Utah Medical Products, Inc. (Utah Medical), a US-based medical devices company, has reported net sales of $6.45 million for the first quarter of 2009, down 6.5 %, compared with the net sales of $6.89 million in the year-ago quarter. It also posted a net income of $1.59 million, or $0.440 per share, for the first quarter of 2009, compared with the net income of $1.89 million, or $0.481 per share, in the year-ago quarter.
Utah Medical’s 1Q 2009 profitability demonstrated marked improvement over the most recent prior quarter, and comparable profitability compared to 1Q 2008, despite 6% lower sales and $194,000 lower non-operating income.
Total 1Q 2009 sales were down $444,000 compared to 1Q 2008. The primary reason for the lower sales was the loss of $478,000 in combined sales to Utah Medical’s largest and third largest international customers. After several years of rapid growth, total international sales in 1Q 2009 were down 17%. Part of the change appears temporary, which applies to Utah Medical’s third largest international customer. This portion has to do with inventory adjustments made as a result of the worldwide economic downturn. The loss of sales of custom blood pressure monitoring (BPM) kits to Utah Medical’s largest international customer, however, may not be temporary. Sales of BPM kits to that customer in the full year of 2008 were $1.7 million. After more than 10 years using Utah Medical’s BPM kits, that international OEM customer may be finally implementing its plan to bring production in-house, as Utah Medical has yet to see an order in 2009.
Domestic sales, direct sales to finished device end-users and sales of OEM components to other companies, were each down 1%. Domestic direct sales of obstetric devices, the product category most affected by restrictive GPO agreements, declined $151,000. On the other hand, domestic direct sales of Gesco neonatal devices increased $96,000.
Comparing 1Q 2009 to 1Q 2008 global sales in product categories, blood pressure monitoring/ components (BPM) sales were down 24%, neonatal device sales were up 6%, gynecology/ electrosurgery device sales were up 2% and obstetrics device sales were down 8%. The loss of 1Q sales to the two large international distributors were all in the BPM category and are all manufactured in Utah Medical’s Ireland facility.
Despite the lower revenue which allows less absorption of fixed overhead costs, Utah Medical achieved a 1Q 2009 GPM approximately the same as in 1Q 2008. This was primarily due to the fact that the loss of sales came from the portion of Utah Medical’s business with the lowest GPMs. International sales of devices from Utah Medical’s Ireland facility dropped from 48% of total sales in 1Q 2008 to 39% of 1Q 2009 sales. Sales in Ireland were 33% lower in US Dollar terms and 22% lower in Euro terms (i.e., about a third of the lower Ireland sales resulted from a stronger US Dollar). Sales of international devices are at lower prices because other entities provide the direct sales and marketing efforts. Utah Medical anticipates a weaker US Dollar as the year progresses that may enhance Utah Medical’s international sales (but also dilute GPM). Raw materials and labor costs were about 4% higher in 1Q 2009 than in 1Q 2008, but remained stable compared to 4Q 2008.
Utah Medical’s operating profit margin improved because operating expenses were about $169,000 lower in 1Q 2009 than in 1Q 2008. About 37% of the lower expenses were in sales & marketing (S&M) because of fewer direct sales representatives. The rest was essentially lower general and administrative (G&A) expenses, which declined $103,000. A third of the decline in G&A expenses were in Ireland, diluted by a stronger US Dollar. The balance was essentially due to lower legal expenses and a lower accrual of projected 2009-ending management bonuses.
The $194,000 lower non-operating income in 1Q 2009 was due to four differences from 1Q 2008:
No royalty income. 1Q 2008 non-operating income included a royalty of $112,500 on patents which expired in 2008.
Lower investment income in the U.S. Interest and dividends in the U.S. were $91,000 lower than in 1Q 2008 because of interest rates approximately two percentage points lower, and average cash balances about $3 million lower.
As a favorable impact, the interest expense on the Ireland bank loan was $51,000 lower, due to lower interest rates, lower average loan balance and favorable foreign exchange conversion as a result of a stronger US Dollar. However, offsetting lower investment income and warehouse rental income in Ireland resulted in a net total of $26,000 lower non-operating expense from Ireland operations.
The remaining element that compromised the lower non-operating income was a $15,400 IRS penalty for the late filing of Utah Medical’s 2007 annual report for its U.S. employee health plan. This expense was also not tax deductible.
Unless cash balances decline substantially as a result of significant share repurchases or alternative investment such as an acquisition, Utah Medical expects its non-operating income will improve during the remaining quarters of 2009. This would be as a result of continued lower interest expense on the Ireland bank loan, a return of rental income from Ireland’s excess warehouse capacity and the absence of any other late filing fees.
In 1Q 2009, lower net income was leveraged by a substantially higher income tax rate of 35.5% compared to the tax provision rate of 31.1% of EBT in 1Q 2008. Although a portion of the difference was due to the non-deductible non-operating expense noted above and lower portion of income before tax (EBT) from Ireland as a percentage of total consolidated EBT (the effective income tax rate on Ireland EBT is about 12%), the tax provision rate in 1Q 2009 was more comparable to an expected income tax rate for the amount of profits typically generated by Utah Medical. For example, the tax provision rate in 1Q 2007 was 35.0%. The lower 1Q 2008 income tax provision rate resulted primarily from one-time refunds on amended 2004-2006 income tax returns for Ireland.
EPS declined less than net income because diluted shares used to calculate EPS declined from 3,929,501 in 1Q 2008 to 3,618,937 in 1Q 2009, as a result of both continuing share repurchases and a lower average stock price. Utah Medical previously targeted 2009 EPS about equal to the $1.86 achieved in 2008. Incorporating the view that Utah Medical has lost the BPM kit business of its previously largest international customer for the full year, a 2009 EPS projection in the range of $1.76 – $1.80 currently appears more likely.