In May 2014, new accounting guidance (ASU 2014-09) was issued that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract.  UTMD adopted this new standard on January 1, 2018, using a modified retrospective approach. In accordance with ASU 2014-09, UTMD's revenue recognition is based on standard terms & conditions of sale for like customers in addition to contracts and the performance obligations identified in them. With very insignificant and limited exceptions, the Company's performance obligation is met when it ships a physical product to a customer. The basis on which UTMD recognizes revenue was updated on January 1, 2018, but it did not result in a change to the process and timing of revenue recognition, because the previous revenue recognition method complies with ASU 2014-09.  Therefore, the adoption of ASU 2014-09 did not have an impact on UTMD's financial statements.  In accordance with this adoption disaggregated revenue is presented in Note 7.

In February 2016, new accounting guidance was issued which requires recording most leases on the balance sheet. The new lease standard requires disclosure of key information about lease arrangements and aligns many of the underlying principles of this new model with those in the new revenue recognition standard noted above. This guidance becomes effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. UTMD has yet to assess the impact that this standard will have on its consolidated financial statements when it is adopted. The only significant lease the Company anticipates it will have at that time is for the parking lot at its Utah facility.

UTMD maintains a warranty reserve to provide for estimated costs which are likely to occur. The amount of this reserve is adjusted, as required, to reflect its actual experience. Based on its analysis of historical warranty claims and its estimate that existing warranty obligations were immaterial, no warranty reserve was made at December 31, 2017, or JuneSeptember 30, 2018.

(6)   Fair Value Measurements.  The Company follows ASC 820, Fair Value Measurement to determine fair value of its financial assets.  The following table provides financial assets carried at fair value measured as of JuneSeptember 30, 2018:

Utah Medical Products, Inc. (UTMD) manufactures and markets a well-established range of specialty medical devices.  The Company's Form 10-K Annual Report for the year ended December 31, 2017, provides a detailed description of products, technologies, markets, regulatory issues, business initiatives, resources and business risks, among other details, and should be read in conjunction with this report.  Because of the relatively short span of time, results for any given three or six month period in comparison with a previous three or six month period may not be indicative of comparative results for the year as a whole.  Currency amounts in the report are in thousands, except per share amounts or where otherwise noted.  Currencies in this report are denoted as $ or USD = U.S. Dollars; A$ or AUD = Australia Dollars; £ or GBP = UK Pound Sterling; C$ or CAD = Canadian Dollars; and € or EUR = Euros.

Financial results in 3Q and 9M 2018, according to U.S. Generally Accepted Accounting Principles (GAAP), were masked by a favorable adjustment to UTMD's initial provisional estimate of its "one time" U.S. repatriation (REPAT) tax liability resulting from the "Tax Cuts and Jobs Act" (TCJA) enacted in December 2017.  UTMD's initial estimate of the combined Federal and Utah State REPAT tax was $6,288, recorded in 4Q 2017 financial results, the period in which the TCJA was enacted by Congress.  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 Company remains on targetactual REPAT tax liability is $3,058, resulting in a favorable $3,230 adjustment to achieve beginningUTMD's 3Q 2018 income tax provision. In addition, there is a new Global Intangible Low-Taxed Income (GILTI) tax applicable for 2018 that resulted from the TCJA, an estimate for which is included in the 3Q 2018 tax provision for the first time. All income statement categories of year goalsUTMD's operating performance are unaffected by the REPAT tax adjustment and GILTI tax estimate except for 2018.Net Income (NI), profits after tax, and Earnings Per Share (EPS).

Income statement results in 2Q3Q and 1H9M 2018 compared to the same periods of 2017 were as follows:

Because 32% of 1HOpposite to first half (1H) 2018, consolidatedUTMD's relative 3Q 2018 sales and 53% of 1Hperformance was reduced by a stronger USD.  Revenues in 3Q 2018 consolidated operating expenses are in foreign currencies,would have been $76 higher using the volatility ofsame foreign currency exchange (FX) rates foras in the prior year ("constant currency").  However, because of the weaker USD in 1H 2018, revenues in 9M 2018 would have been $443 lower in constant currency. The FX rate change represented 43% of the 9M 2018 sales and expenses outside the U.S. (OUS) continuedincrease relative to have an impact on period-to-period relative financial results.9M 2017. UTMD's FX rates for income statement purposes are transaction-weighted averages. The average rates from the applicable foreign currency to USD during 2Q3Q 2018 and 1H9M 2018 compared to the same periods in 2017 follow:

UTMD's revenues invoiced in the above foreign currencies represented 31.3%32.2% of total consolidated USD sales in 2Q3Q 2018 and 32.2%32.6% in 1H9M 2018.

The weighted average positive impact on GBP, EUR, AUD and CAD currency revenues in 2Q 2018associated key profit margins (profits as a percentage of sales) compared to 2Q 2017 was 5.4%, increasing reported USD sales by $177.  The weighted average positive impact on GBP, EUR, AUD and CAD currency sales in 1H 2018 compared to 1H 2017 was 7.9%, increasing reported USD sales by $518. With the same FX ratestime periods in the prior calendar year were as in 2017 (constant currency terms), total consolidated 2Q 2018 sales were down 0.4%, and 1H 2018 sales were up 1.2%.follows:

UTMD's consolidated Gross Profit Margin (GPM), Gross Profit (GP) divided by sales,9M 2018 GPM was squeezed primarily due to higher direct materials costs combined with lack of price increases to customers. Direct labor productivity was consistent with the prior year's periods.year.  Consolidated Operating Expenses (OE) were $69$284 higher in 2Q9M 2018 compared to 2Q 2017,9M 2017. OE are comprised of general and $210 higher in 1H 2018 compared to 1H 2017.  Eighty-threeadministrative (G&A), sales and marketing (S&M) and product development (R&D) expenses. Sixty-one percent of the increase in 2Qtotal OE came from the UK subsidiary G&A. Included in G&A expenses, the UK amortization of IIA was the same in GBP in 9M 2018 as in 9M 2017, but $91 higher because of USD/GBP FX rates. Remaining 9M 2018 UK G&A expenses were $81 higher than in 9M 2017 even though expenses were just GBP 39 higher. The remaining higher OE  was due to the change inhigher worldwide S&M expenses, which were $137 higher with very little impact due to FX rates. Seventy-eight percentU.S. S&M expenses were $85 higher in 9M 2018 than in 9M 2017, and OUS S&M expense were $52 higher, as a result of the increase in 1H 2018 OE was due to the change in FX rates.adding additional people and increasing trade show attendance.  The combination of 3.6% higher revenues, the samea lower GPM butand higher OE resulted in a 2.7% increase in 1H 2018 Operating Income (OI). about the same in 9M 2018 as in 9M 2017 despite 3% higher sales.

The 13.4%37% higher UTMD Net Income (NI) in 1H9M 2018 was primarily a result of a favorable $3,230 REPAT tax adjustment less a $50 GILTI tax provision accrual and $551 higher non-operating income (NOI) compared to 9M 2017.  Excluding the REPAT tax adjustment and GILTI tax accrual, non-GAAP NI was $955 (+8.7%) higher in 9M 2018 than in 9M 2017 due to the higher OI plus 1) non-operating income from the sale of a no longer needed storage facility in Utah,NOI and 2) a lower U.S.an average consolidated income tax provision rate.

UTMD profit marginsUTMD's September 30, 2018 balance sheet compared with its December 31, 2017 balance sheet demonstrates continued strengthening. Working capital increased $10,377 in 2Q 20189M 2018. Capital expenditures for property and 1Hequipment were $255 in 9M 2018, compared to 2Q 2017 and 1H 2017 follow:

UTMD's Balance Sheet continued to strengthen. June 30, 2018 ending Cash and Investments were up $5.9 million and Stockholders' Equity was up $5.2 million from December 31, 2017.  FX rates for Balance Sheetbalance sheet purposes are the applicable rates at the end of each reporting period. The FX rates from the applicable foreign currency to USD for assets and liabilities at the end of JuneSeptember 2018 and the end of DecemberSeptember 2017 follow:

Beginning on January 1, 2018, the Company adopted ASU 2014-09, the 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 product to a customer, 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.

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 that the selling price is fixed prior to the acceptance of a specific customer order.

Total 2Q3Q 2018 consolidated sales were $136 (1.3%$265 (+2.6%) higher than in 2Q3Q 2017, and in 1Hdespite a negative FX impact of ($76).  Total 9M 2018 were $764 (3.6%$1,029 (+3.3%) higher than in 1H 2017.9M 2017, and were helped by a favorable FX impact of +$443.  Comparing 2Q3Q 2018 to 2Q3Q 2017, total U.S. domestic sales were 4%7% higher and USD sales outside the U.S. (OUS sales) were 1%2% lower. Eighty-four percent of the lower 3Q 2018 OUS sales were due to FX rate differences. Comparing 1H9M 2018 to 1H9M 2017, total U.S. domestic sales were 2%4% higher and OUS sales were 5%3% higher. Ninety-eight percent of the higher 9M 2018 OUS sales were due to FX rate differences.

U.S. domestic sales including direct sales to U.S. clinical facilities, OEM sales of components and finished devices to other companies, and sales of the Filshie Clip System to UTMD's exclusive U.S. distributor, CSI, were overall 4%$356 (+$186) and 2% (+$221)7.2%) higher in 2Q3Q 2018 and 1H 2018, respectively, compared to 2Qthan in 3Q 2017, and 1H$577 (+3.7%) higher in 9M 2018 than in 9M 2017.  U.S. domestic sales are obviously not affected by FX rate fluctuations.   U.S. domesticDomestic sales were 50%51% of total consolidated sales in 2Q3Q 2018 compared to 49% in 2Q3Q 2017, and 49%50% in 1H9M 2018 compared to 50%49% in 1H9M 2017. Sales of Femcare's Filshie Clip System to CooperSurgical Inc. (CSI) for distribution in the U.S. were $14 higher$156 (23.6%) lower in 2Q3Q 2018 compared to 2Q3Q 2017, and $38$194 (6.4%) lower in 1H9M 2018 compared to 1H9M 2017.  Femcare's sales to CSI were 22%10% of total domestic sales in 2Q3Q 2018 compared to 23%13% in 2Q3Q 2017, and 22%18% in 1H9M 2018 compared to 23%20% in 1H9M 2017. Domestic OEM sales were 26%$224 (+$193)27.1%) higher in 2Q3Q 2018 compared to 2Q3Q 2017, and 21%$548 (+$324)23.4%) higher in 1H9M 2018 compared to 1H9M 2017. Direct sales to U.S. user facilities were 1% ($22) lower$287 (+8.4%) higher in 2Q3Q 2018 compared to 2Q3Q 2017, and also 1% ($64) lower$223 (+2.2%) higher in 1H9M 2018 compared to 1H9M 2017.

The 1% lower 2Q 2018 OUS sales was due to variationconsolidated in order pattern by UTMD's China distributor of BPM kits.  Shipments to the China distributorUSD in 3Q 2018 were $337$91 (1.7%) lower than in 3Q 2017, and $452 (+2.9%) higher in 9M 2018 than in 9M 2017. Constant currency OUS sales were 0.3% lower in 2Q3Q 2018 than in 3Q 2017, and 0.1%  higher in 9M 2018 compared to 2Q9M 2017. Excluding shipments to the China distributor in both 2Q periods, OUS sales were 6% higher in 2Q 2018.

The following table provides USD sales amounts divided into general product categories for total sales and the subset of OUS sales:

Additional comments onLooking forward, sales in 4Q 2018 are expected to be lower than in 4Q 2017 from two main sources which are both related to the above tables:timing of shipments to a third party distributor:

Looking forward, CSI current forecasts indicate $424As sales to these two distributors are in fixed USD, fluctuations in FX rates do not affect the revenue numbers. Although UTMD considers the lower 2H 2018 purchases than in 2H 2017, and UTMD's China distributor for BPM devices, which placed an annual fixed order, has no shipments scheduled in 4Q 2018 resulting in 2Hcompared to 4Q 2017 sales to these distributors to represent quarterly order pattern fluctuations, not a trend, management does not believe that UTMD will make up the almost $700 lower 4Q 2018 sales another $402 lower thanfrom growth in 2Hother areas because of a likely negative change in average 4Q 2018 FX rates compared to 4Q 2017. Trump administration trade policies may have negative consequences as direct exports from Utah representComparing the (above) September 30, 2018 FX rates used for balance sheet purposes with the (above) weighted-average FX rates for the 3Q 2018 income statement revenues and expenses, indicates a recent trend in declining value of foreign currencies relative to the USD.  The trend did continue in October 2018.    Although management typically does not try to project changes in FX rates, which it considers to be futile, since about 14%one-third of total sales, whichconsolidated revenues are invoiced in foreign currencies, there could be losta negative FX impact on same foreign currency sales relative to 4Q 2017 as much as another $100.  There is an additional 4Q FX rate negative impact risk that foreign distributors which purchase UTMD products in USDs (roughly one-sixth of total consolidated sales) might delay purchases to 2019 if receiving countries increase tariffs on U.S. goods.  Further, possible increased tariffs in Ireland, the UK, Australia and Canada on components and finished devices manufactured in Utah and sold on an intercompany basis could substantially increase subsidiary costs and reduce OUS sales made by UTMD's subsidiaries. Whilethey think the USD was weaker in 1H 2018 than in 1H 2017, which benefited 1Hwill weaken later, and they have sufficient inventory to support that gamble.

Despite the anticipated lower 4Q 2018 sales in USD terms oncompared to 4Q 2017, UTMD expects to meet or exceed its beginning of year projection of flat sales for the 2018 year as a comparative basis, it presently is stronger than the average foreign FX rates in 2H 2017, which, if it persists, would have a negative effect on 2H 2018 USD sales on a comparative basis.whole.

GP results from subtractingis revenues (sales) minus the cost of manufacturing and shipping products to customers (direct materials, direct labor, manufacturing overhead and shipping costs),(CGS) or the purchase price of distributed finished products manufactured by other companies, from revenues.  At UTMD,devices for resale. CGS is comprised of direct labor (DL), direct materials (DM) and manufacturing overhead costs fully absorb indirect costs including depreciation of manufacturing equipment and facilities, quality assurance, materials requirements planning and purchasing, manufacturing engineering, production supervision, shipping, royalties paid to other entities and health plan benefits for both direct and indirect manufacturing personnel.(MOH).  UTMD's consolidated GPM remained consistentGP in 2Q3Q 2018 despite noticeable increases in variable manufacturing costs – direct labor and materials. Just the expectation of tariffs on metals, for example, caused aluminum and stainless steel component vendors to substantially increase prices for parts used in UTMD's electrosurgical generators and specialty electrodes.  The higher variable costs were offset by better absorption of overheads and improved productivity.  Higher variable costs in combination with projected lower sales in 2H 2018, leading to lower absorption of manufacturing overheads, leads management to expect GPMs in 2H 2018 will bewas $203 lower than in 2H3Q 2017, while sales were $265 higher. UTMD's 9M 2018 GP was only $275 higher than in 9M 2017, while sales were $1,029 higher. This GP dilution obviously resulted from lower GPMs (GP divided by sales) as shown in the table above.

DM expense represented 53.6% of CGS in 3Q 2018 compared to 50.3% of CGS in 3Q 2017. The 3Q 2017 GPM was helped by a favorable $80 adjustment in UTMD's U.S. health plan reserve (representing about 0.8 GPM percentage points for the quarter) due to better than expected employee medical cost experience, which did not recur in 3Q 2018. Except for that one-time 3Q 2017 reserve adjustment, DL and MOH productivity in both 3Q and 9M 2018 was consistent with 3Q and 9M 2017 on a variable sales basis. Expected higher tariffs are playing a role in UTMD vendor quotes for DM. With only a few exceptions, UTMD has not yet raised finished device prices to its customers in response to higher DM costs.

OI is GP minus Operating Expense (OE).  Due to lower GP and higher OE, OI in 3Q and 9M 2018 was $4,402 and $14,429 respectively, compared to $4,679 and $14,438 in 3Q and 9M 2017 respectively. Although lower OI with higher sales diluted UTMD's 3Q and 9M 2018 OIMs compared to 3Q and 9M 2017, per the table above, UTMD's continued excellent OIM remains key to its financial success.

S&M expenses were 4.3% of revenues in 3Q 2018 compared to 3.6% of revenues in 3Q 2017. In 9M 2018, S&M expenses were 4.0% of revenues compared to 3.7% of revenues in 9M 2017. Consolidated S&M expenses increased because UTMD added a marketing person in the case of OE, higherU.S. and a fluent French-speaking S&M person in the UK to help better service direct accounts in France.  UTMD also expanded participation in clinical trade shows in 9M 2018.  In addition, although changed FX rates (weaker USD) fordid not increase 3Q 2018 OUS OE reduce OI. The OE of UTMD's foreign subsidiaries in the aggregate in 2Qsubsidiary S&M expenses relative to 3Q 2017, they did increase 9M 2018 and 1H 2018 would have been $57 and $163 lower, respectively, in constant currency.OUS S&M expense by $15.  In other words, 11% of the 9M consolidated S&M expense increase was due to FX rate impact on OE represented 83% of the total increase in 2Q 2018 OE and 78% of the total increase in 1H 2018 OE.differences.

UTMD promises prospective customers that it will provide, at no charge in reasonable quantities, copies of instruction materials developed for the use of its products. UTMD provides customer support from offices in the U.S., Canada, the UK, Ireland and Australia by telephone, and employed representatives on a geographically dispersed basis, 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 inservice and training expenses are routinely expensed as they occur.  All of these services are allocated from S&M overhead costs included in OE.  Historically, marginal consulting costs have been immaterial to financial results.

R&DG&A expenses were 12.8% of revenues in 2Q 2018 were $117 compared to $119 in 2Q 2017 (1.1% of sales in both periods), and were $230 in 1H3Q 2018 compared to $23813.3% of revenues in 1H3Q 2017. In both 9M 2018 and 9M 2017, (1.1% of sales in both periods).

Summary comparisonR&D expenses were 1.0% of (USD) consolidated operating expenses:sales in both 3Q 2018 and 3Q 2017. R&D expenses were 1.0% of sales in 9M 2018 compared to 1.1% of sales in 9M 2017. As virtually all R&D expenses were in the U.S., there was no FX rate impact.

 

NOE/NOI includes the combination of 1) expenses from loan interest and bank fees; 2) expenses or income from losses or gains from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms; and 3) income from rent of underutilized property, investment income and royalties received from licensing the Company's technology.technology; and 4) losses or gains from dispositions of assets. Negative NOE is NOI.  Net NOI in 2Q3Q 2018 was $501$79 compared to $23 NOI$17 in 2Q3Q 2017. Interest income on cash balances in the U.S. were $60 higher in 3Q 2018 than in 3Q 2017 due to higher interest rates and cash repatriated from OUS subsidiaries. Net NOI in 1H9M 2018 was $538$617 compared to $49 NOI$66 in 1H9M 2017.  IncludedThe difference in the 2Q9M 2018 NOIcompared to 9M 2017 was largely due to a one-time $418 gain on the sale of a storage facility in Utah that iswas no longer needed, and a $32 gain on the sale of other investments.  Theinvestments, in 2Q 2018.  There were no similar asset dispositions in 2017. Although in all four periods of time UTMD experienced a gain on remeasured foreign currency balances (RFCB), the gains were minimal. In 3Q 2018 the RFCB gain was $3 compared to a gain of $4 in 2Q3Q 2017.  In 9M 2018, the gain on RFCB was $10 compared to a loss/gain of $0$5 in 2Q 2017.  In 1H 2018, the gain on remeasured foreign currency balances was $8 compared to a gain of $1 in 1H9M 2017.  Royalties received were $19$18 in 2Q3Q 2018 compared to $19$23 in 2Q3Q 2017, and $41$60 in 1H9M 2018 compared to $42$65 in 1H9M 2017.

Consolidated EBT results from subtracting net NOEnon‑operating expense (NOE) from, or adding net non-operating income (NOI) to, OI.  NOE includes 1) any loan interest, which there was none in 2017 or 2018, 2) bank fees and 3) losses from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms, minus NOI from or to, as applicable, consolidated OI.  1) rent of underutilized property, 2) investment income, 3) gains from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms, 4) gains from the sale of assets and 5) royalties received from licensing the Company's technology. NOI is negative NOE. For clarity, the REPAT tax adjustment and 2018 GILTI tax estimated accrual do not affect EBT.

Consolidated 2Q3Q 2018 EBT was $5,556 (50.7%$4,481 (43.1% of sales) compared to $5,057 (46.7%$4,696 (46.4% of sales) in 2Q3Q 2017. The difference was almost entirely due to lower GP in 3Q 2018 than in 3Q 2017. Consolidated 1H9M 2018 EBT was $10,565 (48.3%$15,046 (46.7% of sales) compared to $9,807$14,503 (46.5% of sales) in 1H9M 2017. Although not directly relatedIn 9M 2018, $275 higher GP was offset by $284 higher OE.  Consequently, the $542 (+3.7%) higher EBT in 9M 2018 compared to sales, 2018 EBTMs were enhanced by the one-time NOI9M 2017 was essentially due to higher NOI. There was a $450 gain from salesales of assets.assets in 2Q 2018 that did not occur in 2017. The remeasured currency gain in 9M 2018 was $10 compared to $5 in 9M 2017. The remaining difference was due to higher interest income from UTMD's cash bank balances.

The EBT of UTMD's subsidiaries in Ireland and the UK results not only from trade sales but also intercompany sales. For clarity, the subsidiary profit resulting from intercompany sales is eliminated in UTMD's consolidated income results. Utah Medical Products, Inc. (U.S.) was $2,885 in 2Q 2018 compared to $2,233 in 2Q 2017, and $5,136 in 1H 2018 compared to $4,484 in 1H 2017. TheLtd's (Ireland) EBT of Utah Medical Products, Ltd (Ireland) was EUR 9432,499 in 2Q9M 2018 compared to EUR 8752,229 in 2Q 2017,9M 2017. The higher 9M 2018 EBT in Ireland was due to 9% higher combined trade and EUR 1,740 in 1H 2018 compared to EUR 1,512 in 1H 2017 . Theintercompany sales. EBT of Femcare Group Ltd (Femcare-Nikomed,(Femcare Ltd., UK and Femcare Australia)Australia Pty Ltd) was GBP 1,1172,841 in 2Q9M 2018 compared to GBP 1,1463,141 in 2Q9M 2017. The lower Femcare Group EBT in 9M 2018 was due to the combination of 1) prior 2017 international sales from the UK converted to Ireland in 2018, and GBP 2,180 in 1H 20182) 12.9% lower Australia sales (in AUD) combined with a 6.6% weaker AUD compared to GBP 2,306 in 1H 2017.the GBP. The 2Q 2018 EBT of Utah Medical Products Canada, Inc. in 9M 2018 was CAD 4461,246 compared to CAD 5671,497 in 2Q 2017, and9M 2017.  The lower Canada EBT was due to 13.1% lower CAD 917sales in 1H9M 2018 compared to CAD 1,062 in 1H9M 2017.

Excluding the noncash effects of depreciation, amortization of intangible assets and stock option expense, 2Q3Q 2018 consolidated EBT excluding the noncash remeasured bank balance currency gain or loss and interest expense (adjusted("adjusted consolidated EBITDA)EBITDA") were $6,312 (57.6% of sales)$5,206 compared to $5,779 (53.4% of sales)$5,417 in 2Q3Q 2017. The lower 3Q 2018 EBITDA was due to the lower GP in 3Q 2018. Adjusted consolidated EBITDA in 1H9M 2018 were $12,122 (55.5% of sales)$17,328 compared to $11,236 (53.3% of sales)$16,653 in 1H9M 2017.  The increases in adjustedBased on the 9M 2018 EBITDA were largely due toresults, management expects 2018 EBITDA for the one-time 2Q 2018 asset sales. TTM adjustedyear as a whole will be higher than the $21,979 EBITDA were $22,864.for 2017.

NI is EBT minus a provision for income taxes. NI in 3Q 2018 per GAAP was substantially affected by a $3,230 favorable adjustment in UTMD's calculation of its "one-time" REPAT tax due under the TCJA enacted in December 2017.  In addition, in 3Q 2018, UTMD added its best estimate of the new GILTI tax under the TCJA, although the IRS has yet to provide complete guidance on the calculation and the State of Utah has yet to provide any guidance. As there was no REPAT tax or GILTI tax calculation included in 3Q and 9M 2017 results, comparing period-to-period financial results net of income taxes does not provide meaningful information to stockholders, in UTMD's opinion. Therefore, in addition to the increaseGAAP results, UTMD is providing a non-GAAP NI and EPS comparison which ignores the REPAT tax adjustment and GILTI tax accrual in EBT,3Q 2018.

In 3Q 2018, GAAP NI of $6,762 was 86.7% higher than the 3Q 2017 NI of $3,622.  GAAP NI in 1H9M 2018 of $8,400$15,162 was $995 (+13.4%)37.5% higher than the NI of $7,405$11,027 in 1H9M 2017. The consolidated income

For the benefit of stockholders, UTMD believes that further discussion of its current understanding of the impact of tax provision rateslaw changes resulting from the TCJA might be helpful. As stockholders likely remember, 4Q 2017 results according to U.S. Generally Accepted Accounting Principles (GAAP) were 20.5%affected by the recognition of an estimated "one-time" U.S. repatriation tax (REPAT tax) on foreign E&P resulting from the TCJA enacted by Congress in 1HDecember 2017.  UTMD's reasonable total REPAT tax estimate was $6,288 ($1.68 per share), including an estimated Utah State assessment of $1,065 and a $362 Federal REPAT tax credit for the State REPAT tax.

As more IRS information regarding the REPAT tax rules became available during 2018, and 24.5% in 1H 2017.conjunction with completing and filing its 2017 tax returns, UTMD learned that it needed to adjust its provisional assessment as it completed a "more likely than not" assessment in 3Q 2018.  The combinedresults of the assessment are a total REPAT tax of $3,058, including an estimated Utah State assessment of $1,066 and a $362 Federal REPAT tax credit for the State REPAT tax.

New "Global Intangible Low-taxed Income" (GILTI) Tax. Supposedly, the TCJA changed the U.S. federaltax system from one where worldwide income of U.S. corporations was taxed (when foreign subsidiary profits were repatriated) to one which only taxes income earned within the U.S. The REPAT tax was explained to be a "one-time" tax of 15.5% on liquid assets and 8% on illiquid assets resulting from cumulative foreign E&P, regardless of whether or not prior earnings had been repatriated.  In actuality, Congress walked back from the concept of not taxing future foreign earnings by slipping in a new GILTI tax.  This new tax apparently was aimed at corporations like Apple which had transferred intangible assets to low tax sovereignties, i.e. managed highest profits to be generated in the lowest taxed countries. Although UTMD does have OUS intangible assets acquired in the acquisition of Femcare in 2011, these assets were clearly developed in the UK, not transferred from the U.S.  Also, UTMD's OUS average tax rate is about 19%, higher than the targeted low average foreign tax threshold of 13.125% over which a company like UTMD theoretically would not have to pay a GILTI tax.  However, it appears now that because of the way that the tax is calculated by IRS form rules, that nearly every company with international intangible assets will end up paying GILTI income taxes going forward.  If the State of Utah statedoes not allow Foreign Tax Credits for GILTI Tax purposes, which remains to be determined, the annual State of Utah GILTI tax would be substantial, would eliminate any GILTI tax paid to the Federal government by virtue of the State tax credit allowed by the IRS and would clearly violate the premise of the one-time REPAT tax.  To date, according to UTMD's tax advisors, neither the IRS nor the State of Utah has provided clear rules for calculating the GILTI tax.

Using 2017 performance as a basis, assuming the corporate tax rate is not increased again during the next eight years and UTMD's current GILTI tax estimate is reasonable, the net annual gain to stockholders between the average payments of the REPAT and GILTI taxes and the higher NI resulting from lower income tax rates were 25.95%on future EBT is estimated to be about $280/ year, or about $.07/ share using current diluted number of shares.

In UTMD's public disclosures, management attempts to explain its expectations in 1H 2018 compared to 39% in 1H 2017.  For foreign subsidiaries, the tax provision booked in consolidated results is based on taxable income in the applicable sovereignty, not based on U.S. GAAP EBT. In 1H 2017, UTMD held about $16 million in cash in USD currency in Ireland and UK subsidiary bank accounts, and the USD weakened relative to the applicable native currency, resulting in a translation lossforward-looking statements for each subsidiary that created a significant 2017 tax credit for those subsidiaries in their applicable native currencies. This did not recur in 1H 2018, which offset the benefit of its stockholders.  However, management also acknowledges that financial estimates and other business projections are subject to change, and that the reduction in the U.S. tax rates.Company assumes no obligation to update or disclose revisions to its prior forward-looking statements.

EPS are consolidated 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). DilutedNon-GAAP EPS of $0.954 in 2Q3Q 2018 were $1.148 compared1.5% lower than the 3Q 2017 EPS of $0.969.  Non-GAAP EPS of $3.194 in 9M 2018 were 8.1% higher than the EPS of $2.953 in 9M 2017.  The 8.1% higher 9M 2018 non-GAAP EPS was due to $1.037 in 2Q 2017.  In 1H 2018, EPS were $2.239 compared to $1.985 in 1H 2017.  With some hindrance from8.7% higher NI diluted by 0.5% higher diluted shares outstanding, 2Q 2018 EPS increased 10.7% (11.1 cents) compared to 2Q 2017, and 1H 2018 EPS increased 12.8% (25.4 cents) compared to 1H 2017.shares. Looking forward, management is now projectingcontinues to expect to exceed its beginning of year projection for full year 2018 EPS greater than $4.00.non-GAAP EPS.

In 3Q 2018, GAAP EPS forof $1.802 were 85.9% higher than the most recent twelve months3Q 2017 EPS of $0.969.  GAAP EPS in 9M 2018 of $4.041 were $2.53, which includes36.8% higher than the 4Q 2017 recognitionEPS of a $6,288 one-time U.S. and Utah repatriation tax (REPAT) on foreign subsidiary cash and cumulative earnings (E&P) resulting from the "Tax Cuts and Jobs Act" enacted$2.953 in December9M 2017.  Excluding the REPAT tax, TTM EPS were $4.15.

Diluted shares outstanding used to calculate 2Q3Q 2018 EPS were 3,753,6083,753,111 compared to 3,731,8593,738,190 in 2Q3Q 2017.

Diluted shares outstanding used to calculate 9M 2018 EPS were 3,751,830 compared to 3,734,102 in 9M 2017.  The number of shares added as a dilution factor in 2Q9M 2018 was 23,08422,235 compared to 15,68617,647 in 2Q 2017. Diluted shares outstanding used to calculate 1H 2018 EPS were 3,751,072 compared to 3,730,478 in 1H 2017.  The number of shares added as a dilution factor in 1H 2018 was 23,326 compared to 15,253 in 1H9M 2017.

Outstanding shares at the end of 2Q3Q 2018 were 3,731,9203,734,165 which included 1H9M 2018 employee and outside director option exercises of 12,92715,172 shares. The number of shares used for calculating earnings per share was higher than ending shares because of a time-weighted calculation of average outstanding shares plus dilution from unexercised employee and director options. The total number of outstanding unexercised employee and outside director options at JuneSeptember 30, 2018 was 41,41339,168 shares at an average exercise price of $45.89/$46.24/ share, including shares awarded but not vested. This compares to 62,32457,019 unexercised option shares outstanding at JuneSeptember 30, 2017 at an average exercise price of $46.15/$45.35/ share. No option shares have been awarded

Exercises of employee options and dilution from a higher share price for unexercised options increased diluted shares. In 9M 2018, no new employee options were awarded. UTMD has not to date in 2018.  Despite the lower number2018 repurchased any of outstanding option shares, the dilution factor in 2018 was higher primarily because of a higher share market price.

ROE is the portion of NI retained by UTMD to internally finance its growth, divided by the average accumulated stockholders' equity for the applicable time period.  Annualized adjusted ROE in 9M 2018 (prior to the favorable REPAT Tax adjustment) was 14% compared to 14% in 9M 2017.  Annualized adjusted ROE (before stockholder dividends) in 1H9M 2018 was 21%19% compared to 18%20% in 1H9M 2017.  The higherlower adjusted ROE before dividends in 1H9M 2018 was due to thean 11% increase in average accumulated stockholders' equity with only a 9% increase in NI.  Targeting a high ROE of 20% (before dividends) remains a key financial objective for UTMD management.  ROE can be increased by increasing NI, or by reducing stockholders' equity by paying cash dividends to stockholders or by repurchasing shares.

Net cash provided by operating activities, including adjustments for depreciation and amortization and other non-cash expenses along with changes in working capital, totaled $7,747$12,350 in 1H9M 2018 compared to $7,743$12,323 in 1H9M 2017.  The most significant differences in the two periods were the $995$4,135 higher increase in net income (largely due to the REPAT Tax adjustment), offset by a $165$4,258 higher decrease in 9M 2018 accrued expenses (also due to the REPAT Tax adjustment),  a $441 benefit to cash from the sale of assets and non-cash investments, a $392 use of cash from a smaller decrease in accounts receivable, a $556 benefit to cash from a smaller increasedecrease in 1H 2018 trade accounts receivableinventories compared to 1H 2017, a $798 benefit to cash from an increase in accrued expenses in 1H 2018 resulting from the REPAT tax following a decrease in 1H9M 2017, and a $449$459 use of cash from a gain on investments and disposal of assets 1Hdecrease in accounts payable in 9M 2018 that did not occurcompared to an increase in the same period in9M 2017.

Capital expenditures for property and equipment (PP&E) were $201$255 in 1H9M 2018 compared to $114$174 in 1H9M 2017.   Depreciation of PP&E was $395$577 in 1H9M 2018 compared to $330$489 in 1H 2017.  The difference in depreciation was due primarily to the new facility in the UK put in service in 4Q9M 2017.

UTMD made cash dividend payments of $2,011$3,018 in 1H9M 2018 compared to $984$1,969 in 1H9M 2017.  The difference was due to the fact that the 2017 year-end dividend was paid in January 2018, whereas the 2016 year-end dividend was paid in December 2016.  The Company did not use cash to repurchase any of its own shares during either 1H9M 2018 or 1H9M 2017.

In 1H9M 2018, UTMD received $347$436 and issued 10,48812,733 shares of its stock upon the exercise of employee and director stock options, net of 2,439 shares retired upon employees trading those shares in payment of the stock option exercise price. Option exercises in 1H9M 2018 were at an average price of $44.23$43.58 per share.  In comparison, in 1H9M 2017 the Company received $168$224 and issued 4,8606,198 shares of stock on the exercise of employee and director stock options.options, net of 211 shares retired upon optionees trading those shares in payment of the stock option exercise price. Option exercises in 1H9M 2017 were at an average price of $34.67$37.39 per share.

Management believes that current cash balances, income from operations and effective management of working capital will provide the liquidity needed to finance internal growth plans. The Company may utilize cash not needed to support normal operations in one or a combination of the following:  1) in general, to continue to invest at an opportune time 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.

JuneSeptember 30, 2018 total consolidated assets were $97,045,$99,151, an increase of $4,300$6,407 from December 31, 2017. The increase was primarily due to a $5,918$9,398 increase in cash and investments. Other significant changes in assets included a $909$852 increase in consolidated net trade receivables, a $1,656$323 decrease in consolidated inventories and a $2,413 decrease in net intangible assets, a $852 decrease in the current USD value of net property and equipment, a $617 decrease in L/T taxes payable due to payment of the first installment of the REPAT tax, and a $275 decrease in the current USD value of the deferred tax liability associated with the amortization of acquired Femcare identifiable intangible assets (IIA).assets. UTMD's Ireland subsidiary EUR-denominated assets and liabilities on September 30, 2018 were translated into USD at an FX rate 2.9%3.3% lower (weaker EUR)EUR relative to the USD) than the FX rate at the end of 2017. UTMD's UK subsidiary GBP-denominated assets were translated into USD at an FX rate 2.4%3.4% lower (weaker GBP) than the FX rate at the end of 2017.  UTMD's Australia subsidiary AUD-denominated assets were translated into USD at an FX rate 5.3%7.4% lower (weaker AUD) than the FX rate at the end of 2017.  UTMD's Canada subsidiary CAD-denominated assets were translated into USD at an FX rate 4.7%3.1% lower (weaker CAD) than the FX rate at the end of 2017.  The net book value of consolidated property, plant and equipment decreased $852$1,047 at JuneSeptember 30, 2018 from the end of 2017 due to period-ending changed FX rates, $201$255 in new asset purchases and $395$577 in depreciation.

Working capital (current assets minus current liabilities) was $50,748$54,285 at JuneSeptember 30, 2018 compared to $43,909 at December 31, 2017.  Cash balances were $45,873 of the working capital. A current asset increase of $6,808$9,867 was leddominated by the $5,918$9,398 increase in cash and investments. CurrentA current liabilities were about the same, withdecrease of $510 was largely due to a slight $31 decrease from the end$418 lower current portion of 2017.REPAT tax liability, since UTMD essentially paid two years' of adjusted REPAT tax liability in 2018 before it understood it had originally estimated its REPAT tax liability too high. UTMD management believes that its working capital remains sufficient to meet normal operating needs, new capital expenditures and projected cash dividend payments to stockholders.

JuneSeptember 30, 2018 intangible assets (goodwill plus other intangible assets) decreased $1,656$2,413 from the end of 2017.  The decrease was due to the 3.4% lower FX rate (stronger USD) for GBP Femcare intangibles as of JuneSeptember 30, 2018 compared to year-end 2017, plus the $1,097 1H$1,617 9M 2018 amortization of Femcare IIA. At JuneSeptember 30, 2018, net intangible assets including goodwill declined to 31%30% of total consolidated assets compared to 34% at year-end 2017, and 37%36% at JuneSeptember 30, 2017.

The deferred tax liability balance for Femcare IIA ($9,084 on the date of the acquisition), was $2,827$2,698 at JuneSeptember 30, 2018, compared to $3,102 at December 31, 2017, and $3,178$3,175 at JuneSeptember 30, 2017.  Reduction of the deferred tax liability occurs as the book/tax difference of IIA amortization is eliminated over the remaining useful life of the Femcare IIA, i.e. as Femcare pays its taxes in the UK without the benefit of a deduction for IIA amortization expense.

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.

UTMD has manufacturing and trading operations, including related assets, in the U.S. denominated in the U.S. Dollar (USD), in Ireland denominated in the Euro (EUR), in England denominated in the British Pound (GBP), in Australia denominated in the Australia Dollar (AUD), and, starting in 2017, in Canada denominated in the Canadian Dollar (CAD).  The currencies are subject to exchange rate fluctuations that are beyond the control of UTMD.  The exchange rates were .8564,.8601, .8319 and .8763.8465 EUR per USD as of JuneSeptember 30, 2018, December 31, 2017 and JuneSeptember 30, 2017, respectively.  Exchange rates were .7578,.7463, .7395 and .7696.7659 GBP per USD as of JuneSeptember 30, 2018, December 31, 2017 and JuneSeptember 30, 2017, respectively.  Exchange rates were 1.3515,1.3814, 1.2796 and 1.30281.2756 AUD per USD on JuneSeptember 30, 2018, December 31, 2017, and JuneSeptember 30, 2017, respectively.  Exchange rates were 1.3141,1.2921, 1.2519, and 1.29821.2513 CAD per USD on JuneSeptember 30, 2018, December 31, 2017, and JuneSeptember 30, 2017, respectively. UTMD manages its foreign currency risk without separate hedging transactions by either invoicing customers in the local currency where costs of production were incurred, by converting currencies as transactions occur, and by optimizing global account structures through liquidity management accounts.

The Company's management, under the supervision and with the participation of the Chief Executive Officer and the Principal Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of JuneSeptember 30, 2018. Based on this evaluation, the Chief Executive Officer and Principal Financial Officer concluded that, as of JuneSeptember 30, 2018, the Company's disclosure controls and procedures were effective.

There were no changes in the Company's internal controls over financial reporting that occurred during the sixnine months ended JuneSeptember 30, 2018, that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

The Company may be a party from time to time in litigation incidental to its business.  Presently, there is no litigation the outcome of which is expected to be material to financial results.