Thereafter
| 299
Reconciliation of operating lease liabilities/ payments to operating lease liabilities | (in thousands) | Total operating lease liabilities/ payments | $528 | Operating lease liabilities – current (included in Accrued Expenses) | $40 | Operating lease liabilities – long term | $346 | Present value adjustment | $142 |
ReconciliationMaturities of operating lease liabilities/ payments to operating lease liabilities
| were as follows:(in thousands)
| Maturities of lease liabilities were as follows: | (in thousands) | Year ending December 31, | | 2020 | $38 | 2021 | $40 | 2022 | $27 | 2023 | $29 | 2024 | $30 | Thereafter | $248 |
Total operating lease liabilities/ payments
|
$5367
|
Operating lease liabilities
| 404Table of Contents
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Present value adjustment
| $132(8) Distribution Agreement Purchase. UTMD completed the purchase of exclusive U.S. distribution rights for the Filshie Clip System from CooperSurgical, Inc. (CSI) on February 1, 2019. The $21,000 purchase price represented an identifiable intangible asset which is being straight-line amortized and recognized as part of G&A expenses over a remaining 3.08 year life as of September 30, 2020 of the prior CSI distribution agreement with Femcare.
|
Maturities of lease liabilities were as follows: | (in thousands) | Year ending December 31, | | 2020 | $38 | 2021 | 40 | 2022 | 27 | 2023 | 29 | 2024 | 30 | Thereafter | 248 |
(8) Distribution Agreement Purchase. UTMD completed the purchase of exclusive U.S. distribution rights for the Filshie® Clip System from CooperSurgical, Inc. (CSI) on February 1, 2019. The $21,000 purchase price represents an identifiable intangible asset which is being straight-line amortized and recognized as part of G&A expenses over the now 3.58 year remaining life of the prior CSI agreement with Femcare.
9) Earnings Per Share. Basic earnings per share is calculated by dividing net income attributable to the common stockholders of the company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by assuming the exercise of stock options at the closing price of stock at the end of first quarter 2020.
The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share:
(in thousands) | Three months ended | | March 31, | | 2020 | 2019 | Numerator | | | Net income | 3140 | 3139 | | | | Denominator | | | Weighted average shares, basic | 3707 | 3722 | Dilutive effect of stock options | 17 | 16 | Diluted shares | 3724 | 3738 | | | | Earnings per share, basic | 0.85 | 0.84 | Earnings per share, diluted | 0.84 | 0.84 |
(10) Subsequent Events.UTMD has evaluated subsequent events through the date the financial statements were issued, and concluded there were no other events or transactions during this period that required recognition or disclosure in its financial statements. The COVID-19 pandemic itself was not a subsequent event. However, the negative impact of the pandemic in the ensuing 2Q 2020 to date has been substantially greater than in 1Q 2020. More detail is provided in Item 2.
(9) Earnings Per Share. Basic earnings per share is calculated by dividing net income attributable to the common stockholders of the company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by assuming the exercise of stock options at the closing price of stock at the end of 3rd quarter 2020. The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share: (in thousands) | Three months ended | | Nine months ended | | September 30, | | September 30, | | 2020 | | 2019 | | 2020 | | 2019 | Numerator | | | | | | | | Net income | 2,933 | | 3,705 | | 7,386 | | 10,369 | | | | | | | | | Denominator | | | | | | | | Weighted average shares, basic | 3,642 | | 3,720 | | 3,664 | | 3,722 | Dilutive effect of stock options | 11 | | 17 | | 14 | | 16 | Diluted shares | 3,653 | | 3,737 | | 3,678 | | 3,738 | | | | | | | | | Earnings per share, basic | 0.81 | | 1.00 | | 2.02 | | 2.79 | Earnings per share, diluted | 0.80 | | 0.99 | | 2.01 | | 2.77 |
(10) Subsequent Events.UTMD has evaluated subsequent events through the date the financial statements were issued, and concluded there were no other events or transactions during this period that required recognition or disclosure in its financial statements.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General 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, 2019, 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 month period in comparison with a previous three 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. Analysis of Results of Operations a)Overview Income statement results in the first quarter (1Q) of3Q and 9M 2020 compared to 1Qthe same periods of 2019 were as follows: | 1Q 2020 | 1Q 2019 | change | 3Q 2020 | 3Q 2019 | change | 9M 2020 | 9M 2019 | change | Net Sales | $ 10,902 | $ 10,732 | +1.6 % | $ 10,479 | $ 12,494 | (16.1%) | $ 30,168 | $ 35,073 | (14.0%) | Gross Profit | 6,836 | 6,773 | +0.9 % | 6,497 | 7,379 | (12.0%) | 18,283 | 21,652 | (15.6%) | Operating Income | 3,863 | 4,102 | (5.8%) | 3,588 | 4,371 | (17.9%) | 9,428 | 12,954 | (27.2%) | Income Before Tax | 3,988 | 4,137 | (3.6%) | 3,588 | 4,448 | (19.3%) | 9,553 | 13,150 | (27.4%) | Net Income | 3,140 | 3,139 | - | | Earnings per Share | $ 0.843 | $ 0.840 | +0.4 % | | Net Income (NI) | | 2,933 | 3,705 | (20.8%) | 7,386 | 10,369 | (28.8%) | Earnings per Diluted Share (EPS) | | 0.803 | 0.991 | (19.0%) | 2.008 | 2.774 | (27.6%) |
Profit margins
UTMD management believes that the presentation of sequential 2020 quarterly results provides meaningful supplemental information to both management and investors. Keeping in 1Qmind that results for any given three month period in comparison with a previous three month period may not be indicative of comparative results for the year as a whole, the following table shows the percent changes in 2020 compared to 1Q 2019 follow: | 1Q 2020 (JAN – MAR) | 1Q 2019 (JAN – MAR) | Gross Profit Margin (Gross Profit/ sales): | 62.7% | 63.1% | Operating Income Margin (Operating Income/ sales): | 35.4% | 38.2% | EBT Margin (Profits before Income Taxes/ sales): | 36.6% | 38.5% | Net Income Margin (Profit after Taxes/ sales): | 28.8% | 29.2% |
Although sales and gross profits were higher in 1Q 2020 than in 1Q 2019, the corona virus (COVID-19) pandemic substantially hampered financialquarterly results beginning in March. UTMD’s gynecology/ electrosurgery/ urology (GYN) product category is primarily comprised of devices used in procedures which are considered “elective” in the current pandemic. Sales of the Filshie® Clip System (Filshie devices), which are included in the GYN product category, were $764 (+83%) higher in 1Q 2020 than in 1Q 2019 because UTMD first began selling Filshie devices directly to domestic end-users in February 2019 (part way through 1Q 2019), after acquiring the exclusive distribution rights from CooperSurgical Inc. Although a very short span of time, a better comparison might be that domestic Filshie device sales were 25% lower in March 2020 compared to the January/February 2020 monthly average. Outsidesame periods of time in 2019:
Consolidated Income Statement | 1Q | 2Q | 3Q | 9M | Worldwide Revenues | + 1.6% | (25.8%) | (16.1%) | (14.0%) | Gross Profit | + 0.9% | (34.0%) | (12.0%) | (15.6%) | Operating Income | ( 5.8%) | (55.9%) | (17.9%) | (27.2%) | Earnings Before Income Tax | ( 3.6%) | (56.7%) | (19.3%) | (27.4%) | Net Income | - | (62.8%) | (20.8%) | (28.8%) | Earnings Per Share | - | (62.0%) | (19.0%) | (27.6%) |
Revenues [USD denominated] | 1Q | 2Q | 3Q | 9M | U.S. domestic (excluding OEM) | + 14.5% | (29.1%) | (8.0%) | ( 9.2%) | Canada domestic | (21.7%) | (62.9%) | ( 5.6%) | (32.0%) | Ireland domestic | (26.2%) | (48.6%) | (18.1%) | (30.9%) | UK domestic | (11.2%) | (72.8%) | (34.4%) | (38.7%) | France domestic | (11.8%) | (72.1%) | (12.3%) | (32.6%) | Australia domestic | ( 8.6%) | (43.0%) | (13.6%) | (22.0%) | Subtotal, Direct to End User: | + 4.2% | (39.1%) | (11.1%) | (16.3%) | All Other OUS (Sales to Int’l Distributors) | ( 5.2%) | ( 4.5%) | (34.7%) | (15.6%) | U.S. OEM Sales | + 0.7% | + 9.5% | ( 8.9%) | ( 0.6%) | Worldwide Revenues | + 1.6% | (25.8%) | (16.1%) | (14.0%) |
UTMD subsidiary direct domestic sales in Canada, Ireland, the U.S. (OUS), Filshie device sales, which were for the full quarterUnited Kingdom, France and Australia are invoiced in each year, were $513 (19%) lower. On a constant currency basis (foreign currency sales converted to USD at the same foreign currencies. Foreign currency exchange (FX) rate as in the prior year’s 1Q), OUS Filshie device sales were $440 (17%) lower. In other words, at least 14% of the decline in OUS Filshie device sales was due to a stronger USD in 1Q 2020 compared to 1Q 2019. Because 26% of consolidated sales and 32% of consolidated operating expenses (in USD terms) are in foreign currencies, the change in FX rates for sales and expenses OUS had an impact on period-to-period relative financial results. FX rates for income statement purposes are transaction-weighted averages. The average FX rates from the applicable foreign currency to USD during 1Q3Q 2020 and 1Q9M 2020 compared to the same periods in 2019 follow:
| 1Q 2020 | 1Q 2019 | Change | 3Q 20 | 3Q 19 | Change | 9M 20 | 9M 19 | Change | GBP | 1.283 | 1.304 | (1.6%) | 1.295 | 1.233 | +5.0% | 1.279 | 1.273 | +0.5% | EUR | 1.108 | 1.134 | (2.3%) | 1.173 | 1.108 | +5.8% | 1.128 | 1.123 | +0.4% | AUD | 0.655 | 0.713 | (8.1%) | 0.714 | 0.687 | +4.0% | 0.677 | 0.700 | (3.3%) | CAD | 0.750 | 0.753 | (0.5%) | 0.751 | 0.758 | (0.8%) | 0.745 | 0.752 | (1.0%) |
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The weighted average negativeAlthough the volatility of FX rates for OUS sales when consolidated in USD terms continues to impact on allperiod-to-period relative financial results because of UTMD’s significant percentage of foreign currency sales, the FX rate impact in 9M 2020 was 2.6%, reducing reportedless significant than in the recent past. Except for the CAD FX rate which had not changed as significantly as other currencies, a healthy 3Q 2020 decline in the USD offset its strengthening during the first half of the year. Foreign currency revenues in 3Q 2020 were increased by $85 as a result of a weaker USD compared to 3Q 2019. In contrast, the difference in period-to-period FX rates reduced revenues by $36 in 9M 2020. Foreign currency sales as a percentage of total sales were 21.0% of total sales in 3Q 2020 and 22.0% of total sales in 9M 2020. UTMD’s 3Q 2019 and 9M 2019 revenues invoiced in foreign currencies represented 23.6% and 27.2% of total consolidated USD sales by $78 relative to the same foreign currency sales in 1Q 2019. In constant currency terms, total consolidated 1Q 2020 sales were up $247 (+2.3%).respectively.
UTMD’s Other factors that affected period-to-period revenue comparisons included
1)International distributors’ quarter-to-quarter orders fluctuate more than domestic end user orders. 2)1Q 2020 Gross Profit Margin2019 was squeezed by higher direct materials costs. The productivitya partial quarter of UTMD’s direct labor and manufacturing overhead expenses were consistent withU.S. domestic Filshie Clip System (Filshie device) sales, as the prior year.UTMD acquisition of the Cooper Surgical Inc. (CSI) exclusive Filshie device distribution rights took effect February 1, 2019. UTMD’s Operating Income
UTMD profit margins in 1Q3Q 2020 and 9M 2020 compared to 3Q 2019 and 9M 2019 follow: | 3Q 2020 (Jul – Sep) | 3Q 2019 (Jul – Sep) | 9M 2020 (Jan – Sep) | 9M 2019 (Jan – Sep) | Gross Profit Margin (gross profits/ sales): | 62.0% | 59.1% | 60.6% | 61.7% | Operating Income Margin (operating profits/ sales): | 34.2% | 35.0% | 31.3% | 36.9% | Net Income Margin (profit after taxes/ sales): | 28.0% | 29.7% | 25.2% | 29.6% |
Gross Profit in 3Q 2020 declined less than the sales decline primarily as a result of sales mix. The 9M 2020 gross profit margin (GPM), gross profit divided by sales, was $238 lower than in 1Q9M 2019 despite the better 3Q GPM because 14% lower sales during 9M 2020 absorbed marginally less of UTMD’s fixed critical mass of manufacturing overhead. Because UTMD believes that the lower sales are transitory, knows it can remain very profitable even at the lower sales levels experienced during the pandemic and has a $368 higher expense from amortizing the purchase price that UTMD paid CSIsignificant cash reserve relative to acquire the exclusive U.S. Filshie distribution rights. The purchase price is anoperational needs, management will not cut important resources and sacrifice future capabilities just to maintain short term profit margins. Operating Income declined more than gross profit in both 3Q 2020 and 9M 2020 because UTMD’s non-cash identifiable intangible asset (IIA) that will be amortized atamortization expense included in operating expenses was 15.5% of sales in 3Q 2020 compared to 12.8% of sales in 3Q 2019, and 16.0% in 9M 2020 compared to 12.7% in 9M 2019. This was due not only to the lower sales in 2020 (less absorption of a fixed expense) but also the GBP FX rate difference in the 3Q and the timing of $1,105 per quarter until October 2023 (14.3 more quarters), as part of General and Administrative (G&A) expenses. Excludingbeginning the CSI IIA amortization expense, UTMD’s Operatingin 2019. Earnings before tax (EBT) declined more than operating income simply because UTMD did not receive interest on its cash balances in 2020 like it did in 2019, although average cash balances were about 20% higher during 9M 2020. Net Income margin was 45.6%declined slightly more than EBT as a result of the sovereignty mix of taxable profits in 1Q 2020 compared to 45.1% in 1Q 2019. Income Before Tax (EBT) was down less than Operating Income because 1Q 2020 non-operating income was $89 higher compared to 1Q 2019. The higher non-operating income was due to a $44 gainlowest tax regimes of Ireland and the UK had the greatest declines in the USD-remeasured value of foreign currency bank balances instead of a $50 loss reported in 1Q 2019. Net Income andEBT. Finally, Earnings Per Share (EPS) were essentiallydeclined less than net income as a result of the samebenefit of share repurchases in both periods as the 21.3% consolidated income tax provision rate in 1Q 2020 was lower than the 24.1% rate in 1Q 2019. The 80,000 UTMD shares repurchased by UTMD in 1Q 2020 had only a small impact on diluted shares for calculating EPS as the shares were purchased in March and the formula for calculating diluted shares is time-weighted.2020.
UTMD’s March 31, 2020 Balance Sheet, in the absence of debt, remained strong. Ending Cash and Investments were $39.6 million on March 31, 2020 compared to $42.8 million on December 31, 2019, after using $6.4 million to repurchase 80,000 UTMD shares in the open market in March, and paying $1.0 million in cash dividends to stockholders during 1Q 2020. Stockholders’ Equity (SE) declined $6.7 million in the three month period from December 31, 2019 because the $7.4 million in stock repurchases and dividends reduced SE. The lower converted USD value of fixed assets outside the U.S. (OUS) also helped reduce SE. 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 1QSeptember 2020 and the end of September 2019 follow:
| 3-31-20 | 12-31-19 | Change | Sep 30, 2020 | Sep 30, 2019 | Change | GBP | 1.245 | 1.327 | (6.1%) | 1.292 | 1.230 | +5.0% | EUR | 1.102 | 1.123 | (1.8%) | 1.172 | 1.091 | +7.5% | AUD | 0.614 | 0.703 | (12.6%) | 0.716 | 0.675 | +6.1% | CAD | 0.708 | 0.771 | (8.2%) | 0.751 | 0.755 | (0.6%) |
UTMD’s September 30, 2020 Balance Sheet remained strong with an absence of debt. During 2020, inventories declined $0.6 million despite much lower sales, which is an indication of good manufacturing planning and control. Due to the increase in value of the GBP, EUR and AUD noted above, despite depreciation of fixed assets, the USD net book value of fixed assets in the UK, Ireland and Australia increased $0.6 million as of September 30, 2020 from September 30, 2019. Over the one year period of time, the intangible asset balance declined $5.5 million, about 12%. Ending cash and investments were $46.3 million on September 30, 2020 compared to $42.8 million on December 31, 2019, after paying $3.1 million in cash dividends to stockholders and repurchasing $7.0 million in UTMD stock during 9M 2020. After reducing stockholders’ equity a combined $10.1 million in 9M 2020 stockholder dividends and share repurchases, September 30, 2020 stockholders’ equity was down only $2.7 million from December 31, 2019.
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b)Revenues 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. Terms of sale are established in advance of UTMD’s acceptance of customer orders. In the U.S., Ireland, UK, France, Canada and Australia, prior to 2017, UTMD generally acceptedaccepts orders directly from and shippedships 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. The same was true in 2017 with the addition of direct shipments to end user facilities in Canada and France. About 14% of UTMD’s domestic end user sales, excluding Femcare’s Filshie Clip Systemdevice sales, to its exclusive U.S. distributor, CooperSurgical Inc. (CSI), go 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, Canada 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 that the selling price is fixed prior to the acceptance of a specific customer order.
Total consolidated 1Q3Q 2020 UTMD sales were $169 (+1.6%$2,016 (16.1%) higherlower than in 1Q3Q 2019. Constant currency sales were $247 (+2.3%$2,101 (16.8%) higher.lower. Total consolidated 9M 2020 UTMD sales were $4,905 (14.0%) lower than in 9M 2019. Constant currency sales in 9M 2020 were $4,869 (13.9%) lower than in 9M 2019. In 3Q 2020 compared to 3Q 2019, U.S. domestic sales were 11% higher8% lower and OUS sales were 10%28% lower. In 9M 2020 compared to 9M 2019, U.S. domestic sales were 7% lower in USD terms. Because of the relatively short span of time, results for any given three month period in comparison with a previous three month period may not be indicative of comparative results for the year as a whole. Furthermore,and OUS sales activity changed dramatically during the quarter due to the COVID-19 pandemic. Forward-looking statements in the current challenging economic environment resulting from the COVID-19 pandemic have a much higher level of uncertainty.were 23% lower. Domestic sales in 1Q3Q 2020 were $6,443$6,950 compared to $5,794$7,575 in 1Q3Q 2019. Domestic sales in 9M 2020 were $18,906 compared to $20,366 in 9M 2019. The components of domestic sales include 1) “direct other device sales” of UTMD’s medical devices to user facilities (and med/surg stocking distributors for hospitals), excluding Filshie deviceClip System (“Filshie device”) sales, 2) “OEM sales” of components and other products manufactured by UTMD for other medical device and non-medical device companies, and 3) “direct Filshie device sales”, which beginning in February 2019 were by UTMDsales direct to U.S. clinical users. Direct other devicemedical facilities starting in February 2019. Domestic direct sales in 3Q 2020 excluding Filshie devices, representing 52%50% of total domestic sales, were $125 (4%$178 (5%) lower in 1Q 2020 than in 1Q3Q 2019. OEMDomestic direct sales in 9M 2020 excluding Filshie devices, representing 21%51% of total domestic sales, were just $9 (+1%$1,078 (10%) higher. Directlower than in 9M 2019. OEM sales in 3Q 2020, representing 25% of total domestic sales, were $172 (9%) lower than in 3Q 2019. OEM sales in 9M 2020, also representing 25% of total domestic sales, were $27 (1%) lower than in 9M 2019. Filshie device sales direct to U.S. domestic end-user facilities were $764 (+83%$275 (14%) higherlower in 1Q3Q 2020 compared to 1Qsales in 3Q 2019. However, the average daily rate of direct U.S. Filshie device sales was 30%direct to U.S. domestic end-user facilities were $355 (7%) lower in March than in the first two months of 1Q 2020. In the short time period during April ensuing the end of 1Q9M 2020 at possibly the height of concern regarding COVID-19, incoming U.S. orders for Filshie devices have been 63% lower than in the first two months of the year. Assuming April sales rate continues through June would yield just $700 in 2Q 2020 direct U.S.compared to Filshie device sales compared to $1,979 in 2Q9M 2019. A numberBecause Filshie device sales are a significant portion of UTMD’s other gynecology/ electrosurgery/ urology devices are also considered “elective”domestic business and a UTMD device most affected by the COVID-19 pandemic, management believes the following table might help to see the overall 2020 pandemic impact and recovery trend:
Filshie device sequential quarterly USD domestic direct sales in the current environment, but unless economic conditions deteriorate to the point where the qualityU.S. Year | 1Q | 2Q | 3Q | 9M | 2020 | 1,689 | 1,135 | 1,733 | 4,557 | 2019 | 925 | 1,979 | 2,008 | 4,912 |
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Table of essential care in general continues to suffer, demand for UTMD’s critical care devices, including devices used in L&D and the NICU, should remain consistent.Contents
OUS sales in 1Q3Q 2020 were $4,459$3,528 compared to $4,938$4,919 in 1Q3Q 2019. OUS sales in 9M 2020 were $11,262 compared to $14,707 in 9M 2019. OUS sales invoiced in GBP, EUR, AUD and CAD currencies were $78$85 higher in 3Q 2020 and $36 lower solelyin 9M 2020 as a result of changes in FX rates. In other words, at least 16% of the lower OUS sales was due to a stronger USD. Foreign currency OUS sales in 1Q3Q 2020 were $2,866,$2,205, which was 64%62% of all OUS sales and 26%21% of total consolidated sales. ForeignIn comparison, foreign currency OUS sales in 1Q3Q 2019 were $3,206,$2,944, which was 60% of all OUS sales and 24% of total consolidated sales. The foreign currency OUS sales in 9M 2020 were $6,653, which was 59% of all OUS sales and 22% of total consolidated sales. In comparison, foreign currency OUS sales in 9M 2019 were $9,534, which was 65% of all OUS sales and 30%27% of total consolidated sales. In USD terms, OUSBecause Filshie device sales were $513 (19%) lower.are also a significant portion of UTMD’s OUS direct end-userbusiness and an implanted device most affected by the COVID-19 pandemic, management believes the following table might help to see the overall 2020 pandemic impact and recovery trend: Filshie device OUS sequential quarterly USD-denominated sales: | Year | 1Q | 2Q | 3Q | 9M | Direct | 2020 | 1,798 | 681 | 1,426 | 3,905 | | 2019 | 2,135 | 2,036 | 1,810 | 5,981 | Distributor | 2020 | 318 | 323 | 133 | 774 | | 2019 | 494 | 487 | 437 | 1,418 | Total OUS | 2020 | 2,117 | 1,003 | 1,559 | 4,679 | | 2019 | 2,630 | 2,523 | 2,246 | 7,399 |
OUS Filshie sales in USD terms were 26% lower in Ireland, 22% lower in Canada, 12% lower in France, 11% lowerobviously took a deeper hit from the pandemic than in the UKU.S. UTMD segments sales into the following general product categories: gynecology/ electrosurgery, labor & delivery, neonatal, and 9% lower in Australia. Because all of the OUS direct end-user sales were in foreign currencies, a portion of the decline was due to the stronger USDmiscellaneous including blood pressure monitoring kits and accessories as noted in the FX rate table above. Although Filshie device sales to OUS distributors were 36% lower in 1Qwell as related OEM products. In 3Q 2020 compared to 1Q3Q 2019, some ofworldwide gynecology/ electrosurgery device sales were down 21%, worldwide labor & delivery device sales were essentially the difference was just uneven order patternsame, worldwide neonatal device sales were down 6% and worldwide blood pressure monitoring and related OEM product sales were down 18%. Devices in the gynecology/ electrosurgery category were mostly classified as distributors order larger quantities of devices“nonessential” during the pandemic. In the blood pressure monitoring category, UTMD’s largest OUS distributor took a double quarterly shipment in less frequent intervals3Q 2019. In 9M 2020 compared to direct users. Recognizing a high level of uncertainty, a projection of the ensuing 2Q 2020 consolidated revenues at the current April incoming order rate extrapolates to 40% lower 2Q 2020 consolidated revenues compared to 2Q9M 2019, revenues. What happens after 2Q 2020 depends in large part not only on when hospitals once again allow so-called elective procedures, but also on when patients again feel confident in going to the hospital without significant risk of contracting an unwanted disease.
Trade sales are sales to third parties, excluding sales from one UTMD entity to another, which are called intercompany sales. Intercompany sales and profits are eliminated from consolidated financial results. Ireland subsidiary 1Q 2020 tradeworldwide gynecology/ electrosurgery device sales were $185 (14%) lower than in 1Q 2019 helped in part by an average 2.3% weaker EUR. Ireland EURdown 22%, worldwide labor & delivery device sales were €142 (12%) lower. Trade sales in 1Q 2020 by UTMD’s UK subsidiary, Femcare Ltd, were $183 (13%) lower, while in GBP terms, UK tradedown 13%, worldwide neonatal device sales were £126 (12%) lower than in 1Q 2019. Femcare Ltd trade sales include Filshie device sales directly to France medical facilities where the elective procedure restriction effects of COVID-19 may have exhibited earlier than in the UK. Trade sales in 1Q 2020 by UTMD’s Australia subsidiary to Australian end user facilities were $37 (9%) lower than in 1Q 2019, but only AUD 4 (less than 1%) lower as the AUD was the weakest foreign currency relative to the USD, down in value more than 8%. Trade sales by UTMD’s Canada subsidiary to Canadian end user facilities in 1Q 2020 were $123 (22%) lower than in 1Q 2019, representing the poorest sales results of UTMD’s foreign direct Filshie device sales, leveraged down only slightly by a weaker CAD. Canada subsidiary2% and worldwide blood pressure monitoring and related OEM product sales were CAD 160 (21%) lower. Because of the relatively short span of time, sales results for any given three month period in comparison with a previous three month period may not be indicative of comparative results for the year as a whole. down 3%.
The following table provides USD sales amounts divided into general product categories for total sales and the subset of OUS sales: Global 3Q 2020 revenues (USD) by product category: | 1Q 2020 | % | 1Q 2019 | % | Obstetrics | $ 1,158 | 11 | $ 1,339 | 12 | Gynecology/ Electrosurgery/ Urology | 5,892 | 54 | 5,582 | 52 | Neonatal | 1,584 | 14 | 1,510 | 14 | Blood Pressure Monitoring and Accessories* | 2,268 | 21 | 2,301 | 22 | Total: | $10,902 | 100 | $ 10,732 | 100 |
| Domestic | Outside US | Total | Obstetrics | $ 1,032 | $ 247 | $ 1,279 | Gynecology/Electrosurgery/Urology | 2,847 | 2,202 | 5,049 | Neonatal | 1,151 | 348 | 1,499 | Blood Pressure Monitoring and Accessories* | 1,920 | 732 | 2,652 | Total: | $ 6,950 | $ 3,529 | $ 10,479 |
OUSGlobal 9M 2020 revenues (USD) by product category:
| 1Q 2020 | % | 1Q 2019 | % | Obstetrics | $ 249 | 6 | $ 312 | 6 | Gynecology/ Electrosurgery/ Urology | 3,075 | 69 | 3,504 | 71 | Neonatal | 443 | 10 | 340 | 7 | Blood Pressure Monitoring and Accessories* | 692 | 15 | 782 | 16 | Total: | $ 4,459 | 100 | $ 4,938 | 100 |
| Domestic | Outside US | Total | Obstetrics | $ 2,739 | $ 612 | $ 3,351 | Gynecology/Electrosurgery/Urology | 7,686 | 6,945 | 14,631 | Neonatal | 3,266 | 1,169 | 4,435 | Blood Pressure Monitoring and Accessories* | 5,215 | 2,536 | 7,751 | Total: | $ 18,906 | $ 11,262 | $ 30,168 |
*includes molded components sold to OEM customers. Looking forward, although an increase in COVID-19 infections is likely in the winter months of 4Q 2020 in the northern hemisphere, assuming no significant new lockdowns or prohibitions of “nonessential procedures” are imposed by governments, UTMD expects that its 4Q 2020 sales will continue to recover and be higher than in 3Q 2020.
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c)Gross Profit (GP) GPGross Profit results from subtracting the costs of manufacturing and shipping products to customers. UTMD’s GPcustomers from revenues. Gross Profit was $63 (0.9%$883 (12.0%) higherlower in 1Q3Q 2020 than in 1Q3Q 2019, and $3,369 (15.6%) lower in 9M 2020 than in 9M 2019. UTMD’s 3Q 2020 GPM improved to 62.0% compared to 59.1% in 3Q 2019 so that the decline in 3Q Gross Profit was not as significant as the 3Q decline in sales. Sales to international distributors are at lower prices for the same devices because the distributor incurs direct marketing expenses instead of higher revenues. However, UTMD’s GP Margin was slightly lower at 62.7%UTMD. Sales to international distributors were only 18% of total sales in 1Q3Q 2020 compared to 63.1%23% in 1Q3Q 2019. The 3Q 2019 dueGPM was also exceptionally low because of a “double” shipment of blood pressure monitoring kits to higher direct material costs. Otherwise,UTMD’s China distributor. For 9M 2020 compared to 9M 2019, Gross Profit declined slightly more than the Company maintained the productivitysales decline as a result of its direct labor andUTMD not cutting critical manufacturing overhead costsresources, and providing special incentives in its manufacturing operations consistent with2Q 2020 for employees to come to work. Nevertheless, the prior 1Q 2019 period.60.6% GPM for the 2020 year to date has met management’s long term objective.
d)Operating Income Operating Income results from subtracting Operating Expenses from GP.Gross Profit. Operating Expenses, comprised of G&Ageneral and administrative (G&A) expenses, sales and marketing (S&M) expenses and product development (R&D) expenses, were $2,97327.8% of sales in 1Q3Q 2020 (27.3% of sales) compared to $2,67124.1% of sales in 1Q 2019 (24.9%3Q 2019. Operating Expenses were 29.4% of sales). Ignoringsales in 9M 2020 compared to 24.8% of sales in 9M 2019. Although the operating expense percentage of sales increased due to the 2020 short term pandemic reduction in sales, management continued to tightly manage operating expenses without sacrificing resources needed for longer term growth. Summary comparison of (USD) consolidated operating expenses: | 3Q 2020 | 3Q 2019 | 9M 2020 | 9M 2019 | S&M Expense | $ 352 | $ 421 | $ 1,195 | $ 1,304 | R&D Expense | 125 | 130 | 375 | 357 | G&A Expense | 2,432 | 2,457 | 7,285 | 7,037 | Total Operating Expenses: | $ 2,909 | $ 3,008 | $ 8,855 | $ 8,698 |
Lower S&M expenses were due primarily to the lack of trade show expenses during the pandemic. S&M expenses were 3.4% of sales in both 3Q 2020 and 3Q 2019. S&M expenses were 4.0% of sales in 9M 2020 compared to 3.7% of sales in 9M 2019. R&D expenses were consistent with the prior year’s same periods of time, varying only by specific project expenses. R&D expenses were 1.2% of sales in 3Q 2020 compared to 1.0% of sales in 3Q 2019. R&D expenses in 9M 2020 were also 1.2% of sales compared to 1.0% of sales in 9M 2019. The higher G&A expense in 9M 2020 was due to amortization expense of the CSI IIA amortization expense which was $368 higher than in 1Q 2019, Operating Expenses were $1,868 (17.1% of sales) in 1Q 2020, and $1,935 (18.0% of sales) in 1Q 2019. A stronger USD in this instance helped Operating Income performance by reducing OUS Operating Expenses in USD terms by $20, the reduction split by Femcare GBP IIA amortization expense of $8 and all other OUS Operating Expenses of $12. Consolidated G&A expenses were $2,419 (22.2% of sales)for a full quarter in 1Q 2020 compared to $2,140 (19.9% of sales)a partial quarter in 1Q 2019. TheConsolidated G&A expenses were 23.2% of sales in 1Q3Q 2020 included $512 (4.7%compared to 19.7% of sales)sales in 3Q 2019. Consolidated G&A expenses were 24.1% of sales in 9M 2020 compared to 20.1% of sales in 9M 2019. G&A expenses included non-cash expense from the amortization of IIA resulting from the March 2011 Femcare Group Ltd (UK) acquisition which were $520 (4.8%and the amortization of sales) in 1Q 2019. The lower USD amortization expense was the result of the stronger USD, as the Femcare amortization expense in GBP was £399 in both periods. In addition, 1Q 2020 G&A expenses included $1,105 (10.1% of sales) IIA amortization expense resulting from the purchase of the CSI remaining U.S. exclusive Filshie devices distribution rights whicheffective in February 2019.
The initial amount of IIA for the 2011 Femcare UK purchase was $737 (6.9%£23,998. After 9.5 years of sales)amortization, the IIA balance is £8,686. For both years of 2020 and 2019, the amortization expense rate was a constant £399 per calendar quarter. The USD amortization expense amount in 1Qeach period, however, varied according to the USD/GBP FX rate. The initial amount of IIA for the 2019 acquisition of 4.75 years’ remaining exclusive U.S. Filshie device distribution rights from CSI was $21,000. The straight-line amortization of this IIA is $1,105/ calendar quarter over the remaining 4.75 years of the prior distribution agreement. After 20 months of amortization, the CSI IIA balance as of September 30, 2020 is $13,632. The difference in 9M CSI IIA amortization expense is due to the start of the amortization in February 2019, i.e. 9 months of expense in 2020 through September versus 8 months in 2019. Excluding both Filshie-related non-cash
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Because the IIA amortization expenses represent a significant portion of UTMD’s G&A expenses, UTMD provides the following table that separates the IIA amortization expenses from all other G&A expenses: | 3Q 2020 | 3Q 2019 | 9M 2020 | 9M 2019 | IIA amortization expense | $ 1,621 | $ 1,597 | $ 4,839 | $ 4,471 | All other G&A expense | 811 | 860 | 2,445 | 2,566 | Total G&A Expenses: | $ 2,432 | $ 2,457 | $ 7,284 | $ 7,037 |
Percent of Sales: | 3Q 2020 | 3Q 2019 | 9M 2020 | 9M 2019 | IIA amortization expense | 15.5% | 12.8% | 16.0% | 12.8% | All other G&A expense | 7.7% | 6.9% | 8.1% | 7.3% | Total G&A Expenses: | 23.2% | 19.7% | 24.1% | 20.1% |
Eventually, when the two Filshie-related IIA balances are fully amortized, stockholders can look forward to a substantial increase in EBT. The Femcare acquisition IIA amortization expense has 5.5 more years to run at about $516 per quarter using the same 1.295 USD/GBP FX rate as in 3Q 2020. The CSI IIA amortization expense has 3.1 more years to run at $1,105 per quarter. Stockholders will appreciate that, although cash flow will not be affected, annualized reported EPS will increase $.90 after another 3.1 years, based on current shares outstanding and if current U.S. and Utah income tax rates remain the same. Similarly, after another 5.5 years annualized EPS would be $1.36 higher based on current shares outstanding and unchanged income tax rates. Other G&A expenses were $802 (7.4% of sales)lower in 1Qboth periods primarily because UTMD’s CEO has taken 50% salary in 2020 compared to $883 (8.2% of sales)2019, and 2020 management bonuses based on the projected 2020 annual EBT have been accrued at a lower rate than in 1Q 2019. The change in FX rates reduced 1Q 2020 OUS G&A expenses excluding IIA amortization expense by $8. The lower 1Q 2020 constant currency G&A expenses were due to lower U.S. G&A salaries including stock option expense, and lower regulatory consulting expenses in Australia. S&M expenses were $419 (3.8% of sales) in 1Q 2020 compared to $416 (3.9% of sales) in 1Q 2019. The change in FX rates reduced 1Q 2020 OUS S&M expenses by $4.
R&D expenses in 1Q 2020 were $135 (1.2% of sales) compared to $115 (1.1% of sales) in 1Q 2019. Since almost all R&D is being carried out in the U.S., there was negligible FX rate impact.
In summary, Operating Income in 1Q3Q 2020 was $3,863 (35.4%$3,588 (34.2% of sales) compared to $4,102 (38.2%$4,371 (35.0% of sales) in 1Q3Q 2019. The additional $368 CSIOperating Income in 9M 2020 was $9,428 (31.3% of sales) compared to $12,954 (36.9% of sales) in 9M 2019. Lower gross profits in 2020 were leveraged down further by higher IIA amortization expense accounted forabsorbed by fewer sales. In any event, the lower Operating Income and Operating Income Margin.operating income margins achieved in 2020 were excellent compared to industry peers.
Summary comparison of (USD) consolidated Operating Expenses:
| 1Q 2020 | 1Q 2019 | S&M Expense | 419 | 416 | R&D Expense | 135 | 115 | G&A Expense: | | | CSI IIA amortization | 1,105 | 737 | Femcare IIA amortization | 512 | 520 | All Other G&A Expenses | 802 | 883 | Total Operating Expenses: | 2,973 | 2,671 |
e)Non-operating expense/ Non-operating income Non-operating expense/ Non-operating incomeexpense 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) losses from disposition of assets. Non-operating income includes 1) investment income from cash deposit balances; 2) rent of underutilized property, investment income andproperty; 3) royalties received from licensing the Company’s technology. Non-operating expense is negative Non-operating income. Net Non-operating income in 1Q 2020 was $125 compared to $36 in 1Q 2019. The difference was due to remeasured USD valuetechnology; 4) gains from dispositions of foreign currency bank balances. In 1Q 2020, UTMD realized a $44 gainassets; and 5) gains from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms. UTMD’s net non-operating income in 3Q 2020 was less than $1 compared to $76 in 3Q 2019. Net non-operating income in 9M 2020 was $126 compared to $196 in 9M 2019. In 1Q3Q 2020 and 3Q 2019, UTMD realized a $50 lossgains or losses from remeasuringremeasurement of the value of EUR cashforeign currency bank balances were negligible. In 9M 2020, UTMD recognized a $41 gain from remeasurement of the value of foreign currency bank balances compared to a $44 loss in the UK,9M 2019. Royalties received were $5 in 3Q 2020 compared to $0 in 3Q 2019, and GBP$10 in 9M 2020 compared to $6 in 9M 2019. Interest earned on cash balances were $2 and $64 in Ireland,3Q and 9M 2020 respectively, compared to interest of $61 and $199 in USD terms.3Q and 9M 2019 respectively. f)Income Before Income Taxes (EBT) Income before income taxes (EBT)EBT results from subtracting net non-operating expense or adding net Non-operatingnon-operating income from or to, as applicable, Operating Income. Consolidated 1Q3Q 2020 EBT was $3,988 (36.6%$3,588 (34.2% of sales) compared to $4,137 (38.5%$4,448 (35.6% of sales) in 1Q3Q 2019. The $149 (3.6%) lower 1QConsolidated 9M 2020 EBT was $9,553 (31.7% of sales) compared to 1Q 2019 was due to the $368 higher CSI IIA amortization expense included$13,150 (37.5% of sales) in G&A Operating Expense.9M 2019.
The EBT of Utah Medical Products, Inc. in the U.S. was $2,497$6,469 in 1Q9M 2020 compared to $2,628$8,674 in 1Q9M 2019. The EBT of Utah Medical Products, Ltd (Ireland) was EUR 1,1162,393 in 1Q9M 2020 compared to EUR 8142,157 in 1Q9M 2019. The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was GBP 148(297) in 1Q9M 2020 compared to GBP 5851,449 in 1Q9M 2019. The 1Q9M 2020 EBT of Utah Medical Products Canada, Inc. (dba Femcare Canada) was CAD 257565 in 9M 2020 compared to CAD 355926 in 1Q9M 2019. The lower Femcare Group and Femcare Canada EBT was primarily theof UTMD’s manufacturing subsidiaries varies as a result of lower Filshie device sales. The higher UTMD Ireland EBT was primarily due to consistent international trade sales of pressure monitoring kits combined with higher intercompany shipments which are eliminated in the consolidation of Filshie Sterishot kits to Australia and Filshie clips to the U.S. after depletion of the inventory that UTMD acquired from CSI in 2019.results.
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EBITDA is a non-US GAAP metric that measuresUTMD management believes is of interest to investors because it provides meaningful supplemental information to both management and investors that represents profitability performance without factoring in effects of financing, accounting decisions regarding non-cash expenses, capital expenditures or tax environments. ExcludingAlthough the noncash effects of depreciation, amortization of intangible assetsU.S. Securities and stock option expense, 1Q 2020 consolidated EBT excluding the remeasured bank balance currency gain or loss and interest expense (“adjusted consolidated EBITDA”) were $5,772 (+1.9%) compared to $5,665 in 1Q 2019. UTMD’s adjusted consolidatedExchange Commission advises that EBITDA asis a percentage of sales was 52.9% in 1Q 2020 compared to 52.8% in 1Q 2019. Management believes that this operatingnon-GAAP metric, provides meaningful supplemental information to both management and investors and confirms UTMD’s continued excellent financial performance.
UTMD’s non-US GAAP adjusted consolidated EBITDA is the sum of the following elements in the table below, each of which is a US GAAP number: | 1Q 2020 | 1Q 2019 | EBT | $3,988 | $4,137 | Depreciation Expense | 175 | 179 | Femcare IIA Amortization Expense | 512 | 520 | CSI IIA Amortization Expense | 1,105 | 737 | Other Non-Cash Amortization Expense | 13 | 14 | Stock Option Compensation Expense | 23 | 28 | Interest Expense | - | - | Remeasured Foreign Currency Balances | (44) | 50 | UTMD non-US GAAP EBITDA: | $5,772 | $5,665 |
Component of EBITDA | 3Q 2020 | 3Q 2019 | Change | 9M 2020 | 9M 2019 | Change | EBT | $ 3,588 | $ 4,448 | (19.3%) | $ 9,553 | $13,150 | (27.4%) | Depreciation of fixed assets | 160 | 171 | | 495 | 526 | | Amortization of patent expenses | 13 | 13 | | 37 | 41 | | Amortization of Femcare IIA | 516 | 492 | | 1,523 | 1,524 | | Amortization of CSI distribution agreement IIA | 1,105 | 1,105 | | 3,316 | 2,947 | | Stock option compensation expense | 49 | 29 | | 121 | 85 | | Remeasured currency (gains) or losses | 2 | (3) | | (41) | 44 | | Adjusted Consolidated EBITDA: | $ 5,433 | $ 6,255 | (13.2%) | $15,004 | $18,317 | (18.1%) |
Management believes that the non-US GAAP EBITDA decline is more indicative of the COVID-19 negative impact on UTMD’s 2020 operating results than the change represented by EBT. g)Net Income Net Income is EBT minus a provision for income taxes. Net Income in 1Q3Q 2020 was $2,933 (28.0% of $3,140sales) compared to $3,705 (29.7% of sales) in 3Q 2019. The average consolidated income tax provision (as a % of EBT) in 3Q 2020 was essentially the same as18.3% compared to 16.7% in 3Q 2019. Net Income in 9M 2020 was $7,386 (24.5% of sales) compared to Net Income of $3,139$10,369 (29.6% of sales) in 1Q9M 2019. Net Income in 9M 2020 included a 2Q 2020 unfavorable $225 tax provision increase for a future UK income tax increase on non-deductible IIA amortization expense over the next six years. The average consolidated income tax provisions (as a percent% of EBT) in 1Q9M 2020 and 1Q9M 2019 were 21.3%22.7% and 24.1%21.1%, respectively. The income tax provision for 1Q 2020 was $114 lower than it would have been using the 1Q 2019 rate. The lower combined tax provision rate resulted from a lower U.S. GILTI tax estimate on foreign earnings (included by Congress in the December 2017 TCJA), and a shift in taxable income of foreign subsidiaries with differing income tax rates. The income tax provision rate for the full year of 2019 at 20.9% was closer to the 1Q 2020 provision rate. h)h) Earnings Per Share (EPS) EPS are consolidated Net Income divided by the weighted average number of shares of stock outstanding (diluted to take into consideration stock option awards which are “in the money,” i.e., have exercise prices below the applicable period’s weighted average market value). Diluted EPS in 1Q3Q 2020 were practically$.803 compared to $.991 in 3Q 2019. Diluted EPS in 9M 2020 were $2.008 compared to $2.774 in 9M 2019. According to U.S. GAAP, the sameUK tax law change in 2Q 2020 which increased UTMD’s deferred tax liability, to be amortized over the next six years, was recognized as an income tax provision increase in 1Q 2019, consistent with NI because diluted shares used to calculatethe 2Q 2020 income statement. Without the 2Q 2020 $225 tax provision adjustment, 9M 2020 EPS were only slightly lower. $2.069. Diluted shares were 3,724,1563,653,500 in 1Q3Q 2020 compared to 3,738,3733,737,335 in 1Q3Q 2019, and 3,678,210 in 9M 2020 compared to 3,738,056 in 9M 2019. The lower diluted shares in 1Q9M 2020 were the combined result of 5,000 shares repurchased in May 2019 and 80,000 shares repurchased in March1Q 2020, offset by7,000 shares repurchased in 3Q 2020, 5,614 employee option exercises a newin 9M 2020 and an employee option award of 26,300 shares in late March 2020. Outstanding shares at the end of 3Q 2020 and a higher dilution factor for unexercised optionswere 3,640,371 compared to 3,721,757 at the end of calendar year 2019. The difference was due to a higher share price.employee option exercises of 5,614 during 9M 2020 offset by 87,000 shares repurchased in the open market. Outstanding shares were 3,720,344 one year ago at the end of 3Q 2019. The number of shares used for calculating diluted EPS was higher than ending shares because of a time-weighted calculation of average outstanding shares plus dilution from unexercised employee and director options. In other words, the main benefit to EPS from the March share repurchase will not occur until 2Q 2020. Outstanding shares at the end of 1Q 2020 were 3,642,431 compared to 3,721,757 at the end of calendar year 2019. The difference was due to the 80,000 share repurchase less 674 shares in employee option exercises during 1Q 2020. For comparison, outstanding shares were 3,722,706 at the end of 1Q 2019. The total number of outstanding unexercised employee and outside director options at March 31,September 30, 2020 was 77,31571,700 at an average exercise price of $64.71,$65.80, including shares awarded but not yet vested. This compares to 57,35051,690 unexercised option shares at the end of 1Q 2019 at an average exercise price of $57.90/$58.50/ share, including shares awarded but not yet vested.
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The number of shares added as a dilution factor in 1Q3Q 2020 was 17,31311,130 compared to 16,32617,588 in 1Q3Q 2019. The number of shares added as a dilution factor in 9M 2020 was 14,514 compared to 16,435 in 9M 2019. In March 2020, 26,300 option shares were awarded to 48 employees at an exercise price of $77.05 per share. No options were awarded in 2019. UTMD paid $1,042$1,020 ($0.280/share) in dividends to stockholders in 1Q3Q 2020 compared to $1,027$1,028 ($0.275/ share) paid in 1Q3Q 2019. Dividends paid to stockholders during 1Q3Q 2020 were 33%35% of NI.3Q 2020 Net Income. UTMD paid $3,097 ($0.280/share) in dividends to stockholders in 9M 2020 compared to $3,083 ($0.275/ share) paid in 9M 2019. Dividends paid to stockholders during 9M 2020 were 41% of 9M 2020 Net Income. In March 2020, UTMD repurchased 80,000 of its shares in the open market at $80.32/ share. In September 2020, UTMD repurchased 7,000 of its shares in the open market at $78.67/ share. The total 87,000 shares repurchased in 9M 2020 were at an average price of $80.19/ share. In May 2019, UTMD repurchased 5,000 shares at $79.52/ share. No other shares were repurchased in 2019. The Company retains the strong desire and financial ability for repurchasing its shares at a price it believes is attractive for remaining stockholders. UTMD’s closing share price at the end of 1Q 2020 was $94.05, down 13% from the $107.90 closing price at the end of 2019. The closing share price at the end of 1Q 2019 was $88.25. i)Return on Stockholder Equity (ROE) and Stock Value
ROE is the portion of Net Income retained by UTMD to internally finance its growth, divided by the average accumulated stockholders’ equity for the applicable time period. AnnualizedAfter payment of cash dividends to stockholders, annualized ROE (before stockholder dividends) in 1Q9M 2020 was 13% and6% compared to annualized ROE of 11% in 1Q 20199M 2019. Before the payment of dividends, annualized ROE in 9M 2020 was 17%. Because Net Income was the same10% compared to 15% in both periods, the9M 2019. The lower ROE before dividends in 1Q9M 2020 was due to much higheran 8% increase in average Stockholders’ Equity.accumulated stockholders’ equity together with a 29% decrease in Net Income. Targeting a high ROE of 20% (before dividends) remains a key financial objective for UTMD management. ROE can be increased by increasing Net Income, or by reducing stockholders’ equity by paying cash dividends to stockholders or by repurchasing shares. UTMD’s closing share price at the end of 3Q 2020 was $79.87, down 26% from the $107.90 closing price at the end of 2019. The closing share price at the end of 3Q 2019 was $95.84. Liquidity and Capital Resources j)Cash flows Net cash provided by operating activities, including adjustments for depreciation and amortization and other non-cash expenses along with changes in working capital, totaled $5,674$14,359 in 1Q9M 2020 compared to $3,360$11,415 in 1Q9M 2019. Since Net Income was the sameThe $2,944 higher cash provided by operating activities in both periods, the substantial difference9M 2020 was due primarily to greater amortization expense along with changesa $6,187 difference from 1) 1,184 decreased trade accounts receivable and inventories compared to a $2,588 increase in 9M 2019, yielding a significant $3,772 working capital. The most significant differencescapital change difference in cash provided during the two periods, were the $158 lower ending inventories in 1Q 2020 compared to $2,255 higher inventories in 1Q 2019 due to the purchase of CSI Filshie device inventory in 1Q 2019,2) a $231 decrease in trade accounts receivable (A/R) in 1Q 2020 compared to a $940 increase in 1Q 2019 A/R, a $218 higher$651 increase in accrued expenses compared to a $1,023 decrease in 9M 2019, yielding another $1,674 working capital change difference in the two periods, 3) $363 higher intangible asset amortization expense, and a $3594) $378 lower decrease in deferred income taxes, minus 1) $2,983 lower net income and 2) $251 higher increasedecrease in non-cash amortization expense.accounts payable. Capital expenditures for property and equipment (PP&E) were $454$806 in 1Q9M 2020 compared to $12$251 in 1Q 2019 as UTMD invested in a state-of-art testing machine for its specialized pressure transducers for its bio-pharmaceutical OEM customer, and9M 2019. The higher capital expenditures were due to a new molding machineroof on the Midvale facility and investment in new manufacturing capabilities in Ireland. There were no capital expenditures for increased capacity. Depreciation of PP&E was $175intangible assets in 1Q9M 2020 compared to $179$21,000 in 1Q 2019. Both capital expenditures and depreciation are expected to increase during the balance of 2020 as the Company needs a new roof for its Midvale facility and depreciation9M 2019 for the PPE just put in service in 1Q 2020 kicks in. purchase of the remaining life of CSI’s exclusive U.S.distribution rights for the Filshie Clip System. Cash dividends paid to stockholdersUTMD made cash dividend payments of $3,097 in 1Q9M 2020 were $1,042 compared to $1,027$3,083 in 1Q9M 2019. The Company used $6,976 of its cash to repurchase 87,000 of its own shares in 9M 2020 compared to using $398 of its cash to repurchase 5,000 of its own shares during 9M 2019.
In 1Q9M 2020, UTMD received $47$282 and issued 6745,614 shares of its stock upon the exercise of employee and director stock options. Option exercises in 1Q9M 2020 were at an average price of $70.47$50.15 per share. In comparison, in 1Q9M 2019 UTMDthe Company received $97$222 and issued 2,9915,629 shares of its stock uponon the exercise of employee and director stock options. Option exercises in 1Q9M 2019 were at an average price of $32.33$39.53 per share. Management believes that current cash balances, income from operations and effective management of working capital will provide the liquidity needed to survive the COVID-19 pandemic shutdown of the U.S. economy. As it did in 1Q 2019, thefinance 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.
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k)Assets and Liabilities March 31,September 30, 2020 total consolidated assets declined $6,593were $107,072, a net decrease of $2,715 from December 31, 2019 to $103,193. The2019. Net intangible assets declined by $5,397, inventories declined by $609 and receivables declined by $466. Offsetting that combined $6,472 asset decline was due to a $3,174 decrease$3,507 increase in cash and investments, a $489 decrease$308 increase in current assets other than cash, and $2,830 lower net intangible assets. In addition to the decrease in cash which resulted from $7,468 use of cash for share repurchases and payment of stockholder dividends, significant changes in current assets from the end of 2019 included a $332 decrease in consolidated net trade receivables and a $157 decrease in consolidated inventories.
The 1Q 2020 ending lower net intangible assets resulted from amortization expense of $1,630 and a 4.4% lower GBP/USD exchange rate on remaining Femcare IIA. At March 31, 2020, net intangible assets including goodwill were 40% of total consolidated assets compared to 40% at year-end 2019 (because of the large reduction in cash during 1Q 2020), and 46% at March 31, 2019.
The Net Book Value (NBV) of consolidated property, plant and equipment (PP&E) fixed assets decreased $100 as a combined result of $454 in new purchases, $175 in depreciation and $379 in lower USD NBV due to ending FX rate changes. PP&E assetsnet of $495 in the U.S. increased $162 as investment in new manufacturing equipment exceeded
depreciation. But the NBV of PP&E OUS in USD at March 31, 2020 declined $262 in the aggregate, affected by the change in FX rates which changed significantly near the end of the quarter asAs a result of the COVID-19 pandemic. FX rates for Balance Sheet purposes are the applicable rates at the end of each reporting period. increase in cash, consolidated current assets increased $2,375. UTMD’s FemcareIreland subsidiary PP&EEUR-denominated assets in the UK and Australialiabilities on September 30, 2020 were $320 lower as, in addition to the UK GBP-denominated assets translated into USD at an FX rate 6.1% lower than4.4% higher (stronger EUR relative to the FX rate at the end of 2019, Australia AUD-denominated assets translated into USD at an FX rate 12.6% lowerUSD) than the FX rate at the end of 2019. BecauseUTMD’s UK subsidiary GBP-denominated assets were translated into USD at an FX rate 2.6% lower (weaker GBP) than the FX rate at the end of 2019. UTMD’s Australia subsidiary AUD-denominated assets were translated into USD at an FX rate 1.9% higher (stronger AUD) than the FX rate at the end of 2019. UTMD’s Canada subsidiary CAD-denominated assets were translated into USD at an FX rate 8.2%2.7% lower (weaker CAD) than the FX rate at the end of 2019 in addition to depreciation, PP&E in Canada was $62 lower than2019. The net book value of consolidated property, plant and equipment increased $308 at September 30, 2020 from the end of 2019. Ireland PP&E NBV increased $119 despite a 1.8% lower EUR as a result of investment2019 due to period-ending changed FX rates, $806 in new manufacturing capabilities.asset purchases and $495 in depreciation. Working capital (current assets minus current liabilities) was $47,422$53,632 at March 31,September 30, 2020 compared to $51,438 at December 31, 2019,2019. Consolidated receivables and $38,625 at March 31, 2019. Current assetsinventories declined $3,662$466 and current$609, respectively, but cash increased $3,507. Accrued liabilities increased $354$649, primarily from $550 higher income taxes payable as UTMD had over-accrued income taxes payable by $514 at the end of 2019.2019, and $244 higher customer deposits as a result of the timing of international distributor shipments in 4Q 2020 requiring prepayment. UTMD management believes that its working capital remains sufficient to meet normal operating needs, new capital investmentsexpenditures and projectedcontinued cash dividend payments to stockholders. September 30, 2020 net intangible assets (goodwill plus other intangible assets less amortization) declined $5,397 from the end of 2019. No new intangible assets were acquired in 9M 2020. At September 30, 2020, net intangible assets including goodwill were 36% of total consolidated assets compared to 40% at year-end 2019, and 42% at September 30, 2019. The long term deferred tax liability (DTL) balance for the Femcare Ltd IIA ($9,084 on the date of the 2011 acquisition) was $2,008$2,132 (£1,650) at March 31,September 30, 2020, compared to $2,239 (£1,688) at December 31, 2019, and $2,496$2,170 (£1,764) at March 31,September 30, 2019. Reduction of the deferred tax liabilityDTL occurs as the book/tax difference of IIA amortization is eliminated over the remaining useful life of the Femcare Ltd IIA. IIA (because the amortization expense is not tax deductible in the UK). The DTL only declined $107 at September 30, 2020 from December 31, 2019, despite 9M 2020 amortization expense of $1,523, which reduced the DTL balance by $289. The difference was due to a 2Q 2020 UK tax law change which increased the DTL balance by $225 (£182) plus the change in ending FX rates. The UK decided to not reduce its corporate income tax rate from 19% to 17% beginning in 2Q 2020, as previously enacted. (The $225 increase in deferred UK taxes over the following six years was also booked in the 2Q 2020 tax provision, reducing 9M 2020 net income $225.) UTMD’s total debt ratio (total liabilities/total assets) as of March 31,September 30, 2020 was 9% compared to 8%, including a remaining $2,074 REPAT tax liability payable over another five years. The total debt ratio as of December 31, 2019 (again, because of the 1Q 2020 reduction in cash). UTMD’s total debt ratiowas also 8%, and as of March 31,September 30, 2019 was 12%9%. The $2,715 decrease in total liabilities and equity (same as total assets) was primarily due to a $2,677 September 30, 2020 ending decrease in stockholders’ equity compared to December 31, 2019. Stockholders’ equity was reduced during 9M 2020 by $10,074 from share repurchases and dividends paid to stockholders, offset by $7,386 net profit accumulated during 9M 2020. l)Management's Outlook Even though the COVID-19 pandemic has significantly changed UTMD’s financial outlook asAs outlined in its December 31, 2019 SEC 10-K report, UTMD’s operatinggeneral plan for 2020 remainswas to
1) exploit distribution and manufacturing synergies by further integrating capabilities and resources in its multinational operations; 2) focus on effectivelyeffective direct marketing of the benefits of the Filshie Clip System in the U.S.;U.S; 3) introduce additional products helpful to clinicians through internal new product development; 4) continue to achieve profitableexcellent overall financial operating performance and a stable working environment for employees;performance; 5) utilize positive cash generation to continue providing cash dividends to stockholders and make open market share repurchases if/when the UTMD share price seems undervalued; and 6) be vigilant for accretive acquisition opportunities which may be brought about by difficult burdens on small, innovative companies. Although not on its plan relative to specific financial numbers due to the current challenging economic environment on companies with more limited resources.COVID-19 pandemic, the Company continues to effectively execute its general plan outlined above.
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m)Accounting Policy Changes None.None
Forward-Looking Information.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 3.Quantitative and Qualitative Disclosures about Market Risk 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 .9071,.8529, .8907 and .8906.9169 EUR per USD as of March 31,September 30, 2020, December 31, 2019 and March 31,September 30, 2019, respectively. Exchange rates were .8029,.7741, .7537 and .7672.8129 GBP per USD as of March 31,September 30, 2020, December 31, 2019 and March 31,September 30, 2019, respectively. Exchange rates were 1.6285,1.3964, 1.4226 and 1.40831.4823 AUD per USD on March 31,September 30, 2020, December 31, 2019, and March 31,September 30, 2019, respectively. Exchange rates were 1.4118,1.3323, 1.2962, and 1.36441.3242 CAD per USD on March 31,September 30, 2020, December 31, 2019, and March 31,September 30, 2019, 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. Item 4. Controls and Procedures 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 March 31,September 30, 2020. Based on this evaluation, the Chief Executive Officer and Principal Financial Officer concluded that, as of March 31,September 30, 2020, 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 quarternine months ended March 31,September 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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PART II - OTHER INFORMATION Item 1.Legal Proceedings The Company may be a party from time to time in litigation incidental to its business. Presently, there is no litigation. Item 1A.Risk Factors In addition to the other information set forth in this report, investors should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in UTMD’s Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect its business, financial condition or future results. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to UTMD or currently deemed to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. Legislative or executive order healthcare reform in the United States, particularly as suggested by leading candidates in a presidential election year, have the potential to render the U.S. medical device marketplace unpredictable. A fully government-run healthcare system would likely eliminate healthcare consumer choice as well as commercial incentives for innovation. Government-mandated shutdowns of “nonessential” medical procedures with the intent of protecting the public from a virus have the potential to substantially reduce demand for UTMD’s medical devices. Increasing regulatory burdens, including premarketing approval delays, may result in significant loss of revenue, unpredictable costs and loss of management focus on developing and marketing products that improve the quality of healthcare: Thousands of small focused medical device manufacturers including UTMD that do not have the overhead structure that the few large medical device companies can afford are increasingly burdened with bureaucratic and underqualified regulator demands that are not reasonably related to assuring the safety or effectiveness of the devices that they provide. Premarketing submission administrative burdens, and substantial “user fees” or notified body review fees, represent a significant non-clinical and/or non-scientific barrier to new product introduction, resulting in lack of investment or delays to revenues from new or improved devices. The risks associated with such circumstances relate not only to substantial out-of-pocket costs, including potential litigation in millions of dollars, but also loss of business and a diversion of attention of key employees for an extended period of time from managing their normal responsibilities, particularly in new product development and routine quality assurance activities. The growthdominance 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, theirTheir business model based on “kickbacks” would be a violation of law.law in any other industry. 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 driven by collection of their administrative fees. 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 and overly cumbersome 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.
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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 suffered 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 sellingdistributing 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 devices and/or U.S. made raw materials and components are likely being purchased in fixed USD. Trade restrictions and /or tariffs resulting from changing government trade policies have the potential to disrupt UTMD’s supply chain.
The economic effects of government intervention in the private sector economy due to the COVID-19 pandemic has created a high level of uncertainty.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds During 1Q9M 2020, UTMD purchased 80,00087,000 of its shares in the open market for $6,426$6,977 including commissions and fees ($80.32/ share).fees. During 9M 2019 UTMD did not purchase anypurchased 5,000 of its own securities during 1Q 2019, but purchased 5,000 shares in the open market for $398 ($79.52/share) in 2Q 2019, which was the total number of shares repurchased in 2019.including commissions and fees.
Item 6. Exhibits Exhibit # | SEC Reference # | Title of Document | 1 | 31 | Certification of CEO pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 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 | 3 | 32 | Certification of CEO pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 4 | 32 | Certification of Principal Financial Officer pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 5 | 101 ins | XBRL Instance | 6 | 101.sch | XBRL Schema | 7 | 101.cal | XBRL Calculation | 8 | 101.def | XBRL Definition | 9 | 101.lab | XBRL Label | 10 | 101.pre | XBRL Presentation |
Exhibit # | Title of Document | | | 31.1 | Certification of CEO pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | 32.1 | Certification of CEO pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | 32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | 101 | The following financial information from the Utah Medical Products, Inc. quarterly report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Condensed Balance Sheets, (ii) Consolidated Condensed Statements of Income, (iii) Consolidated Condensed Statements of Cash Flows, (iv) Consolidated Statements of Stockholders’ Equity, and (v) related Notes to the Consolidated Condensed Financial Statements, tagged in detail. | | | 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES Pursuant to the requirements of the Securities Exchanges Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UTAH MEDICAL PRODUCTS, INC. REGISTRANT Date: 5/8/ 11/9/20 By: /s/ Kevin L. Cornwell Kevin L. Cornwell CEO Date: 5/8/ 11/9/20 By: /s/ Brian L. Koopman Brian L. Koopman Principal Financial Officer
2021
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