998 compared to $41,414 in 2017 and $39,298 in 2016. The $584 (+1.4%) higher sales in 2018 were the result of several offsetting factors described below. Total U.S. domestic sales were up $906 (+4.5%) in 2018, at $21,192 compared to $20,286 in 2017. OUS sales were down $322 (1.5%) compared to 2017.
Domestic Sales.U.S. domestic sales in 2018 were $21,192 (50% of total sales) compared to $20,286 (49% of total sales) in 2017. The primary contributors to the 2018 total $906 (+4.5%) higher domestic sales were $968 (+31%) higher sales of components and finished devices used in other companies’ products (OEM customers) and $402 (+3.0%) higher direct sales of UTMD finished devices to domestic end-users. The OEM and Direct user sales increases were partially offset by $464 (12.3%) lower sales to CSI, Femcare’s US distributor of the FILSHIE Clip System.
Domestic OEM sales in 2018 represented almost 10% of total sales compared to 8% in 2017. UTMD sold components and finished devices to 152 different U.S. companies in 2018 compared to 148 companies in 2017, for use in their product offerings. Sales to UTMD’s largest OEM customer, which are expected to continue to grow at a rapid rate in 2019, were up 67%.
Domestic direct (end-user) sales of neonatal products were $4,185 (+3% higher), labor & delivery (L&D) products $3,749 (about the same), pressure monitoring (BPM) products $1,021 (+9% higher) and gynecology/electrosurgery/ urology products excluding the FILSHIE Clip System $4,849 (+4% higher).
On December 31, 2018 UTMD entered into a definitive agreement with CSI to purchase the remaining 4.75 year life of CSI’s exclusive U.S. distribution rights for the FILSHIE Clip System in the U.S., with shipments beginning to customers on February 1, 2019. In addition to adding the distributor margin to sales looking forward, UTMD hopes to expand its direct domestic gynecology sales of the FILSHIE Clip System through a direct marketing focus with end users including a conversion to single use applicator kits, approved by the FDA for distribution in the U.S. in late 2016, which UTMD believes is in the best interest of patients.22
Outside the U.S. (OUS) Sales.Sales OUS in 2018 were $20,806 (1.5% lower) compared to $21,129 in 2017.
The variance in order pattern of UTMD’s China distributor for BPM devices explains 55% of the difference. In 2017, this distributor purchased five shipments at an average $393 each, with two of the shipments in the 2Q 2017. In 2018, this distributor purchased three shipments at an average $416 each, with one in each of the first three quarters and none in 4Q 2018. The order received from this distributor in fixed USD for 2019 returns to four shipments during the year at an average of $419 per shipment, which will add $430 in 2019 sales compared to 2018.
Sixty-seven percent of (USD denominated) 2018 OUS sales were invoiced in foreign currencies compared to 64% in 2017. As a portion of total sales, 33% of UTMD’s USD-equivalent sales were invoiced in foreign currencies in both 2018 and 2017. In 2018, the GBP, EUR, AUD and CAD converted sales represented 10%, 12%, 5% and 6% of total 2018 USD sales, respectively. This compares to 10% GBP, 10% EUR, 6% AUD and 7% CAD of total 2017 USD sales. Because a significant portion of UTMD’s sales are invoiced in foreign currencies, changes in FX rates can potentially have a material effect on period-to-period USD-denominated sales. FX rates had a varied impact during 2018. UTMD’s FX rates for income statement purposes are transaction-weighted averages. The average rates from the applicable foreign currency to USD during 2018 compared to 2017 follow:
FX rates added $306 to 2018 year (as a whole) sales using the same FX rates as in 2017 (constant currency). The USD strengthened considerably later in 2018 compared to the first half of the year.
USD-denominated trade (excludes intercompany) sales of devices to OUS customers by UTMD’s Ireland facility (UTMD Ltd) were $5,008 in 2018 compared to $5,224 in 2017. The FX impact added $134 to 2018 sales compared to 2017. Ireland manufactures the BPM devices it sells to UTMD’s China distributor, which were $716 lower in 2018 than in 2017 due to the previously described order pattern fluctuation. In constant EUR currency and eliminating sales of BPM devices to its China distributor in both years, 2018 Ireland trade sales experienced 11% growth compared to 2017. In EUR terms, UTMD Ltd 2018 sales including intercompany shipments and China trade sales were 6% higher for the year.
In 2018, UTMD formally renamed its UK subsidiary from Femcare-Nikomed Ltd to Femcare Ltd. USD-denominated 2018 trade sales of devices to domestic UK, domestic France and international distributor customers of Femcare Ltd, excluding intercompany sales and sales to CSI (which are classed domestic sales), were $5,849 (+9%) higher compared to $5,356 in 2017. The FX impact added $209 to 2018 sales compared to 2017. In constant currency, 2018 sales were up 5%. Sales of the FILSHIE Clip System in Europe (including the UK) remained strong. Separately, Femcare Ltd sales to CSI (included in U.S. domestic sales) were $464 (12%) lower in 2018 than in 2017. After depletion of CSI’s inventory, the UK trade sales to CSI in 2018 will become intercompany sales to UTMD in Utah in 2019. In GBP terms, total UK subsidiary 2018 sales including intercompany shipments as well as sales to CSI were 6% lower for the year.
USD-denominated sales of devices to end-users in Australia by Femcare’s Australia distribution subsidiary (Femcare Australia Pty Ltd) were 14% lower in 2018 compared to 2017. The FX rate impact subtracted $50 from 2018 sales in 2017. AUD denominated sales in 2018 were 12% lower than in 2017.
USD-denominated sales of devices to end-users in Canada by UTMD’s Canada distribution subsidiary (Utah Medical Products Canada, Inc.) were 12% lower in 2018 compared to 2017. The FX impact added $13 to 2018 sales. CAD denominated sales in 2018 were 13% lower than in 2017.23
Looking forward to 2019, there again seem to be several offsetting influences on projected sales which may not be minor. UTMD expects worldwide macroeconomic conditions to weaken, which may affect the demand for discretionary specialty medical devices. A continuing trade war with China could result in significant adverse effects on UTMD’s distributors. On the matter of BREXIT, UTMD does not foresee a material impact on its financial results in 2019, despite the politically expressed doomsday concerns. As of this date in early March 2019, the FX rates of the above foreign currencies remain consistent with the 4Q 2018 average rates, i.e. substantially weaker relative to the USD than in 2018 as a whole year. If the current FX rates remain for the balance of 2019, a projected negative $500 impact on same foreign currency sales would wipe out the additional sales obtained from the China distributor. Although it remains uncertain as to whether or not the weaker FILSHIE Clip System sales experienced particularly in 4Q 2018 in Australia, Canada and the U.S. might represent a trend into 2019, or just a fluctuation in end-of-year order pattern, UTMD expects a substantial increase in FILSHIE Clip System sales in the U.S. due to direct sales to end-users beginning in February. Combining the above assumptions with another strong increase in U.S. OEM sales, management currently projects UTMD 2019 USD consolidated revenues may be in the range of 9-10% higher than in 2018.
UTMD groups its sales into four general product categories: 1) obstetrics, comprised of labor and delivery management tools for monitoring fetal and maternal well-being, for reducing risk in performing difficult delivery procedures and for improving clinician and patient safety; 2) gynecology/ electrosurgery/ urology, comprised of tools for gynecological procedures associated primarily with cervical/ uterine disease including LETZ, endometrial tissue sampling, transvaginal uterine sonography, diagnostic laparoscopy, surgical contraception and other MIS procedures; specialty excision and incision tools; conservative urinary incontinence therapy devices; and urology surgical procedure devices; 3) neonatal critical care, comprised of devices that provide developmentally-friendly care to the most critically ill babies, including providing vascular access, enteral feeding, administering vital fluids, oxygen therapy while maintaining a neutral thermal environment, providing protection and assisting in specialized applications; and 4) blood pressure monitoring/ accessories/ other, comprised of specialized components as well as molded parts and assemblies sold on an OEM basis to other companies. In these four categories, UTMD’s primary revenue contributors enjoy significant brand awareness by clinical users.
Global revenues by product category:
OUS revenues by product category:
*includes molded components and finished medical and non-medical devices sold to OEM customers.
As a summary description of revenues in the above tables:1. Obstetrics. Increases in sales of newer devices helped offset declines from competition with older devices. 2. The gynecology/ electrosurgery/ urology (ES/Gyn) product category includes FILSHIE Clip System sales, which were $464 lower to CSI (U.S. distributor) and $17 higher OUS (despite being $654 lower in Canada and Australia combined). Electrosurgery sales were $371 higher. Urology sales were $45 higher.3. Neonatal intensive care unit (NICU) device sales are experiencing consistent growth OUS.4. OUS blood pressure monitoring and accessories (BPM) sales in 2018 suffered a loss of $717 compared to 2017 sales of BPM kits to UTMD’s China distributor due to a variation in order pattern.
In calendar year 2019, despite an expected negative FX rate impact on foreign currency sales, UTMD expects overall revenues to be in the range of 9–10% higher due to the acquisition of the right to sell FILSHIE Clip System devices directly to U.S. medical facilities and continued growth in domestic OEM product sales.24
Gross Profit (GP).UTMD’s 2018 consolidated GP, the surplus after subtracting costs of manufacturing, which includes purchasing raw materials, forming components, assembling, inspecting, testing, packaging, sterilizing and shipping products, from net revenues, was $26,306 (62.6% of sales) compared to $26,395 (63.7% of sales) in 2017, and $23,690 (60.3% of sales) in 2016.
UTMD’s 2018 GPM was squeezed by higher labor and direct materials costs, as well as a product mix difference. OEM sales, which grew faster than other sales categories, have inherently lower GPMs than direct end user device sales, because another entity incurs operating expenses (OE) including sales and marketing (S&M) expenses, as well as much of product development (R&D) and general and administrative (G&A) expenses. The combination of higher variable manufacturing costs and change in product mix resulted in a 2018 GPM of 62.6% compared to 63.7% in 2017, which remained above management’s overall GPM target of 60%. Utah and Ireland manufacturing operations, despite higher loaded (by benefits and taxes) labor costs, maintained direct labor and manufacturing overhead productivity in 2018 consistent with the prior year.world. In addition to the product mix GPM dilution, actual raw material price increases and increased freight-in expense from raw material vendors helped dilute the GPM.
Because UTMD’s medical devices are differentiated and not subject to GPO agreements or other significant commodity pricing pressures, the Company was able to avoid unit sales price reductions.
UTMD’s Ireland subsidiary’s (UTMD Ltd’s) GP was EUR 3,606 in 2018 compared to EUR 3,234 in 2017 and EUR 3,988 in 2016. The associated GPMs were 49.8% in 2018, 47.5% in 2017 and 49.5% in 2016. The higher GP and GPM in 2018 were due to the 6% higher total sales, including intercompany sales, and a more favorable product mix as sales to UTMD’s China distributor, which were substantially lower, are priced at a very low GPM.
Femcare UK GP was GBP 5,010 in 2018 compared to GBP 5,317 in 2017, and GBP 4,138 in 2016. The lower GP in 2018 was due to $464 (12.3%) lower sales of FILSHIE Clip System devices to CSI in the U.S. The 2018 GPM was 71.7% compared to 71.7% in 2017 as well, and 69.4% in 2016.
Femcare Australia and Femcare Canada are purely distribution facilities for UTMD finished devices in their respective countries. Australia GP was AUD 1,526 in 2018 compared to AUD 1,846 in 2017 and AUD 2,049 in 2016. In addition to 11.6% lower AUD sales, GP were further leveraged lower as a weaker AUD raises the AUD cost of finished devices purchased from other UTMD subsidiaries in their fixed currency terms. The respective Femcare Australia GPMs were 58.7% in 2018, 62.7% in 2017 and 65.1% in 2016. Canada GP was CAD 1,999 in 2018 (60.0% of sales) compared to 2,300 (60.2% of sales) in 2017, its first year of operation. The 13% lower GP was due to 13% lower CAD sales.
In the U.S., GP was $13,065 in 2018 compared to $12,497 in 2017 and $12,547 in 2016. GPMs were 54.1% in 2018, 55.0% in 2017 and 54.3% in 2016. The lower 2018 U.S. GPM was the result of higher direct materials costs and higher direct material content of high growth OEM product sales. Otherwise, U.S. direct labor and manufacturing overhead costs as a percentage of sales were consistent with the prior year, primarily because of UTMD’s very experienced manufacturing personnel.
A summation of the above 2018 GP of each subsidiary will not yield consolidated total GP because of elimination of profit in inventory of intercompany goods. With a 9–10% projected increase in total consolidated 2019 sales, UTMD expects almost a two percentage point increase in its consolidated 2019 GPM, yielding a 12-13% increase in 2019 consolidated GP compared to 2018. This would be the result of gaining the previous CSI distributor margin on 2019 direct sales of the FILSHIE Clip System in the U.S., offset by projected marginally higher direct material costs and higher labor costs as a result of a Utah employee cost of living adjustment at the beginning of 2019. The increase in consolidated GP will be subdued until the $2,098, approximate 9 months’ worth, of CSI repurchased inventory is consumed, as the price of the inventory is the same as the past Femcare sales price to CSI, previously realized in UK GP.
c) Operating Income (OI). OI results from subtracting OE from GP. OI in 2018 was $18,697 (44.5% of sales) compared to $19,011 in 2017 (45.9% of sales), and $16,187 (41.2% of sales) in 2016. The lower 2018 OIM reflected the lower 2018 GPM, and higher OE as planned. The UTMD Ltd (Ireland) OIM in 2018 was 45.9% compared to 42.7% in 2017, and 45.9% in 2016. Femcare UK’s 2018 OIM was 38.1% compared to 40.1% in 2017, and 30.3% in 2016. Femcare Australia’s 2018 OIM was 45.4% compared to 50.0% in 2017, and 54.3% in 2016. Femcare Canada’s 2018 OIM was 49.1% compared to 51.5% in 2017. UTMD U.S. OIM in 2018 was 39.1% compared to 39.8% in 2017, and 38.1% in 2016.25
OE include sales and marketing (S&M) expenses, product development (R&D) expenses and general and administrative (G&A) expenses. Consolidated OE were $7,608 (18.1% of sales) in 2018 compared to $7,385 (17.8% of sales) in 2017, and $7,503 (19.1% of sales) in 2016. The following table provides a comparison of OE categories for the last three years.
Description of OE Categoriesi) S&M expenses:S&M expenses in 2018 were $1,708 (4.1% of 2018 sales) compared to $1,544 (3.7% of sales) in 2017, and $1,673 (4.3% of sales) in 2016. The higher USD S&M expenses were due primarily to UTMD hiring planned additional S&M personnel in the U.S. Although further expanded S&M resources are needed in 2019 to distribute and support the FILSHIE Clip System directly to end user facilities in the U.S., S&M expenses as a percentage of total revenues in 2019 are not expected to increase.
S&M expenses are the costs of communicating UTMD’s differences and product advantages, providing training and other customer service in support of the use of UTMD’s solutions, attending clinical meetings and medical trade shows, administering customer agreements, advertising, processing orders, shipping, paying commissions to outside independent representatives and, when applicable, paying the MDET in the U.S. In markets where UTMD sells directly to end-users, which in 2018 included the U.S., Ireland, UK, Australia, France and Canada, the largest components of S&M expenses were the cost of employing direct sales representatives, including associated costs of attending trade shows, travel, subsistence and communications; the cost of customer service required to timely process orders; and the distribution costs associated with shipping products to many locations. The theoretical trade-off between higher gross profit margins for selling directly at end user prices is higher S&M expenses as a percent of sales. S&M expenses associated with direct France sales have been effectively absorbed by the UK subsidiary with a minimal increase in S&M resources.
S&M expenses include all customer support costs including training. In general, training is not required for UTMD’s products since they are well-established and have been clinically widely used. Written “Instructions For Use” are packaged with all finished devices. Although UTMD does not have any explicit contracts with customers to provide training, it does provide hospital in-service and clinical training as required and reasonably requested.
UTMD promises prospective customers that it will provide, at no charge in reasonable quantities, electronic media and other instructional materials developed for the use of its products. UTMD provides customer support from offices in the U.S., Canada, Ireland, UK and Australia by telephone to answer user questions and help troubleshoot any user issues. Occasionally, on a case-by-case basis, UTMD may utilize the services of an independent practitioner to provide educational assistance to clinicians. All in-service and training expenses are routinely expensed as they occur. Except for the consulting services of independent practitioners and occasional use of marketing consultants, all of these services are allocated from fixed S&M overhead costs. Historically, additional consulting costs have been immaterial to financial results, which is also UTMD’s expectation for the future.26
The MDET, a component of the Patient Protection and Affordable Care Act, (known commonly as Obamacare) was effective between 2013 and 2015. In December 2015, U.S. legislators suspended the MDET for 2016 and 2017, and in January 2018, further suspended it for 2018 and 2019. The excise tax was 2.3% of domestic sales of medical devices listed with the FDA. Medical devices designed for human use were taxed, whether or not they were sold for human use, e.g. veterinarian uses or laboratory use were also taxed. The impact of the tax was felt beyond 2.3%, as costs associated with administering, tracking, collecting and paying the tax were significant.
ii) R&D expenses:R&D expenses were $454 (1.1% of sales) in 2018 compared to $447 (1.1% of sales) in 2017, and $475 (1.2% of sales) in 2016. R&D expenses include the costs of investigating clinical needs, developing innovative concepts, testing concepts for viability, validating methods of manufacture, completing any necessary premarketing clinical trials, regulatory documentation and other activities required for design control, responding to customer requests for product enhancements, and assisting manufacturing engineering on an ongoing basis in developing new processes or improving existing processes. Although no new UTMD devices were launched in 2018, R&D played a significant and continuing role in manufacturing process improvements that were needed to support fast growing OEM product sales, in addition to continuing work on new product projects. UTMD does not pre-announce new devices that are being developed. R&D expenses in 2019 as a percentage of 2019 sales are not expected to increase.
iii) G&A expenses:G&A expenses in 2018 were $5,447 (13.0% of sales) compared to $5,393 (13.0% of sales) in 2017, and $5,355 (13.6% of sales) in 2016. G&A expenses include the “front office” functional costs of executive management and outside directors, finance and accounting, corporate information systems, human resources, stockholder relations, corporate risk management, corporate governance, protection of intellectual property, amortization of identifiable intangibles and legal costs. The table above helps clarify certain specific categories of G&A expenses of interest to stockholders. Amortization of the 2011 acquired Femcare IIA is part of G&A expenses. Although the IIA GBP amortization expense in 2018 was the same as in 2017, because of the stronger GBP for the year as a whole, the USD 2018 IIA amortization expense was $75 higher than in 2017. The resulting G&A noncash amortization expense of Femcare IIA was 5.1% of total 2018 sales compared to 5.0% of total sales in 2017 and 5.5% of sales in 2016. The Femcare IIA amortization expense will continue until March 2026 (or until the value of any remaining IIA becomes impaired).
The early 2019 $21,000 purchase of CSI exclusive FILSHIE Clip System distribution rights becomes an IIA which will be amortized on a straight line basis over the remaining 4.75 year life of the Femcare distribution agreement with CSI. This new amortization expense included in G&A expenses will be $4,053 in 2019, by itself about 9% of projected 2019 total revenues. The new G&A amortization expense exceed UTMD’s increase in 2019 GP.
In 2019, not including unforeseen litigation expenses or possible acquisition costs, UTMD expects consolidated OE to be about 2.5% higher than in 2018 apart from the new CSI IIA amortization expense. In summary, management projects resulting 2019 consolidated OI to be 4-5% lower than in 2018.
d) Non-operating Income (NOI), Non-operating Expense (NOE) and EBT. NOI includes royalties from licensing UTMD’s technology, rent from leasing underutilized property to others, income earned from investing the Company’s excess cash and gains or losses from the sale of assets or remeasurement of foreign currency bank account balances into USD, offset by NOE which includes interest on bank loans, bank service fees and excise taxes. The period-to-period remeasured value of EUR cash balances held in the UK and GBP balances held in Ireland generates a gain or loss which is booked at reporting period end as NOI or NOE.
Net NOI (combination of NOE and NOI) was $761 in 2018 compared to $71 in 2017 and $235 in 2016. The primary causes of the $690 higher NOI in 2018 compared to 2017 were a one-time $450 gain from the sales of assets in 2Q 2018 and $201 higher interest received on higher U.S. cash balances. A description of NOE and NOI components follows:27
1) Interest Expense. There was no interest expense in 2018, 2017 or 2016. Absent an acquisition or large repurchase of shares that requires new borrowing, UTMD does not expect any interest expense in 2019.2) Investment of excess cash. Consolidated investment income (including gains and losses on sales of investments) was $248 in 2018 compared to $17 in 2017 and $12 in 2016. Prior to 2018, cash was generally held in non-interest bearing bank accounts because avoiding the bank operating fees which would result from lower balances offset the low interest that could be earned at then current interest rates. UTMD estimates investment income will be lower in 2019 because of the use of $21,000 cash to repurchase the CSI FILSHIE Clip System distribution rights.3) Royalties. Femcare received a royalty from licensing the use of the FILSHIE Clip System intangibles to CSI as part of its U.S. exclusive distribution agreement. Royalties in 2018 were $76 compared to $86 in 2017 and $91 in 2016. UTMD will not receive a CSI royalty in 2019 because of the purchase of the distribution agreement. Presently, there are no other arrangements under which UTMD is receiving royalties from other parties.4) Gains/ losses from remeasured currency in bank accounts. UTMD recognized 2018 NOI of $13, 2017 NOI of $4 and 2016 NOI of $129 from gains on remeasured foreign currency bank balances. EUR and AUD currency cash balances in the UK, and GBP currency cash bank balances in Ireland, are subject to remeasured currency translation gains/ losses as a result of period to period changes in FX rates. Because of UTMD’s subsidiaries’ profitability, the subsidiaries may continue to accumulate cash until uses of cash that increase stockholder value are identified. No remeasured currency gains or losses are included in UTMD’s projections for 2019.5) Other NOI/NOE. Income received from renting unused warehouse space in Ireland and parking lot space in Utah for a cell phone tower, offset by bank fees, miscellaneous non-operating expenses and non-MDET excise taxes resulted in a net NOE of $3 in 2018 compared to NOE of $36 in 2017 and NOI of $3 in 2016. UTMD estimates Other NOI/NOE will be nominal in 2019.
Income before Taxes (EBT) results from adding net NOI or subtracting net NOE from OI. Consolidated EBT was $19,458 (46.3% of sales) in 2018 compared to $19,082 (46.1% of sales) in 2017, and $16,422 (41.8% of sales) in 2016. The 2018 EBT of UTMD Ltd. (Ireland) was €3,144 (43.4% of sales), compared to €2,779 (40.8% of sales) in 2017, and €3,489 (43.3% of sales) in 2016. Femcare UK’s 2018 EBT was £2,896 (41.5% of sales) compared to £3,155 (42.5% of sales) in 2017 and £2,141 (35.9% of sales) in 2016. Femcare AUS’s 2018 EBT was AUD 1,183 (45.5% of sales) compared to AUD 1,473 (50.0% of sales) in 2017 and AUD 1,713 (54.4% of sales) in 2016. Femcare Canada’s 2018 EBT was CAD 1,632 (49.0% of sales) compared to 1,906 (49.9% of sales) in 2017.
As a side note for clarity of financial results, UTMD’s 2018, 2017 and 2016 EBT, as well as all other income statement measures above the EBT line in the Income Statements, were unaffected by the 2017 accrual of the REPAT tax, the reduction in the 2017 end DTL, the 2018 correction in the REPAT tax and the new GILTI tax accrued in 2018, all of which resulted from the TCJA enacted in late 2017. The year-to-year GAAP comparisons of GP, OI and EBT are good indicators of UTMD’s operating performance.
Looking forward, based on the projected 4-5% lower OI plus lower NOI in 2019 because of one-time gains in 2018, management expects consolidated EBT to be 7-8% lower than in 2018.
e) Net Income (NI), EPS and ROE. NI is EBT minus income taxes, often called the “bottom line”. There were tax law changes enacted in the U.S. in 2017 and in the UK in 2016. The lowering of a future income tax rate results in a reduction in DTL. According to US GAAP, the total effect of tax rate changes on DTL balances is recorded as a component of the income tax provision related to continuing operations in the period in which the law is enacted. The DTL adjustments which lowered the applicable year’s consolidated income tax provision were $230 in 2017 and $123 in 2016. There was no DTL adjustment in 2018.
In addition, the U.S. TCJA enacted in December 2017 included a special levy on the cumulative income (E&P) of UTMD’s foreign subsidiaries. Foreign cash balances of $29 million were taxed at a 15.5% rate, and the remaining E&P at an 8% rate for accrued Federal income tax purposes. The State of Utah followed the Federal government and also levied a REPAT tax on half the E&P at the State of Utah corporate income tax rate of 5%. UTMD’s end of 2017 tax provision was increased by an estimated $6,288 to incorporate the total Federal and State REPAT tax according to GAAP, reducing 2017 NI and EPS accordingly. In 3Q 2018, after more IRS information became available and when UTMD’s independent tax advisors completed the 2017 income tax return, it became known to the Company that the actual REPAT tax liability was $3,058, resulting in a favorable $3,230 adjustment to UTMD’s 3Q 2018 income tax provision. The favorable adjustment was due to the allowance of foreign tax credits by the IRS. Although the REPAT tax is clearly a tax on foreign income, the State of Utah did not follow the IRS and allow foreign tax credits. In addition, the Company became aware of a new and ongoing Global Intangible Low-Taxed Income (GILTI) tax applicable beginning in 2018 that resulted from the TCJA, an estimate for which is included in the 2018 tax provision for the first time. Perversely, because the State of Utah also does not presently allow foreign tax credits when calculating the GILTI tax, the State GILTI tax represents an ongoing substantial tax on foreign income which was conceptually meant to be alleviated by the State REPAT tax of over $1 million. Essentially no GILTI tax will be received by the Federal government due to the deductibility of State GILTI taxes.28
Because of the estimated “one-time” REPAT tax in 2017, the DTL adjustment in 2017 resulting from the adoption of lower Federal and State corporate income tax rates, the REPAT tax correction in 2018 and the new GILTI tax in 2018, calculating and comparing period-to-period income tax provisions as a percentage of EBT does not provide meaningful information to stockholders, in UTMD’s opinion. Therefore, NI and EPS are presented below both according to GAAP and also prior to recognition of the various tax provisions related to the TCJA.
US GAAP:
Non-GAAP (excluding TCJA REPAT and GILTI taxes):
Note: The tax provision adjustments only affected UTMD’s income tax provision, NI and EPS, not consolidated revenues (sales), GP, OI or EBT.
The (non-US GAAP) consolidated combined income tax provision rate for 2018 was 20.3% of EBT compared to 23.7% in 2017, and 26.9% in 2016. The GAAP consolidated income tax provision rate for 2018 was 4.6% compared to 55.4% of EBT in 2017 and 26.2% in 2016. The non-US GAAP difference in rates was due primarily to the tax deduction allowed in the UK and Ireland on the remeasured value of their USD cash balances, as well as the mix of income generated and actual tax provisions in sovereignties with varying tax rates. Both UK and Ireland subsidiaries experienced native currency losses on the value of their large USD cash balances in 2017. These currency translation losses are tax deductions in the applicable foreign jurisdiction, but do not affect UTMD’s EBT (USD are USD). But the actual tax (lower) provisions of the OUS subsidiaries do become part of UTMD’s consolidated income tax provision.
In general, year to year fluctuations in the combined tax rate will result from variation in EBT contribution from subsidiaries in jurisdictions with different corporate income tax rates. The UK had an income tax rate of 20% in 1Q 2017 and a rate of 19% thereafter through March 2020, compared to a rate of 20% in 2016. The UK also allows a tax deduction for sales of UK patented products which varies from year-to-year based on somewhat complicated rules which are sorted out for UTMD by independent tax accountants. The current UK income tax rate of 19% is scheduled to decline to 17% beginning April 1, 2020. The income tax rate for AUS has been and is planned to remain at 30%. The income tax rate for Canada was and is expected to remain at about 26%. Profits of the Ireland subsidiary are taxed at a 12.5% rate on exported manufactured products, and a 25% rate on rental and other types of income including income from sales of medical devices in Ireland domestically.29
The Company believes that investors benefit from referring to the non-GAAP financial measures above in assessing UTMD’s performance. The non-GAAP financial measures also facilitate management’s internal comparisons for purposes of planning future performance. The non-GAAP financial measures disclosed by UTMD should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations to those financial statements should be carefully evaluated.
EPS are NI divided by the number of shares of stock outstanding (diluted to take into consideration stock option awards which are “in the money,” i.e., have exercise prices below the applicable period’s weighted average market value). Diluted EPS in 2018 per GAAP were $4.950 ($4.136 prior to the REPAT tax correction and GILTI tax provision), compared to $2.276 in 2017 ($3.897 prior to the REPAT tax and DTL adjustment) and $3.220 ($3.188 prior to the DTL adjustment) in 2016. The 2018 non-GAAP results exceeded management’s expectations for the year.
The 2018-ending weighted average number of diluted common shares (the number used to calculate diluted EPS) was 3,749 (in thousands), compared to 3,737 shares in 2017 and 3,766 shares in 2016. Dilution for “in the money” unexercised options for the year 2018 was 18 (in thousands) shares compared to 19 shares in 2017 and 15 shares in 2016. Actual outstanding common shares as of December 31, 2018 were 3,720.
In summary, after an outstanding year of growth in 2017, UTMD achieved slightly better revenues in 2018, with GP and OI challenged by broadly higher costs. Nevertheless, helped by the gain on sales of assets and a lower combined income tax rate, non-GAAP NI and EPS were up 6%.
UTMD’s calendar year 2019 operating plan for conservative reasons excludes additional share repurchases, acquisitions other than the repurchase of CSI distribution rights and potential sales growth from unannounced new products. Incorporating the model described above which projects 7-8% lower EBT, and adding the GILTI tax as it is currently administered by the State of Utah, management estimates 2019 EPS between $3.70 and $3.80.
Return on stockholders’ equity (ROE) is the portion of NI retained by UTMD (after payment of dividends) to internally finance its growth, divided by the average accumulated stockholders’ equity (ASE) during the applicable time period. ROE includes balance sheet measures as well as income statement measures. Maintaining a high ROE is a key management objective for UTMD in order to grow without diluting its stockholders’ interest. ROE is the quotient of NI divided by ASE, but it is the product of NIM, productivity of assets and financial leverage. UTMD’s high NIM is the primary factor that continues to drive its ROE. Repurchases of shares and dividends help ROE as the applicable value reduces ASE, the denominator. Because of its magnitude, the REPAT tax estimate in 2017 and correction in 2018 both had a significant impact on the overall ROE ratio, even though the REPAT tax amounts reduce both the numerator and denominator.
UTMD’s 2018 ROE was 17% using 2018 GAAP NI and subtracting dividends. In comparison, 2017 ROE was 8% using GAAP NI and subtracting dividends, and 12% in 2016. Before dividends, UTMD’s 2018 ROE was 22%, compared to 2017 ROE at 12% and 2016 at 17%. Because of the impact on NI from the over-estimate of the REPAT tax in 2017 and the correction in 2018, stockholders might consider that the average ROE of 17% is more indicative of results in both years.
ASE was $83,557 in 2018, $73,683 in 2017 and $69,445 in 2016. Maintaining a high ROE with the dilutive effect of rapidly growing ASE suggests an excellent increase in stockholder value.
Liquidity and Capital ResourcesCash Flows.Net cash provided by operating activities, including adjustments for depreciation and other non-cash operating expenses, along with changes in working capital and the tax benefit attributable to exercise of employee incentive stock options, totaled $16,834 in 2018 compared to $16,908 in 2017 and $14,528 in 2016. The largest changes in 2018 changes in cash from operating activities compared to 2017 changes (second order derivative) were related to the REPAT tax: a $10,505 increase in GAAP net income, and a $2,727 adjustment reduction to the long term REPAT tax payable instead of the establishment of a $5,785 liability in the prior year. Other contributors included a $426 greater reduction to cash from operating activities as a result of the gain on sale of assets, a $254 greater reduction from higher accounts receivable, a reduction of $558 from lower accrued expenses instead of a $1,027 increase in adjustment to cash from operating activities from higher accrued expenses in 2017, a $332 lower reduction as a result of a smaller change in deferred income taxes, and a $222 lower reduction as a result of a smaller increase in inventories. Other changes were generally consistent with prior year changes relative to effective working capital management and sales activity.30
In investing activities, during 2018 UTMD used $402 to purchase new molds and manufacturing equipment to maintain and improve operating capabilities. In 2017, UTMD used $1,597 for capital expenditures including fitting-out the 38,600 square foot facility in the UK that it purchased in late 2016 to replace its leased facility.
In 2018, UTMD received $454 and issued 13,283 shares of stock upon the exercise of employee and director stock options. Employees and directors exercised a total of 15,722 option shares in 2018, with 2,439 shares immediately being retired as a result of optionees trading the shares in payment of the exercise price of the options. Option exercises in 2018 were at an average price of $43.22 per share. The Company received a $49 tax benefit from option exercises in 2018, which is reflected in net income as a result of adopting a new accounting standard in 2017. UTMD repurchased 15,000 shares of its stock in the open market during 2018 at an average cost of $80.35 per share.
In comparison, in 2017 UTMD received $302 and issued 8,302 shares of stock upon the exercise of employee and director stock options. Employees and directors exercised a total of 8,638 option shares in 2017, with 336 shares immediately being retired as a result of optionees trading the shares in payment of the exercise price of the options. Option exercises in 2017 were at an average price of $37.83 per share. The Company received a $38 tax benefit from option exercises in 2017, which is reflected in net income as a result of adopting a new accounting standard in 2017. UTMD did not repurchase any shares of its stock in the open market during 2017. In 2016, UTMD received $376 and issued 11,945 shares of stock upon the exercise of employee and director stock options. Employees and directors exercised a total of 12,806 option shares in 2016, with 861 shares immediately being retired as a result of optionees trading the shares in payment of the exercise price of the options. Option exercises in 2016 were at an average price of $33.68 per share. The Company received a $50 tax benefit from option exercises in 2016. UTMD repurchased 50,000 shares of stock in the open market during 2016 at an average cost of $57.00 per share.
UTMD did not borrow in any of the three years 2016-2018. Cash dividends paid to stockholders were $4,026 in 2018 compared to $2,955 in 2017 and $3,916 in 2016. The $1,005 cash dividend declared for 4Q 2017 was paid in early January 2018, a change from the dividend declared in 4Q 2016, which was paid in late December 2016.
Management believes that future income from operations and effective management of working capital will provide the liquidity needed to finance internal growth plans. In an uncertain economic environment, UTMD’s cash balances allow management to operate with the long-term best interest of stockholders in mind. Planned 2019 capital expenditures for ongoing operations are expected to be less than depreciation of current PP&E.
Management plans to utilize cash not needed to support normal operations in one or a combination of the following: 1) in general, to continue to invest at opportune times in ways that will enhance future profitability; 2) to make additional investments in new technology and/or processes; and/or 3) to acquire a product line or company that will augment revenue and EPS growth and better utilize UTMD’s existing infrastructure. If there are no better strategic uses for UTMD’s cash, the Company will continue to return cash to stockholders in the form of dividends and share repurchases when the stock appears undervalued.
Management's Outlook.UTMD is small, but its employees are experienced and remain diligent in their work. UTMD’s passion is in providing differentiated clinical solutions that will help improve the effectiveness of medical procedures and reduce health risks, particularly for women and their babies.31
The safety, reliability and performance of UTMD’s medical devices are high and represent significant clinical benefits while providing minimum total cost of care. UTMD will continue to leverage its reputation as a device innovator which will responsively take on challenges to work with clinicians who use its specialty devices. In doing so, UTMD will continue to differentiate itself, especially from commodity-oriented competitors. In 2019, UTMD plans to
The Company has a fundamental focus to do an excellent job in meeting clinicians’ and patients’ needs, while providing stockholders with excellent returns. In 2018, the value of UTMD’s stock increased 2%, ending the year at $83.08/ share, while $1.085 in dividends/ share were paid. In comparison, the DJIA, S&P 500 and NASDAQ indices were down 4% or more in 2018.
Taking a longer term view, as of the end of 2018 from the end of 1998, UTMD’s share price increased 1,166%, representing a 13.5% annually compounded share price increase over the twenty year time span. If additional returns to stockholders from cash dividends are added, stockholder value increased 1,385% over the twenty-year time span, representing 14.4% annually compounded growth in value. In comparison to UTMD’s 1,166% increase in stock value over the same twenty years, the NASDAQ Composite Index was up 203%, the S&P 500 Index was up 104% and the DJIA was up 154%.
Combining share price appreciation as a result of a long term profitable financial performance and a capital allocation strategy that includes opportunistic share repurchases with steadily growing quarterly cash dividends paid to stockholders since 2004, longer term UTMD stockholders have experienced excellent returns. Management is committed to continue that performance.
Off Balance Sheet ArrangementsNone
Contractual ObligationsThe following is a summary of UTMD’s significant contractual obligations and commitments as of December 31, 2018:
Critical Accounting Policies and EstimatesThe preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the reported amounts of revenues and expenses during the reporting period.
Management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Management has identified the following as the Company’s most critical accounting policies which require significant judgment and estimates. Although management believes its estimates are reasonable, actual results may differ from these estimates under different assumptions or conditions.
32
Accounting Policy Changes The Company’s management has evaluated the recently issued accounting pronouncements through the filing date of these financial statements and has determined that the application of these pronouncements will not have a material impact on the Company’s financial position and results of operations.
ITEM 7A ‑ QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had manufacturing operations, including related assets, in the U.S. denominated in the U.S. Dollar (USD), in Ireland denominated in the Euro (EUR), and in England denominated in the British Pound (GBP). UTMD also has trading activities in the U.S. and in subsidiaries in other countries denominated in the USD, EUR, GBP, the Australian Dollar (AUD) and the Canadian Dollar (CAD). The currencies are subject to exchange rate fluctuations that are beyond the control of UTMD. The exchange rates were .8729, .8319 and .9474 EUR per USD as of December 31, 2018, 2017 and 2016, respectively. Exchange rates were .7837, .7395 and .8105 GBP per USD as of December 31, 2018, 2017 and 2016, respectively. Exchange rates were 1.4193, 1.2796 and 1.3829 AUD per USD on December 31, 2018, 2017 and 2016, respectively. Exchange rates were 1.3644, 1.2519 and 1.3425 CAD per USD on December 31, 2018, 2017, and 2016, respectively. Please see note 1 in Item, 8, below under “Translation of Foreign Currencies” for more information. UTMD manages its foreign currency risk without separate hedging transactions by either invoicing customers in the local currency where costs of production were incurred, or by converting currencies as transactions occur.
ITEM 8 ‑ FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Currency amounts are in thousands except per-share amounts and where noted.
TABLE OF CONTENTS
33
MANAGEMENT’S REPORT ON INTERNAL CONTROLOVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States, of America ("GAAP"). The Company's internal control over financial reporting includes those policies and procedures that:
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.The Company’s management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).Based on its assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2018.The Company's independent registered public accounting firm, Haynie & Company, has audited the Company's internal control over financial reporting as of December 31, 2018, and its report is shown on the next page.Nortons Assurance Limited audited the internal control over financial reporting of Femcare Group Limited as of December 31, 2018, and its report follows the report of Haynie & Company.
By:/s/ Kevin L. CornwellKevin L. CornwellChief Executive Officer
By:/s/ Brian L. KoopmanBrian L. KoopmanPrincipal Financial Officer
34
Certified Public Accountants (a professional corporation)50 West Broadway, Suite 600 Salt Lake City, Utah 84101 (801)532-7800 Fax (801)328-4461
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and
Stockholders of Utah Medical Products, Inc.Midvale, UtahOpinion on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying balance sheet of Utah Medical Products, Inc. (the Company) as of December 31, 2018, and the related statements of income, comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.Basis for OpinionThe Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We did not audit portions of the consolidated financial statements and we did not examine the effectiveness of internal control over financial reporting for portions of Femcare Group Limited, a wholly owned subsidiary. The portions not audited by us include assets of $38,787,000 as of December 31, 2018 and total revenues of $11,286,000 for the year ended December 31, 2018. Those portions of the consolidated financial statements and the effectiveness of internal control over financial reporting were audited by other auditors whose reports have been furnished to us, and our opinions, insofar as they relate to the amounts included for Femcare Group Limited and the effectiveness of Femcare Group Limited's internal control over financial reporting, is based solely on the reports of the other auditors.
An Association ofIndependent Accounting Firms35
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Haynie & CompanyHaynie & Company
We have served as the Company’s auditor since 2018.Salt Lake City, UtahMarch 14, 201936
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholdersof Utah Medical Products, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Utah Medical Products, Inc. as of December 31, 2017 and 2016, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017. We also have audited Utah Medical Products, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Utah Medical Products, Inc. as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, based on our audit and the report of the other auditors, Utah Medical Products, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (1992) issued by COSO.
Basis for Opinion
Utah Medical Products, Inc.’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on Utah Medical Products, Inc.’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Utah Medical Products, Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We did not audit portions of the consolidated financial statements and we did not examine the effectiveness of internal control over financial reporting for portions of Femcare Group Limited, a wholly owned subsidiary. The portions not audited by us include assets of $26,564,000, and $19,412,000 as of December 31, 2017 and 2016, respectively, and total revenues of $11,371,000, $10,214,000, and $12,548,000, respectively for each of the years in the three-year period ended December 31, 2017. Those portions of the consolidated financial statements and the effectiveness of internal control over financial reporting were audited by other auditors whose reports have been furnished to us, and our opinions, insofar as they relate to the amounts included for Femcare Group Limited and the effectiveness of Femcare Group Limited’s internal control over financial reporting, is based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
JONES SIMKINS LLC
We have served as Utah Medical Products, Inc.’s auditor since 2003.
Logan, UtahMarch 5, 201837
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders
of Utah Medical Products, Inc.Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the consolidated balance sheets of Femcare Group Limited (the Company), including its subsidiaries, as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018. We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.Basis for OpinionThe Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
NORTONS ASSURANCE LIMITEDWe have served as the Company’s auditor since 2011.Reading, United KingdomMarch 8, 201938
See accompanying notes to financial statements.39
See accompanying notes to financial statements.
40
See accompanying notes to financial statements.
41
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS
Set forth below is each director’s name and age and his or her principal occupation, business history and public company directorships held during the past five years.
| Year | |||
| First | |||
Name | Age | Elected | Business Experience during Past Five Years and Other Information |
| Kevin L. Cornwell | 73 | 1993 | Chairman of UTMD since 1996. President and CEO since December 1992. Secretary since 1993. Has served in various senior operating management positions in several technology-based companies over a 42-year time span, including as a director on seven other company boards. Received B.S. degree in Chemical Engineering from Stanford University, M.S. degree in Management Science from the Stanford Graduate School of Engineering, and MBA degree specializing in Finance and Operations Management from the Stanford Graduate School of Business. |
| Ernst G. Hoyer | 82 | 1996 | Retired. Chairman of the Audit Committee and Lead Independent Director. Served fifteen years as General Manager of Petersen Precision Engineering Company, Redwood City, CA. Previously served in engineering and general management positions for four technology-based companies over a 35-year time span. Received B.S. degree in process engineering from the University of California, Berkeley, and MBA degree from the University of Santa Clara. |
| Barbara A. Payne | 73 | 1997 | Retired. Served over eighteen years as corporate research scientist for a Fortune 50 firm, as an environmental scientist at a national laboratory and as a consulting environmental sociologist. Received B.A. degree in psychology from Stanford University, M.A. degree from Cornell University, and M.A. and Ph.D. degrees in sociology from Stanford University. |
| James H. Beeson | 78 | 2007 | Retired. Maternal-Fetal Medicine Physician, St. Joseph Medical Center, Houston, Texas. Professor of Maternal-Fetal Medicine at the McGovern Medical School at the University of Texas Health Science Center at Houston. Received B.S. degree in Chemistry from Indiana University, Ph.D. degree in Organic Chemistry from M.I.T., MBA from Michigan State University, and MD from the University of Chicago Pritzker School of Medicine. Served four year residency in Ob/Gyn at Chicago Lying-In Hospital, a fellowship in maternal-fetal medicine at the University of Utah and actively practiced Obstetrics and Gynecology for over 35 years. Currently licensed to practice medicine in the states of Utah, Oklahoma and Texas. Has published numerous articles and other technical papers. Has industrial experience in product development of in vitro diagnostics at the Ames Company division of Miles Laboratory (now Bayer). |
| Paul O. Richins | 59 | 1998 | Retired. Chief Administrative Officer of UTMD from 1997 to 2018. UTMD Treasurer and Assistant Secretary from 1994 to 2018. Received B.S. degree in finance from Weber State University, and MBA degree from Pepperdine University. |
4
EXECUTIVE OFFICERS
UTMD executive officers, their ages and positions are as follows:
Name | Age | Appointed | Position |
| Kevin L. Cornwell | 73 | 1992 | President and CEO |
| Description of experience provided above. | |||
| Brian L. Koopman | 50 | 2018 | Principal Financial Officer |
| Accounting Manager/ Controller of UTMD since 2006. Principal Financial Officer since April 2018. Served in various accounting positions prior to UTMD for over eleven years. Previous CPA (California). Received B.S. degree in Business Administration, Accounting, from UNLV. |
CORPORATE GOVERNANCE
Code of Ethics
The Company has adopted a Code of Ethics specifically for its Board of Directors. The Company also has a Code of Conduct that applies to all of its employees, including its named executive officers, principal financial officer and Board of Directors. The Code of Ethics and Code of Conduct are available on the Company’s website, www.utahmed.com.
Audit Committee
The Audit Committee oversees the financial reporting and internal controls processes for UTMD on behalf of the Board of Directors. The Audit Committee formally met four times during 2019 and once to date in 2020 to review the quarterly financial reports, periodic independent accounting reviews and financial and internal control audits by UTMD’s independent audit firms. The Committee also met informally as needed during the year. In accordance with Statement on Auditing Standards No. 61, discussions were held with management and the independent auditors as needed regarding the acceptability and the quality of the accounting principles used in the reports. These discussions included the clarity of the disclosures, the underlying estimates and assumptions used in the financial reporting and the reasonableness of the significant judgments and management decisions made in developing the financial statements.
The Audit Committee also met with Company management and its independent auditors and discussed issues related to the overall scope and objectives of the audits conducted, the internal controls used by the Company, the openness and honesty of management, auditor verification of information provided by management, quality control procedures used by auditors in performing the independent audit and any possible conflicts of interest. The Committee elicited recommendations for improving UTMD’s internal control procedures. The independent auditors completed a formal review of the scope and effectiveness of the Company’s internal control procedures, and made informal suggestions.
The Audit Committee selects the Company’s independent accountants, approves the scope of audit and related fees and reviews financial reports, audit results, internal accounting procedures, internal controls and other programs to comply with applicable requirements relating to financial accountability. The Audit Committee Chairman on behalf of the Audit Committee reviewed and selected independent auditors for the UK, Ireland, Canada and Australia subsidiaries’ financial audits and tax returns. In addition, the Audit Committee discussed with the independent auditors their independence from the Company and its management, including the matters in the written disclosures required by Independence Standards Board Standard No. 1 and The Sarbanes-Oxley Act of 2002.
The Audit Committee of the Board of Directors is composed of all four outside directors, all of whom except one are independent as defined in Nasdaq Stock Market Rule 5605(a)(2) and under Rule 10A-3(b)(1) adopted pursuant to the Securities Exchange Act of 1934. The exception is Paul Richins, who prior to April 2018 had been an employee member of the board of directors since 1998 and had served as the Principal Financial Officer of UTMD. Under Nasdaq Rule 5605, Mr. Richins is not considered independent until three years after his employment ended. That notwithstanding, at the Annual Stockholder Meeting in May 2018, Mr. Richins was elected to continue as an outside director. Nasdaq Rule 5605(c)(2)(B) has an exception that allows one non-independent member of the Audit Committee “if the board, under exceptional and limited circumstances, determines that membership on the committee is required by the best interests of the Company and its Shareholders.” The board of directors made that determination based on Mr. Richins’ deep understanding of the Company’s internal control systems and financial reporting. Mr. Richins may not serve longer than two years and may not chair the Audit Committee. The remaining three members of the Audit Committee are independent and comprise a majority of the Board of Directors. The Audit Committee charter is available at www.utahmed.com. Ernst G. Hoyer is the Board of Directors’ designated Audit Committee Chairman and Financial Expert consistent with The Sarbanes-Oxley Act of 2002.
5
EXECUTIVE OFFICER COMPENSATION
The following table sets forth, for the last three fiscal years, compensation received by the Company’s Chief Executive Officer and Principal Financial Officer. There are no other named executive officers.
2019 Summary Compensation Table
Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($) | Non-equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||
Kevin L. Cornwell | 2019 | 156,000 | -- | -- | 310,800 | 7,320 | 474,120 | |||||||||||||||||
Chairman & CEO | 2018 | 156,000 | -- | -- | 338,100 | 7,200 | 501,300 | |||||||||||||||||
| 2017 | 156,000 | -- | -- | 338,100 | 7,080 | 501,180 | ||||||||||||||||||
Paul O. Richins | 2018 | 39,827 | -- | -- | -- | 1,702 | 41,529 | |||||||||||||||||
VP & Principal Financial Officer | 2017 | 118,507 | -- | -- | 24,292 | 3,931 | 146,730 | |||||||||||||||||
Brian L. Koopman | 2019 | 107,694 | -- | -- | 13,276 | 3,516 | 124,486 | |||||||||||||||||
Principal Financial Officer | 2018 | 103,141 | -- | -- | 13,814 | 3,388 | 120,343 | |||||||||||||||||
The Company’s only equity incentive plan is its 2013 Employees’ and accessories as outlined above, but does not market electronic monitors, the capital equipment that processes the electrical signals. In addition to products currently offered, UTMD has continued to investigate the feasibility of tools that enhance fetal monitoring techniques.Directors’ Incentive Plan, under which no option awards were issued in 2019.
Named Executive Officers participated in the Profit-Sharing Management Bonus (MB) Plan, generally available to all exempt and reusable hand-held vacuum pumps which are the safest products available for use in vacuum-assisted operative deliveries. UTMD’s soft silicone cup is a bell-shaped cup design that should be preferred for fetal well-being in low or outlet fetal stations with occiput anterior presentations, which represent more than 90%key nonexempt employees. The structure of the cases where VADperformance-based MB Plan is indicated. Operative vaginal deliveries using forceps or vacuum-assisted delivery systems provide knowledgeable physicians with a trial vaginal operative delivery priordescribed in the following Compensation Discussion and Analysis. The 2019 awards under the MB Plan to a more invasive C-section intervention. Although there are risks associated with vaginal operative deliveries which may currently represent 3-4% of all U.S. hospital births, the procedures are generally regarded as safer long term for the mother, and at least as safe for the fetus, as abdominal (Cesarean) delivery in comparable clinical situations. UTMD’s bell-shaped soft silicone TENDER TOUCH® cups enjoy a low reported complication rate compared to other vacuum cup designs, as evidencednamed executive officers were recommended by the FDA Medical Device Reporting System (MAUDE) which publicly lists serious injuries reportedCompensation and Benefits Committee in early 2020, after the independent audit of financial results had been concluded. The awards were subsequently approved by hospitals using specific brand namesthe Board of products.
6
Additional disclosure regarding executive and employee compensation
The Compensation and Benefits Committee establishes the criteria, and directs the implementation, of all compensation program elements for the CEO. The CEO’s base salary is set early in each calendar year by the Board of Directors after review of the recommendation of the Compensation and Benefits Committee. Mr. Cornwell’s base salary in 2020 was set at $156,000, the same as in 2019 and 2018. However, Mr. Cornwell will contribute 50% of his base salary in 2020 to recompense the cost difference above normal sick benefits of paying employees required to be on quarantine from work due to the corona virus. The annual MB paid to Mr. Cornwell in early 2020 for 2019 performance represented 66% of his total 2019 compensation. Mr. Cornwell’s 2019 MB was 8% lower than in 2018 because the Company’s consolidated Earnings Before Tax were 8% lower than in 2018. The MB, which was based by formula on 5% of the Company’s EBT prior to MB accrual, was 8% lower in 2019 than in 2018 for all participants who had met their objectives for the year, except for those who had a change in responsibilities during the year or those who did not receive the full bonus inflating factor due to option awards in the prior year, as further explained below. As in prior years, Mr. Cornwell’s MB was consistent with other participants in the MB Plan, with the exception that he is not eligible for the bonus inflating factor.
The compensation of employees other than the CEO, including other named executive officer(s), is administered by the CEO under the review and ratification of the Compensation and Benefits Committee comprised of all the independent directors. For all other employees, in collaboration with the other executive officer(s), the CEO develops compensation policies, plans and programs that are intended to meet the objectives of the Company’s overall compensation program. The Compensation and Benefits Committee annually reviews and approves the elements of the compensation program recommended by the CEO. In particular,addition, the committee periodically reviews any proposed changes within a few hundred thousand implanted ESSURE devices, thousandscalendar year.
Employment Agreements, Termination of women complained about possible autoimmune responses, allergic response to nickel and/or significant chronic pain. These symptoms simply do not apply to FILSHIE clips asEmployment, and Change in Control.
Except for Mr. Cornwell, the ESSURE device and FILSHIE clips are substantially different in design and use. ESSURE had a metal coil with a tip capable of perforation, with nickel components, hysteroscopically implanted (with some difficulty and risk of unwanted bodily injury) inside the Fallopian tubes, which then caused scar tissue to grow around it over time and occlude the tubes. FILSHIE clips are clamped over the tubes, laparoscopically or following a C-section, with immediately effective occlusion and almostCompany has no chance of patient injury beyond the normal risks of laparoscopic surgery. There are no nickel componentsemployment agreements in the FILSHIE clip. However,United States. In Ireland and Canada, UTMD is subject to providing certain statutory advance notice and severance benefits to its employees in the event of redundancy termination. In the United Kingdom (UK) and Australia (AUS), Femcare has an employment agreement with each of its employees that typically includes a minute amountthree month termination notice or pay in lieu of nickel does existnotice.
In May 1998, the Company entered into an agreement with the CEO to provide a long term incentive to increase stockholder value. Per the agreement, the Company is required to pay Mr. Cornwell additional compensation in medical grade siliconethe event his employment is terminated as a result of a change in control at the election of the Company or by the mutual agreement of Mr. Cornwell and titanium, generally accepted worldwide as the most biocompatible materialsCompany. Under the agreement, the additional compensation that the Company is required to pay Mr. Cornwell is equal to his last three years’ salary and bonuses. Based on actual salary plus bonuses for human implants. A toxicology studythe three years of 2017-2019, the additional compensation would be $1,455,000.
In the event of a change in control, the Company will also pay Mr. Cornwell incentive compensation under the agreement equal to about 1.8% of the enterprise value paid by a reputable microbiology firm confirmedan acquiring entity that exceeds $14.00 per share. For example, at the $107.90 per share closing price at the end of 2019, the amount of nickel found in FILSHIE clips is significantly less than that found in normal drinking water and foods. Orthopedic implants, for example, are routinely made of titanium in massively greater amounts. There have been a few patient complaints of suspected allergic response to FILSHIE clips within millions of uses (including from patients allergic to copper, which there is none in FILSHIE clips), but no such reports from clinicians orincentive compensation in the clinical literature.
Except for statutory notice, or payment in validated sterile packaging. Nevertheless, painlieu provisions in UK employee contracts, UTMD’s CEO is the most prevalent (but rare) FILSHIE complaint.only employee with a formal termination benefit agreement, which was last modified in 1998. The Board of Directors does not anticipate the need for any other agreements for the indefinite future. In women with implanted clips who have reported chronic pain, several other gynecological symptoms are present which are not relatedthe absence of any practical requirement, UTMD has no general policies regarding termination benefits.
The Company is also required to FILSHIE clips. The obvious recoursepay all optionees under employee and outside director’s option plans, the appreciation of stock value for a person experiencing pain that she associates with an implanted device is to remove it. ESSURE, difficult if not impossible to remove, required very specialized surgical technique. In contrast, given currently widely available imaging and normal laparoscopic skills, FILSHIE clips can be removed safely, although removal is rarely requested.
7
| Option Awards | |||||||||||||
Number of Securities Underlying Unexercised Options (#) | Number of Securities Underlying Unexercised Options (#) | Option Exercise Price ($) | Option Expiration Date | ||||||||||
| Named Executive Officer | Exercisable | Unexercisable | |||||||||||
| Brian L. Koopman | 62 | 0 | 49.18 | 5/8/2024 | |||||||||
| 500 | 187 | 58.50 | 11/8/2026 | ||||||||||
| 400 | 1,200 | 74.64 | 12/24/2028 | ||||||||||
2019 Option Exercises
No stock option exercises were made in 2019 by any of the named executive officers listed in the Summary Compensation Table.
2019 Pension Benefits
The Company does not provide a proprietary endoscopic irrigation devicedefined benefit pension plan to any employee.
2019 Nonqualified Deferred Compensation
The Company does not provide nonqualified deferred compensation to any employee.
2019 Outside Director Compensation
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | All Other Compensation ($) | Total ($) | |||||||||||||||
| James Beeson | 26,000 | -- | -- | -- | 26,000 | |||||||||||||||
| Ernst Hoyer | 33,000 | -- | -- | -- | 33,000 | |||||||||||||||
| Barbara Payne | 26,000 | -- | -- | -- | 26,000 | |||||||||||||||
| Paul Richins | 26,000 | 26,000 | ||||||||||||||||||
Directors of UTMD and/or its corporate subsidiaries who are also employees do not receive a separate director’s fee. The Board of Directors has concluded that allows a uro/gyn surgeon to precisely irrigate, clearing the visual field, withoutside director compensation for 2020 will remain the same hand that controlsas in 2019.
Narrative disclosure to the endoscope, eliminatingOutside Director Compensation Table:
| 1. | Mr. Hoyer received $4,000 for participating as a member of the Executive Committee, $3,000 as Chairman of the Audit Committee and $26,000 as the base annual outside director’s fee. |
| 2. | Dr. Beeson received the $26,000 base annual outside director’s fee. |
| 3. | Dr. Payne received the $26,000 base annual outside director’s fee. |
| 4. | Mr. Richins received the $26,000 base annual outside director’s fee. |
At the need2003 Annual Meeting, stockholders approved the 2003 Employees’ and Directors’ Incentive Plan, under which up to 1.2 million shares could have been granted over the ten-year life of the plan. The Board of Directors did not approve an award of outside director options in the three preceding years 2000-2002, or in the ensuing years of 2004-2019, except for a separate assistant10,000 share award to irrigate without visualization. An example of a procedure where Pathfinder has found success is ureteroscopic stone ablation.Dr. Beeson upon joining the board in 2007 and an ensuing 10,000 share award to Dr. Beeson in 2008. The 2003 Plan expired in February 2013.
CEO PAY RATIO DISCLOSURE
The median annual total compensation of urinary incontinence in women. UTMD believes that LIBERTY is the easiest-to-use, most cost effective incontinence treatment available that yields a therapeutic effect, not just a cover-up. LIBERTY consists of a battery operated electrical stimulation unit and an intravaginal electrode probe. This physiotherapy technique, which can be done in the privacyall employees of the home, involves passive strengtheningCompany in 2019, other than Mr. Cornwell, was $34,030. Mr. Cornwell’s total annual compensation in 2019 was $474,120. The ratio of the periurethral muscles. Pulsed, low voltage, high frequency currentthese two amounts is applied primarily to the pudendal neuromuscular tissue causing the pelvic area muscles to contract, leading to better muscle tone. Because electrical stimulation has no known adverse side effects, LIBERTY provides women suffering from mild to moderate incontinence an effective, lower cost and lower risk alternative to more traumatic treatments such as surgery and drug therapy.
1:14.
8
| 2018 | 2017 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| 1st Quarter | $ | 101.45 | $ | 78.95 | $ | 73.00 | $ | 58.50 | ||||||||
| 2nd Quarter | 117.65 | 94.00 | 73.05 | 59.50 | ||||||||||||
| 3rd Quarter | 115.15 | 85.40 | 75.45 | 68.10 | ||||||||||||
| 4th Quarter | 99.95 | 73.98 | 85.00 | 73.05 | ||||||||||||
Record Date | Payable Date | Per Share Amount | |||
| March 17, 2017 | April 4, 2017 | 0.265 | |||
| June 16, 2017 | July 6, 2017 | 0.265 | |||
| September 15, 2017 | October 3, 2017 | 0.265 | |||
| December 15, 2017 | January 3, 2018 | 0.270 | |||
| March 16, 2018 | April 3, 2018 | 0.270 | |||
| June 15, 2018 | July 6, 2018 | 0.270 | |||
| September 14, 2018 | October 2, 2018 | 0.270 | |||
| 2017 total cash dividends paid per share | $ | .795 | * | ||
| 2018 total cash dividends paid per share | $ | 1.080 | |||
| Year Ended December 31 | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| Net Sales | $ | 41,998 | $ | 41,414 | $ | 39,298 | $ | 40,157 | $ | 41,278 | ||||||||||
| Net Income | 18,555 | 8,505 | 12,128 | 11,843 | 11,378 | |||||||||||||||
| Earnings Per Common Share (Diluted) | 4.95 | 2.28 | 3.22 | 3.14 | 3.02 | |||||||||||||||
| Total Assets | 99,768 | 92,745 | 76,191 | 79,175 | 81,076 | |||||||||||||||
| Working Capital | 55,643 | 43,909 | 31,451 | 28,807 | 20,704 | |||||||||||||||
| Long-term Debt | 0 | 0 | 0 | 0 | 973 | |||||||||||||||
| Cash Dividends Per Common Share | 1.085 | 1.065 | 1.045 | 1.025 | 1.005 | |||||||||||||||
| 2018 | 2017 | Change | ||||||||||
| Net Sales | $ | 41,998 | $ | 41,414 | + 1.4 | % | ||||||
| Gross Profit (GP) | 26,306 | 26,395 | (0.3 | %) | ||||||||
| Operating Income (OI) | 18,697 | 19,011 | (1.6 | %) | ||||||||
| Income Before Tax (EBT) | 19,458 | 19,082 | + 2.0 | % | ||||||||
| NI Before REPAT and GILTI taxes | 15,504 | 14,562 | + 6.5 | % | ||||||||
| Net Income (NI) per GAAP | 18,555 | 8,505 | +118.2 | % | ||||||||
| EPS Before REPAT Tax and GILTI taxes | 4.136 | 3.897 | + 6.1 | % | ||||||||
| Earnings per Share (EPS) per GAAP | 4.950 | 2.276 | +117.5 | % | ||||||||
| 2018 | 2017 | |||||||
| Gross Profit Margin (GPM) | 62.6 | % | 63.7 | % | ||||
| Operating Income Margin (OIM) | 44.5 | % | 45.9 | % | ||||
| Income Before Tax Margin (EBTM) | 46.3 | % | 46.1 | % | ||||
| NIM (non-GAAP, before TCJA taxes) | 36.9 | % | 35.2 | % | ||||
| 2018 | 2017 | Change | ||||||||||
| NI (non-GAAP) | $ | 15,504 | $ | 14,562 | + 6.5 | % | ||||||
| EPS (non-GAAP) | $ | 4.136 | $ | 3.897 | + 6.1 | % | ||||||
| 12-31-18 | 12-31-17 | |||||||
| EUR | 1.1456 | 1.2021 | ||||||
| GBP | 1.2760 | 1.3523 | ||||||
| AUD | 0.7046 | 0.7815 | ||||||
| CAD | 0.7329 | 0.7988 |
| 2018 | 2017 | Change | ||||||||||
| GBP | 1.334 | 1.290 | +3.4 | % | ||||||||
| EUR | 1.180 | 1.133 | +4.1 | % | ||||||||
| AUD | 0.747 | 0.767 | (2.5 | )% | ||||||||
| CAD | 0.773 | 0.769 | +0.5 | % | ||||||||
| Sales weighted average: | +2.2 | % | ||||||||||
| 2018 | % | 2017 | % | 2016 | % | |||||||||||||||||||
| Obstetrics | $ | 4,447 | 11 | $ | 4,499 | 11 | $ | 4,532 | 12 | |||||||||||||||
| Gynecology/ Electrosurgery/ Urology | 23,167 | 55 | 23,175 | 56 | 20,683 | 53 | ||||||||||||||||||
| Neonatal | 6,436 | 15 | 6,154 | 15 | 6,007 | 15 | ||||||||||||||||||
| Blood Pressure Monitoring and Accessories* | 7,948 | 19 | 7,586 | 18 | 8,076 | 20 | ||||||||||||||||||
| Total: | $ | 41,998 | 100 | $ | 41,414 | 100 | $ | 39,298 | 100 | |||||||||||||||
| 2018 | % | 2017 | % | 2016 | % | |||||||||||||||||||
| Obstetrics | $ | 698 | 3 | $ | 732 | 3 | $ | 658 | 3 | |||||||||||||||
| Gynecology/ Electrosurgery/ Urology | 15,022 | 72 | 14,759 | 70 | 12,851 | 65 | ||||||||||||||||||
| Neonatal | 2,252 | 11 | 2,105 | 10 | 1,965 | 10 | ||||||||||||||||||
| Blood Pressure Monitoring and Accessories* | 2,834 | 14 | 3,533 | 17 | 4,335 | 22 | ||||||||||||||||||
| Total: | $ | 20,806 | 100 | $ | 21,129 | 100 | $ | 19,809 | 100 | |||||||||||||||
2018 | 2017 | 2016 | ||||||||||||
| S&M expenses excluding the MDET | $ | 1,708 | $ | 1,544 | $ | 1,673 | ||||||||
| S&M expense – U.S. MDET | ||||||||||||||
| R&D expenses | 454 | 447 | 475 | |||||||||||
| G&A expenses: | ||||||||||||||
| a) | litigation expense provision | (8 | ) | 29 | 54 | |||||||||
| b) | corporate legal | 32 | 32 | 15 | ||||||||||
| c) | stock option compensation | 64 | 129 | 92 | ||||||||||
| d) | management bonus accrual | 373 | 430 | 445 | ||||||||||
| e) | outside accounting audit/tax | 238 | 196 | 199 | ||||||||||
| f) | intangible asset amortization | 2,191 | 2,113 | 2,223 | ||||||||||
| g) | property & liability insurance premiums | 126 | 155 | 178 | ||||||||||
| h) | all other G&A expenses | 2,431 | 2,309 | 2,149 | ||||||||||
| G&A expenses – total | 5,447 | 5,393 | 5,355 | |||||||||||
| Total Consolidated OE: | $ | 7,608 | $ | 7,385 | $ | 7,503 | ||||||||
| Consolidated OE % of sales: | 18.1 | % | 17.8 | % | 19.1 | % | ||||||||
| 2018 | 2017 | 2016 | ||||||||||
| NI | $ | 18,555 | $ | 8,505 | $ | 12,128 | ||||||
| NIM | 44.2 | % | 20.5 | % | 30.9 | % | ||||||
| EPS | $ | 4.950 | $ | 2.276 | $ | 3.220 | ||||||
| 2018 | 2017 | 2016 | ||||||||||
| NI | $ | 15,504 | $ | 14,562 | $ | 12,004 | ||||||
| NIM | 36.9 | % | 35.2 | % | 30.5 | % | ||||||
| EPS | $ | 4.136 | $ | 3.897 | $ | 3.188 | ||||||
Contractual Obligations and Commitments | Total | 2019 | 2020 - 2021 | 2022 - 2023 | 2024 and thereafter | |||||||||||||||
| Long-term debt obligations | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Operating lease obligations | 613 | 61 | 117 | 91 | 344 | |||||||||||||||
| Purchase obligations | 1,637 | 1,632 | 5 | - | - | |||||||||||||||
| Total | $ | 2,250 | $ | 1,693 | $ | 122 | $ | 91 | $ | 344 | ||||||||||
| UTAH MEDICAL PRODUCTS, INC. | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| December 31, 2018 and 2017 | ||||||||
| (In thousands) | ||||||||
ASSETS | 2018 | 2017 | ||||||
| Current assets: | ||||||||
| Cash | $ | 51,112 | $ | 39,875 | ||||
| Investments, available-for-sale (notes 3 and 4) | - | 80 | ||||||
| Accounts and other receivables, net (note 2) | 3,956 | 3,623 | ||||||
| Inventories (note 2) | 5,412 | 5,244 | ||||||
| Prepaid expenses and other current assets | 423 | 366 | ||||||
| Total current assets | 60,903 | 49,188 | ||||||
| Property and equipment, net (notes 5 and 11) | 10,359 | 11,621 | ||||||
| Goodwill | 13,703 | 14,092 | ||||||
| Other intangible assets (note 2) | 32,979 | 34,805 | ||||||
| Other intangible assets - accumulated amortization | (18,176 | ) | (16,961 | ) | ||||
| Other intangible assets - net (note 2) | 14,803 | 17,844 | ||||||
| Total assets | $ | 99,768 | $ | 92,745 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 975 | $ | 934 | ||||
| Accrued expenses (note 2) | 4,285 | 4,346 | ||||||
| Total current liabilities | 5,260 | 5,280 | ||||||
| Long Term income tax payable (note 8) | 2,441 | 5,785 | ||||||
| Deferred tax liability - intangible assets | 2,540 | 3,102 | ||||||
| Deferred income taxes (note 8) | 535 | 456 | ||||||
| Total liabilities | 10,776 | 14,623 | ||||||
| Commitments and contingencies (notes 7 and 13) | - | - | ||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $.01 par value; 5,000 sharesauthorized, no shares issued and outstanding | - | - | ||||||
| Common stock, $.01 par value; 50,000 shares authorized, issued 3,720 shares in 2018 and 3,721 shares in 2017 | 37 | 37 | ||||||
| Accumulated other comprehensive income (loss) | (11,290 | ) | (8,341 | ) | ||||
| Additional paid-in capital | 122 | 809 | ||||||
| Retained earnings | 100,123 | 85,617 | ||||||
| Total stockholders' equity | 88,992 | 78,122 | ||||||
| Total liabilities and stockholders' equity | $ | 99,768 | $ | 92,745 | ||||
| UTAH MEDICAL PRODUCTS, INC. | ||||||||||||
| CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||
| AND COMPREHENSIVE INCOME | ||||||||||||
| Years ended December 31, 2018, 2017 and 2016 | ||||||||||||
| (In thousands, except per share amounts) | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Sales, net (notes 1, 3, 11 and 13) | $ | 41,998 | $ | 41,414 | $ | 39,298 | ||||||
| Cost of goods sold | 15,692 | 15,019 | 15,608 | |||||||||
| Gross profit | 26,306 | 26,395 | 23,690 | |||||||||
| Operating expense: | ||||||||||||
| Sales and marketing | 1,708 | 1,544 | 1,673 | |||||||||
| Research and development | 454 | 447 | 475 | |||||||||
| General and administrative | 5,447 | 5,393 | 5,355 | |||||||||
| Operating income | 18,697 | 19,011 | 16,187 | |||||||||
| Other income (expense): | ||||||||||||
| Dividend and interest income | 217 | 17 | 12 | |||||||||
| Gains and (losses) on investments | 32 | - | - | |||||||||
| Royalty income (note 14) | 76 | 86 | 91 | |||||||||
| Other, net | 437 | (32 | ) | 132 | ||||||||
| Income before provision for income taxes | 19,459 | 19,082 | 16,422 | |||||||||
| Provision for income taxes (note 9) | 904 | 10,577 | 4,294 | |||||||||
| Net income | $ | 18,555 | $ | 8,505 | $ | 12,128 | ||||||
| Earnings per common share (basic) (note 1): | $ | 4.97 | $ | 2.29 | $ | 3.23 | ||||||
| Earnings per common share (diluted) (note 1): | $ | 4.95 | $ | 2.28 | $ | 3.22 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Foreign currency translation net of taxes of $0 in all periods | $ | (2,949 | ) | $ | 3,893 | $ | (6,289 | ) | ||||
| Unrealized gain (loss) on investments net of taxes of $0, $6 and $3 | - | 10 | 5 | |||||||||
| Total comprehensive income | $ | 15,606 | $ | 12,408 | $ | 5,844 | ||||||
| UTAH MEDICAL PRODUCTS, INC. | ||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOW | ||||||||||||
| Years Ended December 31, 2018, 2017 and 2016 | ||||||||||||
| (In thousands) | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
Cash flows from operating activities: | ||||||||||||
| Net income | $ | 18,555 | $ | 8,505 | $ | 12,128 | ||||||
| Adjustments to reconcile net income to net | ||||||||||||
| cash provided by operating activities: | ||||||||||||
| Depreciation | 765 | 660 | 610 | |||||||||
| Amortization | 2,191 | 2,113 | 2,223 | |||||||||
| Gain on investments | (32 | ) | - | - | ||||||||
| Provision for (recovery of) losses on accounts receivable | 20 | 4 | - | |||||||||
| Loss/(Gain) on disposal of assets | (410 | ) | 17 | 5 | ||||||||
| Deferred income taxes | (326 | ) | (658 | ) | (484 | ) | ||||||
| Stock-based compensation expense | 64 | 129 | 92 | |||||||||
| Tax benefit attributable to exercise of stock options | 49 | - | - | |||||||||
| (Increase) decrease in: | ||||||||||||
| Accounts receivable | (496 | ) | (242 | ) | 295 | |||||||
| Other receivables | 0 | 2 | 897 | |||||||||
| Inventories | (244 | ) | (467 | ) | (360 | ) | ||||||
| Prepaid expenses and other current assets | (68 | ) | 24 | 23 | ||||||||
| Increase (decrease) in: | ||||||||||||
| Accounts payable | 52 | 9 | 286 | |||||||||
| Accrued expenses | (558 | ) | 1,027 | (1,187 | ) | |||||||
| Long-term repatriation tax payable | (2,728 | ) | 5,785 | - | ||||||||
| Net cash provided by operating activities | 16,834 | 16,908 | 14,528 | |||||||||
Cash flows from investing activities: | ||||||||||||
| Capital expenditures for: | ||||||||||||
| Property and equipment | (402 | ) | (1,597 | ) | (3,293 | ) | ||||||
| Intangible assets | - | - | (9 | ) | ||||||||
| Proceeds from the sale of investments | 74 | - | - | |||||||||
| Proceeds from the sale of property and equiment | 862 | - | - | |||||||||
| Net cash provided by (used in) investing activities | 534 | (1,597 | ) | (3,302 | ) | |||||||
Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of common stock - options | 454 | 302 | 376 | |||||||||
| Common stock purchased and retired | (1,205 | ) | - | (2,850 | ) | |||||||
| Tax benefit attributable to exercise of stock options | - | - | 50 | |||||||||
| Dividends paid | (4,026 | ) | (2,955 | ) | (3,916 | ) | ||||||
| Net cash (used in) financing activities | (4,777 | ) | (2,653 | ) | (6,340 | ) | ||||||
| Effect of exchange rate changes on cash | (1,354 | ) | 921 | (1,868 | ) | |||||||
| Net increase in cash and cash equivalents | 11,237 | 13,579 | 3,018 | |||||||||
| Cash at beginning of year | 39,875 | 26,296 | 23,278 | |||||||||
| Cash at end of year | $ | 51,112 | $ | 39,875 | $ | 26,296 | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Income taxes | $ | 4,851 | $ | 5,151 | $ | 4,846 | ||||||
| Interest | - | - | - | |||||||||
| UTAH MEDICAL PRODUCTS, INC. | ||||||||||||||||||||||||
| CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||
| Years Ended December 31, 2018, 2017 and 2016 | ||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Retained | Stockholders' | ||||||||||||||||||||
| Shares | Amount | Capital | Income | Earnings | Equity | |||||||||||||||||||
| Balance at December 31, 2015 | 3,751 | $ | 38 | $ | 2,710 | $ | (5,961 | ) | $ | 72,861 | $ | 69,648 | ||||||||||||
| Shares issued upon exercise of employee stock options for cash | 13 | 0 | 431 | - | - | 431 | ||||||||||||||||||
| Shares received and retired upon exercise of stock options | (1 | ) | (0 | ) | (56 | ) | - | - | (56 | ) | ||||||||||||||
| Tax benefit attributable to appreciation of stock options | - | - | 50 | - | - | 50 | ||||||||||||||||||
| Stock option compensation expense | - | - | 92 | - | - | 92 | ||||||||||||||||||
| Common stock purchased and retired | (50 | ) | (1 | ) | (2,849 | ) | - | - | (2,850 | ) | ||||||||||||||
| Foreign currency translation adjustment | - | - | - | (6,289 | ) | - | (6,289 | ) | ||||||||||||||||
| Unrealized holding gain (loss) from investments, available-for-sale, net of taxes | - | - | - | 5 | - | 5 | ||||||||||||||||||
| Common stock dividends | - | - | - | - | (3,916 | ) | (3,916 | ) | ||||||||||||||||
| Net income | - | - | - | - | 12,128 | 12,128 | ||||||||||||||||||
| Balance at December 31, 2016 | 3,713 | $ | 37 | $ | 378 | $ | (12,243 | ) | $ | 81,072 | $ | 69,244 | ||||||||||||
| Shares issued upon exercise of employee stock options for cash | 9 | 0 | 327 | - | - | 327 | ||||||||||||||||||
| Shares received and retired upon exercise of stock options | (0 | ) | (0 | ) | (25 | ) | - | - | (25 | ) | ||||||||||||||
| Stock option compensation expense | - | - | 129 | - | - | 129 | ||||||||||||||||||
| Common stock purchased and retired | - | - | - | - | - | - | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | 3,893 | - | 3,893 | ||||||||||||||||||
| Unrealized holding gain (loss) from investments, available-for-sale, net of taxes | - | - | - | 10 | - | 10 | ||||||||||||||||||
| Common stock dividends | - | - | - | - | (3,960 | ) | (3,960 | ) | ||||||||||||||||
| Net income | - | - | - | - | 8,505 | 8,505 | ||||||||||||||||||
| Balance at December 31, 2017 | 3,721 | $ | 37 | $ | 809 | $ | (8,341 | ) | $ | 85,617 | $ | 78,122 | ||||||||||||
| Shares issued upon exercise of employee stock options for cash | 16 | 0 | 679 | - | - | 679 | ||||||||||||||||||
| Shares received and retired upon exercise of stock options | (2 | ) | (0 | ) | (225 | ) | - | - | (225 | ) | ||||||||||||||
| Stock option compensation expense | - | - | 64 | - | - | 64 | ||||||||||||||||||
| Common stock purchased and retired | (15 | ) | (0 | ) | (1,205 | ) | - | - | (1,205 | ) | ||||||||||||||
| Foreign currency translation adjustment | - | - | - | (2,949 | ) | - | (2,949 | ) | ||||||||||||||||
| Unrealized holding gain (loss) from investments, available-for-sale, net of taxes | - | - | - | - | - | - | ||||||||||||||||||
| Common stock dividends | - | - | - | - | (4,049 | ) | (4,049 | ) | ||||||||||||||||
| Net income | - | - | - | - | 18,555 | 18,555 | ||||||||||||||||||
| Balance at December 31, 2018 | 3,720 | $ | 37 | $ | 122 | $ | (11,290 | ) | $ | 100,123 | $ | 88,992 | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Weighted average number of shares outstanding – basic | 3,730 | 3,718 | 3,751 | |||||||||
| Dilutive effect of stock options | 18 | 19 | 15 | |||||||||
| Weighted average number of shares outstanding, assuming dilution | 3,748 | 3,737 | 3,766 | |||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Accounts and other receivables: | ||||||||
| Accounts receivable | $ | 4,064 | $ | 3,713 | ||||
| Income tax receivable | - | - | ||||||
| Accrued interest and other | 13 | 14 | ||||||
| Less allowance for doubtful accounts | (121 | ) | (104 | ) | ||||
| Total accounts and other receivables | $ | 3,956 | $ | 3,623 | ||||
| Inventories: | ||||||||
| Finished products | $ | 1,615 | $ | 1,313 | ||||
| Work-in-process | 1,103 | 1,270 | ||||||
| Raw materials | 2,694 | 2,661 | ||||||
| Total inventories | $ | 5,412 | $ | 5,244 | ||||
| Goodwill: | ||||||||
| Balance before effect of foreign exchange | $ | 14,092 | $ | 13,487 | ||||
| Effect of foreign exchange | (389 | ) | 605 | |||||
| Additions as a result of acquisitions | - | - | ||||||
| Subtractions as a result of impairment | - | - | ||||||
| Total Goodwill | $ | 13,703 | $ | 14,092 | ||||
| Other Identifiable Intangible Assets: | ||||||||
| Patents | $ | 2,136 | $ | 2,183 | ||||
| Non-compete agreements | 128 | 135 | ||||||
| Trademarks & trade names | 9,375 | 9,921 | ||||||
| Customer relationships | 9,123 | 9,669 | ||||||
| Regulatory approvals & product certifications | 12,217 | 12,897 | ||||||
| Total Other Identifiable Intangible Assets | 32,979 | 34,805 | ||||||
| Accumulated amortization | (18,176 | ) | (16,961 | ) | ||||
| Other Identifiable Intangible Assets, Net | $ | 14,803 | $ | 17,844 | ||||
| Accrued expenses: | ||||||||
| Income taxes payable | $ | 845 | $ | 1,259 | ||||
| Payroll and payroll taxes | 1,099 | 1,199 | ||||||
| Reserve for litigation costs | 149 | 182 | ||||||
| Other | 2,192 | 1,706 | ||||||
| Total accrued expenses | $ | 4,285 | $ | 4,346 | ||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| Net Sales | $ | 10,887 | $ | 10,965 | $ | 10,390 | $ | 9,756 | ||||||||
| Gross Profit | 6,922 | 6,984 | 6,294 | 6,106 | ||||||||||||
| Net Income (Loss) | 4,092 | 4,308 | 6,762 | 3,393 | ||||||||||||
| Earnings (Loss) Per Common Share (Diluted) | 1.09 | 1.15 | 1.80 | .91 | ||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| Net Sales | $ | 10,259 | $ | 10,829 | $ | 10,125 | $ | 10,201 | ||||||||
| Gross Profit | 6,535 | 6,893 | 6,496 | 6,470 | ||||||||||||
| Net Income | 3,536 | 3,870 | 3,622 | (2,522 | ) | |||||||||||
| Earnings Per Common Share (Diluted) | .95 | 1.04 | .97 | (.67 | ) | |||||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Investments, at cost | $ | - | $ | 42 | ||||
| Equity securities: | ||||||||
| -Unrealized holding gains | - | 38 | ||||||
| -Unrealized holding (losses) | - | - | ||||||
| Investments, at fair value | $ | - | $ | 80. | ||||
| Level 1 | Levels 2 & 3 | Total | ||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
| Equities | $ | - | $ | 80 | - | - | $ | - | $ | 80 | ||||||||||||||
| Total | $ | - | $ | 80 | - | - | $ | - | $ | 80 | ||||||||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Land | $ | 1,653 | $ | 1,339 | ||||
| Buildings and improvements | 13,752 | 15,350 | ||||||
| Furniture, equipment and tooling | 16,003 | 15,696 | ||||||
| Construction-in-progress | 141 | 13 | ||||||
| Total | 31,549 | 32,398 | ||||||
| Accumulated depreciation | (21,190 | ) | (20,777 | ) | ||||
| Property and equipment, net | $ | 10,359 | $ | 11,621 | ||||
2019 Summary Compensation table.
| December 31, 2018 | ||||||||||||||||
| U.S. & | England & | |||||||||||||||
| Canada | Australia | Ireland | Total | |||||||||||||
| Land | $ | 621 | $ | 639 | $ | 393 | $ | 1,653 | ||||||||
| Buildings and improvements | 6,348 | 3,205 | 4,199 | 13,752 | ||||||||||||
| Furniture, equipment and tooling | 14,104 | 765 | 1,134 | 16,003 | ||||||||||||
| Construction-in-progress | 141 | - | - | 141 | ||||||||||||
| Total | 21,214 | 4,609 | 5,726 | 31,549 | ||||||||||||
| Accumulated depreciation | (17,475 | ) | (531 | ) | (3,184 | ) | (21,190 | ) | ||||||||
| Property and equipment, net | $ | 3,739 | $ | 4,078 | $ | 2,542 | $ | 10,359 | ||||||||
| December 31, 2017 | ||||||||||||||||
| U.S. & | England & | |||||||||||||||
| Canada | Australia | Ireland | Total | |||||||||||||
| Land | $ | 926 | $ | - | $ | 413 | $ | 1,339 | ||||||||
| Buildings and improvements | 6,583 | 4,361 | 4,406 | 15,350 | ||||||||||||
| Furniture, equipment and tooling | 14,124 | 427 | 1,145 | 15,696 | ||||||||||||
| Construction-in-progress | 10 | 3 | - | 13 | ||||||||||||
| Total | 21,643 | 4,791 | 5,964 | 32,398 | ||||||||||||
| Accumulated depreciation | (17,270 | ) | (346 | ) | (3,161 | ) | (20,777 | ) | ||||||||
| Property and equipment, net | $ | 4,373 | $ | 4,445 | $ | 2,803 | $ | 11,621 | ||||||||
Years ending December 31: | Amount | |||
| 2019 | $ | 61 | ||
| 2020 | 61 | |||
| 2021 | 61 | |||
| 2022 | 46 | |||
| 2023 | 45 | |||
| Thereafter | 344 | |||
| Total future minimum lease payments | $ | 618 | ||
| December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Inventory write-downs and differences due to UNICAP | $ | 60 | $ | 56 | $ | 98 | ||||||
| Allowance for doubtful accounts | 18 | 16 | 25 | |||||||||
| Accrued liabilities and reserves | 62 | 89 | 147 | |||||||||
| Other - foreign | - | 4 | (23 | ) | ||||||||
| Depreciation and amortization | (3,216 | ) | (3,789 | ) | (4,277 | ) | ||||||
| Unrealized investment gains | - | 66 | 105 | |||||||||
| Deferred income taxes, net | $ | (3,076 | ) | $ | (3,558 | ) | $ | (3,925 | ) | |||
| Years ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Current | $ | 1,386 | $ | 10,944 | $ | 5,467 | ||||||
| Deferred | (482 | ) | (367 | ) | (1,173 | ) | ||||||
| Total | $ | 904 | $ | 10,577 | $ | 4,294 | ||||||
| Years ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Federal income tax expense at the statutory rate | $ | 2,127 | $ | 3,086 | $ | 2,998 | ||||||
| State income taxes | 365 | 299 | 291 | |||||||||
| Foreign income taxes (blended rate) | 1,607 | 1,444 | 1,270 | |||||||||
| ETI, manufacturing deduction and tax credits | (146 | ) | (303 | ) | (287 | ) | ||||||
| Deemed repatriation transition tax | (3,230 | ) | 6,288 | - | ||||||||
| Effective federal rate change | - | (230 | ) | - | ||||||||
| US Taxes on foreign income | 179 | - | - | |||||||||
| Other | 2 | (7 | ) | 22 | ||||||||
| Total | $ | 904 | $ | 10,577 | $ | 4,294 | ||||||
| Years ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Domestic | $ | 10,130 | $ | 9,124 | $ | 8,688 | ||||||
| Foreign | 9,329 | 9,958 | 7,734 | |||||||||
| Total | $ | 19,459 | $ | 19,082 | $ | 16,422 | ||||||
Shares (000's) | Price Range Per Share | |||||||||||
| 2018 | ||||||||||||
| Granted | 22 | $ | 74.76 | $ | 74.76 | |||||||
| Expired or canceled | - | - | - | |||||||||
| Exercised | 16 | 24.00 | 58.50 | |||||||||
| Total outstanding at December 31 | 61 | 24.00 | 74.64 | |||||||||
| Total exercisable at December 31 | 31 | 24.00 | 58.50 | |||||||||
| 2017 | ||||||||||||
| Granted | - | $ | - | $ | - | |||||||
| Expired or canceled | 12 | 49.18 | 58.50 | |||||||||
| Exercised | 9 | 24.00 | 49.18 | |||||||||
| Total outstanding at December 31 | 54 | 24.00 | 58.50 | |||||||||
| Total exercisable at December 31 | 39 | 24.00 | 58.50 | |||||||||
Shares (000’s) | Price Range Per Share | |||||||||||
| 2016 | ||||||||||||
| Granted | 28 | $ | 58.50 | $ | 58.50 | |||||||
| Expired or canceled | 3 | 49.18 | 49.18 | |||||||||
| Exercised | 13 | 24.00 | 49.18 | |||||||||
| Total outstanding at December 31 | 75 | 24.00 | 58.50 | |||||||||
| Total exercisable at December 31 | 36 | 24.00 | 50.72 | |||||||||
| Years ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Expected dividend amount per quarter | $ | .2875 | - | $ | .2775 | |||||||
| Expected stock price volatility | 27.5 | % | - | 28.0 | % | |||||||
| Risk-free interest rate | 2.57 | % | - | 1.30 | % | |||||||
| Expected life of options | 4.9 years | - | 4.7 years | |||||||||
The following table summarizes, information aboutas of the end of the most recent fiscal year, compensation plans, including individual compensation arrangements, under which equity securities of the Company are authorized for issuance, aggregated for all compensation plans previously approved by stockholders and for all plans not previously approved by stockholders:
Plan Category | Number of Securities To Be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a)) (c) | |||||||||
| Equity compensation plans approved by security holders | 51,689 | $ | 58.50 | 532,800 | ||||||||
| Equity compensation plans not approved by security holders | - | (Not applicable) | - | |||||||||
| Total | 51,689 | $ | 58.50 | 532,800 | ||||||||
Additional disclosure regarding dilution from equity awards:
In 2003 and 2013, stockholders approved incentive stock option plans for employees and directors summarized in the table above. Although the 2003 option plan has expired, 8,512 options outstanding at December 31, 2018:awarded prior to expiration of the plan remain unexercised. The Company currently has no other equity award programs. The dilutive impact to stockholders of stock option awards is provided in the tables below:
| 2017 | 2018 | 2019 | ||||||||||
| Option shares available for award per stockholder approved option plans (beginning of year) | 241,300 | 303,000 | 330,600 | |||||||||
| Option shares allocated by the Board of Directors | 40,000 | 40,000 | 40,000 | |||||||||
| Total option shares awarded | 0 | 22,400 | 0 | |||||||||
| 2017 | 2018 | 2019 | ||||||||||
| Total unexercised awarded option shares (end of year) | 54,340 | 61,018 | 51,689 | |||||||||
| Weighted-average unexercised option exercise price | $ | 45.50 | $ | 56.78 | $ | 58.50 | ||||||
| Closing market price of UTMD stock per share (end of year) | $ | 81.40 | $ | 83.08 | $ | 107.90 | ||||||
| (A) Dilution from options (shares) | 19,430 | 18,344 | 17,728 | |||||||||
| (B) Weighted average shares outstanding | 3,717,492 | 3,730,303 | 3,720,868 | |||||||||
| Total diluted shares outstanding (A+B), used for EPS calculation | 3,736,922 | 3,748,647 | 3,738,596 | |||||||||
9
COMPENSATION DISCUSSION AND ANALYSIS
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||
| Weighted | ||||||||||||||||||||||||||
| Average | ||||||||||||||||||||||||||
| Remaining | Weighted | Weighted | ||||||||||||||||||||||||
| | Contractual | Average | Average | |||||||||||||||||||||||
| Range of Exercise | Actual Number | Life | Exercise | Number | Exercise | |||||||||||||||||||||
| Prices | Outstanding | (Years) | Price | Exercisable | Price | |||||||||||||||||||||
| $ | 24.00 | | - | 49.18 | 23,925 | 3.89 | $ | 39.03 | 23,925 | $ | 39.03 | |||||||||||||||
| 58.50 | - | 74.64 | 37,093 | 9.13 | 68.23 | 7,521 | 58.44 | |||||||||||||||||||
| $ | 24.00 | - | 74.64 | 61,018 | 7.08 | $ | 56.78 | 31,446 | 43.67 | |||||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Intrinsic Value of Stock Options Exercised | $ | 812 | $ | 270 | $ | 372 | ||||||
| Intrinsic Value of Stock Options Outstanding | 1,605 | |||||||||||
Under the supervision of the Compensation and Benefits Committee, UTMD has developed and implemented compensation policies, plans and programs that seek to enhance the long-term profitability, EPS growth and return on stockholders’ equity (ROE) of the Company, and thus stockholder value, by aligning closely the financial interests of the Company’s senior management and other key employees with those of its stockholders. The long term key financial performance objectives are a 15% annually compounded rate of increase in EPS and an average ROE prior to payment of cash dividends greater than 20%. As of the end of 2019, the Company has actually achieved a 14.3% annually compounded rate of increase in EPS and an average annual ROE (prior to payment of stockholder dividends) of 27% over the thirty-three years since 1986, UTMD’s first year of profitability since becoming a publicly-traded company.
At the beginning of each year, the Board of Directors approves an operating plan which sets the standard for the Company’s financial and nonfinancial performance. The performance each year may vary according to global economic conditions, competitive environment, life cycle of products, new product development, manufacturing costs and other factors. The Compensation and Benefits Committee then approves compensation criteria set in relation to the Company’s annual operating plan which includes numerous income statement, balance sheet and cash flow measures, in addition to nonfinancial objectives established for each employee participating in the annual MB program.
The Company applies a consistent philosophy to compensation for all employees, including senior management. The philosophy is based on the premise that the achievements of the Company result from the coordinated efforts of all individual employees working toward common objectives. The Company strives to achieve those objectives through teamwork that is focused on meeting the needs and expectations of customers and stockholders.
The Company believes that its compensation policies, in particular its profit-sharing MB program and employee stock option awards, align key employee compensation with stockholder interest in creating longer term stockholder value and consistent profitability. There are no compensation programs or policies that create risks that are reasonably likely to have a material adverse effect on the Company.
There are seven basic objectives for the Company’s compensation program:
(1)Note 11 – Geographic InformationPay for Performance. The basic philosophy is that rewards are provided for the long-term value of individual contribution and performance to the Company. Rewards are both recurring (e.g., base salary) and non-recurring (e.g., bonuses), and both financial and non-financial (e.g., recognition and time off).
(2)Provide for Fairness and Consistency in the Administration of Pay. Compensation is based on the value of the job, what each individual brings to the job, and how well each individual performs on the job, consistently applied across all functions and subsidiaries of the Company.
(3)Pay Competitively. The Company believes it needs to attract and retain the best people in the industry in order to achieve one of the best performance records in the industry. In doing so, the Company needs to be perceived as rewarding well, where competitive compensation includes the total package of base pay, bonuses, awards and other benefits.
(4)Conduct an Effective Performance Review Process. The Company believes it needs to encourage individual employee growth and candidly review each individual’s performance in a timely way. This feedback process is bilateral, providing management with an evaluation of the Company through the eyes of its employees.
(5)Effectively Plan and Administer the Compensation Program. Expenditures for employee compensation must be managed to what the Company can afford and in a way that meets management goals for overall performance and return on stockholder equity.
(6)Communicate Effectively. The Company believes that an effective communication process must be employed to assure that its employees understand how compensation objectives are being administered and met.
(7)Meet All Legal Requirements. The compensation program must conform to all statutory employment laws and rules.
The Company had salesuses essentially five vehicles in the following geographic areas based on the customer’s country of domicile:its compensation program.
| 2018 | 2017 | 2016 | ||||||||||
| United States | $ | 21,192 | $ | 20,286 | $ | 19,488 | ||||||
| Europe | 9,160 | 8,519 | 7,989 | |||||||||
| Other | 11,646 | 12,609 | 11,821 | |||||||||
| 2018 | 2017 | 2016 | ||||||||||
| United States | $ | 10,309 | $ | 10,866 | $ | 11,151 | ||||||
| England | 24,892 | 28,604 | 26,710 | |||||||||
| Ireland | 2,543 | 2,803 | 2,614 | |||||||||
| Australia | 447 | 525 | 513 | |||||||||
| Canada | 676 | 759 | 729 | |||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Obstetrics | $ | 4,447 | $ | 4,499 | $ | 4,532 | ||||||
| Gynecology/ Electrosurgery/ Urology | 23,167 | 23,175 | 20,683 | |||||||||
| Neonatal | 6,436 | 6,154 | 6,007 | |||||||||
| Blood Pressure Monitoring and Accessories | 7,948 | 7,586 | 8,076 | |||||||||
| Total: | $ | 41,998 | $ | 41,414 | $ | 39,298 | ||||||
| 2018 | 2017 | 2016 | ||||||||||
| Obstetrics | $ | 698 | $ | 732 | $ | 658 | ||||||
| Gynecology/ Electrosurgery/ Urology | 15,022 | 14,759 | 12,851 | |||||||||
| Neonatal | 2,252 | 2,105 | 1,965 | |||||||||
| Blood Pressure Monitoring and Accessories | 2,834 | 3,533 | 4,335 | |||||||||
| Total: | $ | 20,806 | $ | 21,129 | $ | 19,809 | ||||||
(2)Note 14 - Product SaleBonuses. UTMD’s Profit-Sharing Management Bonus (MB) Plan, which funds annual management bonuses, along with other contemporaneous incentives during the year, is generated out of a pretax/pre-bonus profit-sharing pool accrued throughout the year, and Purchase Commitmentsfinalized, where the annual MB portion is concerned, after the year-end independent financial audit has been completed. Prior to 2006, the Board of Directors had approved an accrual guideline of 4% of pretax, pre-bonus earnings, plus 10% of pretax, pre-bonus earnings improvements over the prior year’s results, as an allocation for the plan. For example, if the Company achieved 20% growth in pretax/pre-bonus accrual earnings, the MB Plan would accrue 6% of pretax, pre-bonus earnings during the applicable year into a “pool.” The pool would then be distributed after the completed independent audit after recommendation of the Compensation and Benefits Committee and approval by the Board. Beginning in 2006, although the mechanism for the MB Plan remains unchanged, in order to compensate for the decrease in the number of option shares granted key employees (as the result of the requirement to expense the estimated “value” of options), the Board of Directors increased the base percent of the annual Management Bonus accrual formula from 4% to 5% of pretax/pre-bonus profits, and, except for the CEO, added an additional bonus inflating factor ranging from 7-15%.
UTMD’s management personnel, beginning with the first level of supervision and professional management, and including certain non-management specialists and technical people, together with all direct sales representatives, are eligible participants in the MB Plan. At the beginning of the year, plan participants were generally awarded participation units in the bonus plan, proportional to base salary and responsibility, based on senior management’s determination of the relative contribution expected from each person toward attaining Company goals. Each individual’s performance objectives, derived as the applicable contribution needed from that key employee to achieve the Company’s overall business plan for the year, are available for review as needed by the Committee. As part of the planning process, each eligible employee develops a set of measurable and dated objectives for the ensuing year. Achieving the Company’s plan sets an expected value per bonus unit. After the end of the year, each individual participant’s contribution to the Company’s performance is assessed by senior management in order to determine an additional allocation of units for individual contributions, with the accomplishment of the beginning of year objectives as a key component. In 2019, all employees of the Company participated in the distribution of a $617,000 annual MB Plan payout, not including payroll taxes. The MB Plan also funded $37,000 in payroll taxes resulting from bonuses, $3,000 in extraordinary bonuses paid contemporaneously to non-executive employees during the year, and $12,300 in non-exempt U.S. employee attendance bonuses.
The Company makes occasional cash awards, in amounts determined on an individual basis, to employees who make extraordinary contributions to the performance of the Company at any time during the year. These contemporaneous payments are made as frequently as possible to recognize excellent accomplishments when they occur. The awards are funded from the accrued MB plan described above, and therefore do not otherwise impact the Company’s financial performance. Senior management is not eligible for these awards.
(3)Employee Stock Options. The Compensation and Benefits Committee believes that its awards of stock options have successfully focused the Company’s management personnel on building profitability and stockholder value. The Board of Directors considers this policy highly contributory to growth in future stockholder value. The number of options awarded reflects the judgment of the Board of the number of options sufficient to constitute a material, recognizable benefit to recipients. No explicit formula criteria are utilized, other than minimizing dilution to stockholder interests and the impact on earnings per share for option expense. When taken together with the share repurchase program, the net result of the option program over the last twenty-seven years has had license agreementsbeen awarding option shares to key employees at a higher price, and in substantially smaller amounts, than shares actually repurchased in the open market during the same time period.
At the 2003 Annual Meeting, stockholders approved the 2003 Employees’ and Directors’ Incentive Plan, under which up to 1.2 million shares could have been granted over the ten-year life of the plan. During the same period of time that 153,000 (uncancelled) option shares were granted to employees under the 2003 Plan, UTMD repurchased 1.4 million of its shares in the open market. As of December 31, 2019, 8,512 unexercised option shares remained outstanding under the 2003 Plan.
11
At the 2013 Annual Meeting, stockholders approved the 2013 Employees’ and Directors’ Incentive Plan, under which up to 600,000 shares may be granted over the ten-year life of the plan. As of December 31, 2019, 43,177 unexercised option shares were outstanding under the 2013 Plan.
After the first five years of the ten year plan approved by stockholders in 2013, the plan allowed 350,000 shares cumulatively available for grant out of the 600,000 total. In the first six years of the plan, UTMD awarded 89,400 option shares at an average exercise price of $58.48 per share. (As an aside, 22,261 option shares of the 89,400 awarded have been cancelled as the result of employees leaving the Company prior to vesting in the right to exercise.) During the same six years, UTMD repurchased 105,207 shares in the open market at an average price including commissions and fees of $58.84/ share. In other words, UTMD has repurchased more shares at about the same price per share than it has “sold” in the form of option awards under the 2013 plan. In combination with share repurchases, the option plan has been non-dilutive to stockholders while providing a substantial incentive to key employees.
After the conclusion of the annual independent audit and public announcement of financial results, the Board of Directors typically allocates an annual amount of shares for employee options each year at its regularly scheduled Board meeting following the audited close of the prior year’s financial performance. Allocated shares are usually reserved for awards later in the year to employees, including new or key employees with increased responsibilities. The Compensation and Benefits Committee approves all awards, and the closing price on the date of the approval is the exercise price of the option shares. According to policy, awards are not made in advance of material news events, or when material non-public information is known.
In December 2018, option awards were granted to 45 U.S., Ireland, UK, Canada and Australia employees to purchase a total of 22,400 shares at an exercise price of $74.64 per share. One thousand three hundred of the 2018 awarded shares have been cancelled as of March 2020.
Employee and director options vest over a four-year period, with a ten-year exercise period as long as the employee remains employed. Management expects to recommend additional options be awarded on an annual basis to the Company’s key employees based on its belief that sharing ownership of the Company with those who help create its success is the best way to assure growth in stockholder value. UTMD stockholder value in terms of share price, which ended 2019 at $107.90, plus cash dividends paid to stockholders, has grown 1,780% (an annually compounded growth rate of 15%) in the last 21 years.
(4)Retirement Plans. The Company has sponsored a 401(k) retirement plan for U.S. employees since 1985, a contributory retirement plan for Irish employees since 1998, a contributory retirement plan for Femcare UK employees since 2011, a contributory retirement plan for Femcare Australia employees since 2013, and a contributory retirement plan for Femcare Canada employees since 2017. In addition to meeting statutory requirements, the Compensation and Benefits Committee believes that a continuance of the retirement plans is consistent with ensuring a stable employment base by helping to provide Company employees with a vehicle to build long-term financial security. In 2019, the Company contributed and paid administrative costs at a total expense, including all of its subsidiaries, of $178,000. For 2020, the Board of Directors has approved continuing the retirement plan contributions on the same basis as in 2019.
(5)Group Benefit Plans. In the U.S., the Company provides group medical, dental and life insurance benefit plans for its employees. For U.S. employees, the health benefits plan is consistent with self-funded group plans offered by other companies. The portion of the monthly premium cost is paid by U.S. plan participants on a graduated scale so that higher paid employees pay a higher premium. In Ireland, the UK, Canada and Australia, employees do not pay premiums, and are provided medical and life coverages consistent with benefits provided to employees of similar companies.
Structure for Executive Officer Compensation
The structure and activities of the Compensation and Benefits Committee meet the requirements of SEC Rule 10C-1, as mandated by Section 952 of the Dodd-Frank Act. In regard to Item 407 of Regulation S-K, in 2019 and to-date in 2020, the company has not retained or obtained the advice of a compensation advisor.
Utilizing the compensation objectives and vehicles outlined previously, the Compensation and Benefits Committee, comprised of three independent outside directors, establishes the annual base salary for the rightsCEO. All other employees’ salaries are set by the CEO, and reviewed by the Committee for consistency with the Company’s compensation objectives. The Committee periodically uses surveys of similar companies selected from among the companies with which UTMD’s stock is compared in the Stock Performance Chart, based on variations in industry type, geographic location, size, and profitability as the Committee deems appropriate. Base salary is fixed at a level somewhat below the competitive amounts paid to developexecutive officers with comparable qualifications, experience and market certain productsresponsibilities at other similarly sized companies engaged in the same or technologies owned by unrelated parties.similar businesses. The confidential termsannual MB and long-term incentive compensation in the form of such agreements are uniquestock options were more highly leveraged and varied, depending on many factors relatingtied closely to the valueCompany’s success in achieving significant financial and stage ofnon-financial goals.
12
The annual MB for the named executive officers are awarded using the same basis as all employees included in the annual profit-sharing MB Plan, except a bonus inflating factor related to stock option awards is not included for the CEO. The goals for executive officers include financial and non-financial goals. Financial goals include net sales, gross profit margin, operating margin, EBITDA, EBT, after-tax profits, return on equity and earnings per share. Non-financial goals include continuing the development of a talented and motivated team of employees, conceiving and implementing programs to maintain competitive advantages and to achieve consistent earnings per share growth, reacting to competitive challenges, developing business initiatives to further support critical mass in a consolidating marketplace, promoting the technology licensed. RoyaltiesCompany’s participation in socially responsible programs, protecting intellectual property rights, maintaining compliance with regulatory requirements, achieving a high regard for the integrity of the Company and its management, and minimizing issues that represent significant business risk factors such as overly burdensome administrative programs and product liability exposure. In 2019, UTMD met its beginning of year financial objectives. Based primarily on future product sales are a normalthe Company’s 8% lower pretax/pre-MB accrual profit, annual management bonuses were 8% lower than in 2018 for the same level of responsibility and contribution of employees regularly participating in the MB plan.
The Committee intends that stock options serve as an important component of such agreementsexecutive officers’ total compensation in order to retain critical efforts on behalf of the Company and areto focus efforts on enhancing stockholder value. The Committee believes that past option awards have successfully provided this incentive. An option for 50,000 shares was awarded the CEO in January 2004, at an exercise price of $25.59 per share. Except for the 2004 award, no CEO options were awarded during the last twenty-one years.
Report of the Compensation and Benefits Committee
The Compensation and Benefits Committee has reviewed and discussed the CD&A with UTMD management. Based on that review, the Committee recommended to the Board of Directors that the CD&A be included in the Company’s cost of goods soldannual report on an ongoing basis.
Benefits Committee charter is available at Note 15 – Employee Benefit Planswww.utahmed.com.
The Company sponsors a contributory 401(k) savings plan for U.S. employees,following chart compares annual changes in total executive compensation with changes in non-GAAP earnings per share, stockholder return (year-end share price plus cash dividends paid during the year) and contributory retirement plans for Ireland, UK, Australia and Canada employees. The Company’s matching contribution is determined annually byUTMD year-end market capitalization over the board of directors. Company contributions were approximately $160, $153 and $151 for thelast nine years, endedstarting at December 31, 2018, 2017 and 2016, respectively.
13
The following table furnishes information fromconcerning the definitive proxy statementownership of the registrantCompany’s Common Stock as of March 6, 2020, by the directors, the nominees for director, the 2019 annual meetingexecutive officers named in the compensation tables on page 5, all directors and executive officers as a group, and those known by the Company to own beneficially more than 5% of stockholders under the captions,Company’s outstanding Common Stock as of December 31, 2019.
Name | Nature of Ownership | Number of Shares Owned | Percent | ||||||
| Principal Stockholders | |||||||||
| FMR LLC | Direct | 435,898 | 11.8 | % | |||||
| 245 Summer Street | |||||||||
| Boston, Massachusetts 02210 | |||||||||
| T. Rowe Price Associates, Inc. | Direct | 318,683 | 8.6 | % | |||||
| 100 East Pratt Street | |||||||||
| Baltimore, Maryland 21202-1009 | |||||||||
| Renaissance Technologies LLC | Direct | 234,214 | 6.3 | % | |||||
| 800 Third Ave | |||||||||
| New York, New York 10022 | |||||||||
| BlackRock Fund Advisors | Direct | 205,064 | 5.6 | % | |||||
| 400 Howard Street | |||||||||
| San Francisco, CA 94105 | |||||||||
| Directors and Executive Officers | ||||||||
Kevin L. Cornwell (1) | Direct | 197,857 | 5.4 | % | ||||
Ernst G. Hoyer (1)(2)(3)(4) | Direct | 10,000 | 0.3 | % | ||||
Barbara A. Payne (2)(3)(4) | Direct | 18,338 | 0.5 | % | ||||
Paul O. Richins(2)(3) | Direct | 24,254 | 0.7 | % | ||||
| Options | 62 | 0.0 | % | |||||
| Total | 24,316 | 0.7 | % | |||||
James H. Beeson (2)(4) | Direct | 13,125 | 0.4 | % | ||||
| Brian L. Koopman | Direct | 607 | 0.0 | % | ||||
| Options | 2,349 | 0.1 | % | |||||
| Total | 2,956 | 0.1 | % | |||||
| All executive officers and | Direct | 264,181 | 7.1 | % | ||||
| directors as a group (5 persons) | Options | 2,411 | 0.1 | % | ||||
| Total | 266,592 | 7.2 | % | |||||
| (2) | Audit Committee member |
| (4) | Compensation and Benefits Committee member |
In the previous table, shares owned directly by directors and executive officers are owned beneficially and of record, and such record stockholder has sole voting, investment and dispositive power. Calculations of percentage of shares outstanding assumes the exercise of options to which the percentage relates. Percentages calculated for totals assume the exercise of options comprising such totals.
15
Section 16(a) Beneficial Ownership Reporting Requirements
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of equity securities of the Company. Officers, directors and greater than 10% stockholders are required to furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company, all Section 16(a) requirements applicable to persons who were officers, directors and greater than 10% stockholders during the preceding fiscal year were complied with.
ITEM 13 -
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Director Independence
UTMD’s Board of Directors has determined that a majority of its directors are independent, as that term is defined in NASD Rule 5605(a)(2), which satisfies the independence requirement of NASD Rule 5605(b)(1). The information from the definitive proxy statementBoard of the registrant for the 2019 annual meetingDirectors was not aware of stockholdersany transactions, relationships or arrangements to be considered in determining that Dr. Payne, Mr. Hoyer and Dr. Beeson were independent under the captions,
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14 –
PRINCIPAL ACCOUNTING FEES AND SERVICES
The engagements of independent auditors to perform audit and “Auditor Independence” are incorporated hereintax accounting services were made by reference.the Audit Committee. The Audit Committee selected, and the Board of Directors ratified, the engagement of Haynie & Company as the Company’s lead auditor and independent registered public accounting firm for the year ended December 31, 2019. The selection of the independent registered public accounting firm was ratified by stockholders at the May 2019 Annual Stockholders Meeting.
Auditor and accounting firm engagements include independent firms other than Haynie & Company that were required for financial audits of Femcare and its subsidiaries, year-end and statutory fiscal year 2019 financial and internal control audits of Femcare and its subsidiaries, the completion of tax returns for foreign subsidiaries including Femcare and its subsidiaries, and statutory audits of the Company’s employee benefits plans. The policy of the Audit Committee is to require that all services performed by independent auditors be pre-approved by the Audit Committee Chairman before services are performed.
Fees billed by the Principal and Other Accounting Firms
The following table shows the fees billed for the applicable prior year audits of the Company’s consolidated financial statements and for other services rendered by accountants in the years 2019 and 2018.
| Lead Audit Firm | 2019 | 2018 | Other Accounting Firms | 2019 | 2018 | ||||||||||||
| Audit Fees | $ | 125,100 | $ | 127,636 | Audit Fees | $ | 47,489 | $ | 43,837 | ||||||||
| Audit-Related Fees | 1,954 | 1,884 | Audit-Related Fees | - | 1,070 | ||||||||||||
| Tax Fees | - | 20,800 | Tax Fees | 57,811 | 42,873 | ||||||||||||
| Total: | $ | 127,054 | $ | 150,320 | Total | $ | 105,300 | $ | 87,780 | ||||||||
The aggregate total of accounting fees (audit and tax) was $232,354 in 2019 compared to $238,100 in 2018.
Audit Fees. Fees for professional services rendered for the audit of the Company’s annual financial statements, reviews of the financials included in UTMD’s quarterly reports on Form 10‑Q and related regulatory reviews, and audit of UTMD’s internal controls in accordance with the Sarbanes Oxley Act of 2002. The lead audit firm in 2019 was Haynie & Company. The lead audit firm in 2018 was Jones Simkins LLC. The 2019 aggregated audit (and audit-related) fee total was $174,543 compared to $174,427 in 2018.
Tax Fees. Fees for tax filing, preparation and tax advisory services. The 2019 aggregated tax fee total was $57,811 compared to $63,673 in 2018. In 2018, the lead audit firm also prepared U.S. tax returns. In 2019, independent firms prepared the tax returns and provided additional consulting required for state and federal compliance with the U.S. TCJA enacted in December 2017.
All Other Fees. Fees for any other services not included in audit fees, audit-related fees and tax fees.
ITEM 15 –
EXHIBITS FINANCIAL STATEMENT SCHEDULES
| Exhibit # | SEC Reference # | Title of Document | Location |
| 1 | 31 | Certification of CEO Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | This filing |
| 2 | 31 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | This filing |
| Exhibit # | SEC Reference # | Title of Document | Location |
| 1 | 3 | Incorporated by Reference (1) | |
| 2 | 3 | Incorporated by Reference (1) | |
| 3 | 3 | Incorporated by Reference (2) | |
| 4 | 4 | Incorporated by Reference (4) | |
| 5 | 4 | Incorporated by Reference (5) | |
| 6 | 4 | Designation of Rights, Privileges, and Preferences of Series “A” Preferred Stock | Incorporated by Reference (3) |
| 7 | 10 | Incorporated by Reference (6) | |
| 8 | 10 | Incorporated by Reference (6) | |
| 10 | Incorporated by Reference (7) | ||
| 10 | 10 | Incorporated by Reference (8) | |
| 11 | 10 | This filing | |
| 12 | 21 | This filing | |
| 13 | 23 | This filing | |
14 | 23 | This filing | |
| 15 | 23 | This filing | |
| 16 | 31 | This Filing |
| Exhibit # | SEC Reference # | Title of Document | Location |
| 17 | 31 | This Filing | |
| 18 | 32 | This Filing | |
| 19 | 32 | This Filing | |
| 101.ins | XBRL Instance Document | This Filing | |
| 101.xsd | XBRL Taxonomy Extension Schema Document | This Filing | |
| 101.cal | XBRL Taxonomy Extension Calculation Linkbase Document | This Filing | |
| 101.def | XBRL Taxonomy Extension Definition Linkbase Document | This Filing | |
| 101.tab | XBRL Taxonomy Extension Label Linkbase Document | This Filing | |
| 101.pre | XBRL Taxonomy Extension Presentation Linkbase Document | This Filing |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned this 12th31st day of March, 2019.2020.
UTAH MEDICAL PRODUCTS, INC.
By:/s/ Kevin L. Cornwell | |
| Kevin L. Cornwell | |
| Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 31st day of March, 2020.
By: /s/ James H. Beeson | |
| James H. Beeson, Director | |
By: /s/ Kevin L. Cornwell | |
| Kevin L. Cornwell, Director | |
By: /s/ Ernst G. Hoyer | |
| Ernst G. Hoyer, Director | |
By: /s/ Barbara A. Payne | |
| Barbara A. Payne, Director | |
By: /s/ Paul O. Richins | |
| Paul O. Richins, Director |