General
UTMD manufactures and markets a well-established range of primarily single-use specialty medical devices. The Company's Form 10-K Annual Report for the year ended December 31, 2011 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. A pictorial display as well as description of UTMD's devices is available on the Company's website www.utahmed.com.

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.

Analysis of Results of Operations

a) Overview

In the second calendar quarter (2Q) of 2012, although UTMD's sales and gross profits were somewhat lower, operating profits, net income, and earnings per share were substantially higher compared to 2Q 2011. In the first six months (1H) of 2012, all income statement measures were significantly higher compared to 1H 2011. A table of income statement measures for 2Q and 1H 2012 compared to the same periods in 2011 follows:

                         2Q 2012       2Q 2011      change        1H 2012       1H 2011     change
  Net Sales            $  10,025     $  10,377       (3.4%)     $  21,230     $  17,170       23.7%
  Gross Profit             6,071         6,260       (3.0%)        12,809         9,969       28.5%
  Operating Income         3,552         3,233        9.9%          7,667         5,390       42.2%
  Income Before Tax        3,430         2,952       16.2%          7,367         5,094       44.6%
  Net Income               2,401         1,982       21.1%          5,190         3,319       56.4%
  Earnings per Share        .647          .544       19.0%          1.405          .912       54.0%

A comparison of profit margins for 2Q and 1H 2012 compared to the same periods in 2011 follows:

                                    2Q 2012       2Q 2011       1H 2012       1H 2011
        Gross Profit Margin          60.6%         60.3%         60.3%         58.1%
        Operating Profit Margin      35.4%         31.2%         36.1%         31.4%
        Net Income Margin            24.0%         19.1%         24.4%         19.3%

On March 18, 2011, UTMD acquired Femcare Holdings Ltd. ("Femcare") (See note 5). The comparison between 1H 2012 and 1H 2011 is affected by the fact that the 1H of 2011 included the business activity of Femcare for only about 60% of the six month period. In addition, in 1H 2011 there were acquisition expenses which were not repeated in 1H 2012.

The lower 2Q 2012 global consolidated sales compared to 2Q 2011 was consistent with the medical device sector as a whole due to the negative currency exchange impact of a stronger U.S. Dollar (USD), and continued suppressed hospital medical device utilization trends.

Despite end-user price pressures and higher costs of raw materials and direct labor, UTMD was able to maintain its 2Q 2012 gross profit margin (GPM) consistent with 2Q 2011. Operating expenses were 25.1% of sales in 2Q 2012 compared to 29.2% of sales in 2Q 2011 due to $165 lower sales and marketing (S&M) expenses and $342 lower general and administrative (G&A) expenses resulting from the consolidation of Femcare into UTMD and a stronger USD. In 1H 2012 and 1H 2011, operating expenses were 24.2% of sales and 26.7% of sales respectively.

Non-operating expenses in 2Q 2012 were $159 lower than in 2Q 2011, primarily because UTMD's average debt balance was lower, resulting in $131 lower interest expense. Non-operating expenses in 1H 2012 were about the same as in 1H 2011 because UTMD did not incur interest expense from borrowing $26,934 to acquire Femcare until March 18, 2011. As a result of the consistent GPM and lower operating and non-operating expenses, 2Q 2012 Income before Taxes (EBT) compared to 2Q 2011 increased $478 to $3,430, 1H 2012 EBT increased $2,272 from 1H 2011.

Net Income was further leveraged by higher EBT contribution from subsidiaries outside the U.S. combined with lower corporate income tax rates outside the U.S., yielding much higher consolidated net profit margins in 2012. Earnings per share (EPS) increased on a percentage basis a little less than the net income increase due to the exercise of employee options and the higher dilution factor applied to unexercised options as a result of a higher average market price of UTMD stock.

There were a few significant changes in UTMD's Balance Sheet at June 30, 2012 from June 30, 2011. Current assets increased $1.6 million (cash & investments increased that same amount), intangible assets declined $4.5 million and debt principal declined $9.6 million. Shareholders' Equity increased $5.6 million net of cash dividends paid to shareholders of $3.5 million. In the five calendar quarters following the Femcare acquisition, UTMD has repaid 40% of the loan principal provided by JP Morgan Chase to help finance the acquisition.

b) Revenues

The Company believes that revenue should be recognized at the time of shipment as title generally passes to the customer at the time of shipment. Revenue recognized by UTMD is based upon documented arrangements and fixed contracts in which the selling price is fixed prior to acceptance and completion of an order. Revenue from product or service sales is generally recognized at the time the product is shipped or service completed and invoiced, and collectibility is reasonably assured. There are no post-shipment obligations which have been or are expected to be material to financial results.

Domestically, UTMD generally directly accepts orders from and ships to end user clinical facilities under Standard Domestic Terms and Conditions (T&C) of Sale in the U.S., UK, Australia and Ireland. In the few circumstances that UTMD operates under the terms and conditions of a group purchasing organization (GPO), representing a group of hospitals as a bargaining agent, the terms and conditions are not materially different from UTMD's T&C. UTMD accepts orders from international distributors in countries where UTMD sells through a distributor either under formal written agreements negotiated specifically with specific distributors, or under UTMD's Standard International Terms and Conditions of Sale.

For direct shipments to end-users, UTMD may have separate discounted pricing agreements with a clinical facility or group of facilities based on volume of purchases. Pricing agreements with clinical facilities, or groups of facilities, are established (similar to GPO agreements) in advance of orders accepted or shipments made. For existing customers, past actual shipment volumes determine the fixed price by part number for the next agreement period of one, two or three years. For new customers, the customer's best estimate of volume is accepted by UTMD for determining the ensuing fixed prices for the agreement period. New customers typically have one-year agreements. Prices are not adjusted after an order is accepted. To clarify, the separate pricing agreements with clinical facilities based on volume of purchases disclosure is not inconsistent with UTMD's disclosure above that the selling price is fixed prior to the completion of an order.

There are circumstances under which revenue may be recognized when product is not shipped, which meet the criteria of SAB 104: the Company provides engineering services, for example, design and production of manufacturing tooling that may be used in subsequent UTMD manufacturing of custom components for other companies. This revenue is recognized when UTMD's service has been completed according to a fixed contractual agreement.

Second quarter 2012 sales were down $352 (3.4%), and 1H 2012 sales were up $4,060 (23.7%), from the same periods in 2011. UK subsidiary sales were $2,953 in 2Q 2012 and $7,162 in 1H 2012, compared to $3,214 in 2Q 2011 and $3,611 in 1H 2011. Australia subsidiary sales were $845 in 2Q 2012 and $1,700 in 1H 2012, compared to $974 in 2Q 2011 and $1,068 in 1H 2011. Ireland subsidiary sales were of $853 in 2Q 2012 and $1,971 in 1H 2012, compared to $596 in 2Q 2011 and $1,388 in 1H 2011.

Comparing 2Q 2012 to 2Q 2011 global sales in product categories, blood pressure monitoring device/ component (BPM) sales were up 20%, neonatal device sales were down 4%, gynecology/ electrosurgery device sales were down 6% and obstetrics device sales were down 16%. For 1H 2012 compared to 1H 2011 global sales in product categories, BPM sales were up 10%, neonatal device sales were down 5%, gynecology/ electrosurgery device sales were up 56% and obstetrics device sales were down 14%.

International sales in 2Q 2012 were down 7%, and 1H 2012 were up 31%. International sales were 53% of total consolidated 2Q 2012 sales, and 51% of 1H 2012 sales compared to 55% in 2Q 2011 and 48% in 1H 2011.

U.S. domestic sales were up 1% in 2Q 2012 and up 17% in 1H 2012 compared to the same periods in 2011. Domestic direct sales of finished devices to U.S. end-users were 2% lower in 2Q 2012, and 5% lower in 1H 2012, a continuation of lower hospital utilization rates of UTMD's specialty devices. Sales of OEM components and finished devices to other U.S. companies were up 16% for 2Q 2012 and 158% for 1H 2012. Sales of Femcare's Filshie Clip System devices to Cooper Surgical Inc. in 1H 2012 were up 278% compared to 1H 2011, as UTMD did not own Femcare for most of 1Q 2011. Sales of domestic OEM devices excluding Cooper were up 68% in 2Q 2012 and 35% in 1H 2012 compared to the same periods in 2011.

The following table provides the actual sales dollar amounts by general product category for total sales and the subset of international sales:

Global revenues by product category:

                                     2Q 2012       2Q 2011       1H 2012       1H 2011
       Obstetrics                  $   1,259     $   1,493     $   2,542     $   2,967
       Gynecology/
       Electrosurgery/ Urology         5,411         5,751        12,066         7,721
       Neonatal                        1,647         1,711         3,249         3,422
       Blood Pressure Monitoring
       and Accessories*                1,708         1,422         3,374         3,060
       Total:                      $  10,025     $  10,377     $  21,230     $  17,170

*includes molded components sold to OEM customers.

International revenues by product category:

                                     2Q 2012       2Q 2011       1H 2012       1H 2011
       Obstetrics                  $     127     $     272     $     293     $     472
       Gynecology/
       Electrosurgery/ Urology         3,813         4,120         7,732         5,071
       Neonatal                          317           362           587           644
       Blood Pressure Monitoring
       and Accessories*                1,009           931         2,222         2,080
       Total:                      $   5,266     $   5,685     $  10,835     $   8,267

*includes molded components sold to OEM customers.

c) Gross Profit

UTMD's average GPM, gross profits as a percentage of sales, was 60.6% in 2Q 2012 and 60.3% in 1H 2012, compared to 60.3% and 58.1% in 2Q and 1H 2011. The GPM improvement in 1H 2012 compared to 1H 2011 was due to the product mix shift to Femcare devices with higher average GPM.

OEM sales are sales of UTMD components, subassemblies, finished devices and custom products that are marketed by other companies as part of their product offerings. UTMD utilizes OEM sales as a means to help optimize utilization of its capabilities established to satisfy its direct sales business. As a general rule, prices for OEM sales expressed as a multiple of direct variable manufacturing expenses are lower than for direct end-user sales because, in the OEM and many international channels, UTMD's business partners incur significant expenses of sales and marketing. Because of UTMD's small size and period-to-period fluctuations in OEM business, fixed manufacturing overhead expenses cannot be meaningfully allocated between direct and OEM sales. Therefore, UTMD does not report GPM by sales channels.

d) Operating Income

Operating income is the profit remaining after subtracting operating expenses from gross profits. Operating expenses include sales and marketing (S&M), product development (R&D) and general and administrative (G&A) expenses. Consolidated operating expenses were $2,519 in 2Q 2012 (25.1% of sales) compared to $3,027 in 2Q 2011 (29.2% of sales), and $5,143 in 1H 2012 (24.2% of sales) compared to $4,579 in 1H 2011 (26.7% of sales).

The 2Q and 1H 2012 operating profit margin (OPM), operating income divided by sales, was 35.4% and 36.1%, respectively, compared to 31.2% and 31.4% in 2Q and 1H 2011. The 1H 2012 OPM improved compared to 1H 2011 due to 1) a higher GPM,
2) higher sales volume over which consolidated operating expenses were spread, and 3) the consolidation of previous Femcare operating expenses into UTMD.

Consolidated S&M expenses in 2Q 2012 were $703 (7.0% of sales) compared to $867 (8.4% of sales) in 2Q 2011, and $1,354 (6.4% of sales) in 1H 2012 compared to $1,325 (7.7% of sales) in 1H 2011. S&M expenses include all customer support costs including training. In general, training is not required for UTMD's products since they are well-established and have been clinically widely used. Written "Instructions For Use" are packaged with all finished devices. Although UTMD does not have any explicit contracts with end-user customers to provide training, it does have third party group purchasing organization agreements in the U.S. and UK, and international distributor agreements, under which it agrees to provide hospital members or distributors inservice and clinical training as required and reasonably requested.

UTMD promises prospective customers that it will provide, at no charge in reasonable quantities, copies of videotapes and other instruction materials developed for the use of its products. UTMD also maintains product training information on its website that can be accessed by authorized third parties. UTMD provides customer support from headquarters by telephone, and employed representatives on a geographic 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. Except for the consulting services of independent practitioners, all of these services are allocated from fixed S&M overhead costs included in Operating Expenses. Historically, marginal consulting costs have been immaterial to financial results, which is also UTMD's expectation for the future.

R&D expenses in 2Q 2012 and 1H 2012 were $147 (1.5% of sales) and $293 (1.4% of sales), respectively, compared to $148 (1.4% of sales) and $248 (1.5% of sales) in 2Q and 1H 2011. UTMD expects to continue developing new products in-house that will enhance its market position as a clinically-focused company.

Consolidated G&A expenses in 2Q 2012 were $1,670 (16.7% of sales) compared to $2,012 (19.4% of sales) in 2Q 2011, and $3,496 (16.5% of sales) in 1H 2012 compared to $3,005 (17.5% of sales) in 1H 2011. G&A expenses include $639 (6.4% of sales) and $1,274 (6.0% of sales) in 2Q 2012 and 1H 2012 respectively, of expense from the amortization of identifiable intangible assets (IIA) resulting from the Femcare acquisition. This compares to $658 (6.3% of sales) and $753 (4.4% of sales) of IIA amortization expense in 2Q and 1H 2011, respectively. Acquisition expenses of $35 (0.3% of sales) in 2Q 2011 and $285 (1.7% of sales) in 1H 2011 were included in G&A operating expenses. There were no acquisition expenses in 1H 2012. In addition to legal/ litigation costs, G&A expenses include the costs of outside director fees and expenses, business insurance, independent financial auditors' fees, tax preparers' fees and corporate governance activities related to the implementation of SEC rules, as well as estimated stock-based compensation cost. Option compensation expense was $18 in 2Q 2012 compared to $25 in 2Q 2011, and $38 in 1H 2012 compared to $49 in 1H 2011.

Operating expense summary:

                                     2Q 2012       2Q 2011       1H 2012       1H 2011
       S&M Expense                 $     702     $     867     $   1,354     $   1,325
       R&D Expense                       147           148           293           249
       G&A Expense                     1,670         2,012         3,496         3,005
       Total Operating Expenses:   $   2,519     $   3,027     $   5,143     $   4,579

e) Non-operating expense

Non-operating expenses (NOE) include loan interest, bank fees and excise taxes minus non-operating income from rent of underutilized property, investment income and royalties received from licensing the Company's technology. NOE.in 2Q 2012 was $122 compared to $281 in 2Q 2011, and $300 in 1H 2012 compared to $296 in 1H 2011. Interest expense on the loans required to finance the Femcare acquisition is the largest component of NOE in each of the periods: $171 in 2Q 2012 compared to $302 in 2Q 2011, and $360 in 1H 2012 compared to $353 in 1H 2011. UTMD incurred $131 lower interest expense in 2Q 2012 compared to 2Q 2011 as a result of rapidly repaying the initial $26,934 in debt obtained to help acquire Femcare in March 2011. At June 30, 2012, 40% of the debt had been repaid. Interest expense in 1H 2012 was about the same as in 1H 2011 because the debt to finance Femcare was not funded until March 18, 2011.

f) Income Before Income Taxes

Income before taxes (EBT) results from subtracting UTMD's NOE from its operating income. 2Q 2012 consolidated EBT were $3,430 (34.2% of sales) compared to $2,952
(28.5% of sales) in 2Q 2011. EBT in 1H 2012 were $7,367 (34.7% of sales)
compared to $5,094 (29.7% of sales) in 1H 2011. The EBT of UTMD Ltd. (Ireland) were €157 in 2Q 2012 (23.1% of sales) compared to a loss of €5 in 2Q 2011, and €279 in 1H 2012 (18.2% of sales) compared to €58 (5.7% of sales) in 1H 2011. The EBT of Femcare Group Ltd. (Femcare-Nikomed, Ltd., UK and Femcare Australia Ltd) was £722 (29.7% of sales) in 2Q 2012 compared to £563 (21.9% of sales) in 2Q 2011, and £1,999 (35.3% of sales) in 1H 2012 compared to £629 (21.9% of sales) in 1H 2011.

Excluding the noncash effects of depreciation, amortization of intangible assets and stock option expense, 2Q and 1H 2012 consolidated EBT plus interest expense were $4,438 and $9,404, respectively, compared to $4,155 and $6,618 in 2Q and 1H 2011.

g) Net Income

UTMD's consolidated net income was $2,401 (24.0% of sales) in 2Q 2012 compared to $1,982 (19.1% of sales) in 2Q 2011, and $5,190 (24.4% of sales) in 1H 2012 compared to $3,319 (19.3% of sales) in 1H 2011. The improvement in 2Q and 1H 2012 NPM (net income divided by sales) compared to the same periods in 2011 was due to the improvement in OPM described above, less interest expense, a shift in profit mix toward lower taxed sovereignties and a lower corporate income tax rate in the UK. The average consolidated income tax provision (as a % of EBT) in 2Q 2012 was 30.0% compared to 32.9% in 2Q 2011, and 29.6% in 1H 2012 compared to 34.9% in 1H 2011. The corporate income tax rate in the UK changed from 26% to 25% on April 1, 2012. The income tax rate in Australia remains 30%. UTMD's combined state and federal income tax rate in the U.S. is about 36% after allowable deductions.

Because Femcare was acquired near the end of 1Q 2011 and UTMD Ltd (Ireland)'s performance was lower in 2011, most of earnings before income taxes in 1H 2011 were taxed at the U.S. rate, the highest corporate income tax of all the sovereignties in which UTMD now pays income taxes: Australia, Ireland, the UK and the U.S. In addition, almost all of the acquisition expenses in 1H 2011 were not tax deductible. In 2Q and 1H 2012, a greater contribution to EBT by UTMD Ltd (Ireland) at the lowest tax rate of all, 12.5% on profits generated from export of goods manufactured in Ireland, in addition to improved profitability in the UK, reduced the average tax provision rate further.

h) Earnings Per Share

Earnings per share (EPS) is net income 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). EPS for the applicable reporting periods follows:

                                     2Q 2012       2Q 2011       1H 2012       1H 2011
        Earnings Per Share (EPS)   $    .647     $    .544     $   1.405     $    .912
        Shares (000), Diluted          3,711         3,645         3,694         3,638

Diluted shares used to calculate EPS increased to 3,710,800 in 2Q 2012 from 3,644,600 in 2Q 2011, and 3,693,600 in 1H 2012 from 3,638,400 in 1H 2011. The number of shares added as a dilution factor in 2Q 2012 was 32,800 compared to 18,200 in 2Q 2011, and 30,100 in 1H 2012 compared to 15,200 in 1H 2011. Employees and directors exercised options for 16,600 UTMD shares in 2Q 2012, and for 47,800 shares in 1H 2012. Actual outstanding common shares at June 30, 2012 were 3,684,600 compared to 3,634,800 one year earlier. UTMD hasn't repurchased shares since third quarter 2010. Nevertheless, UTMD retains its program for repurchasing shares when they seem substantially undervalued.

i) Return on Equity

Return on equity (ROE) is the portion of net income retained by UTMD (after payment of dividends to shareholders) to internally finance its growth, divided by the average accumulated shareholder equity for the applicable time period. Annualized year-to-date ROE (after payment of dividends) for 1H 2012 was 16% compared to 8% for 1H 2011. ROE prior to payment of dividends was 24% in 1H 2012 and 17% in 1H 2011. The higher ROE in 2012 was due primarily to higher net income.

Liquidity and Capital Resources

j) Cash flows

Net cash provided by operating activities, including adjustments for depreciation and amortization and other non-cash operating expenses along with changes in working capital totaled $6,537 in 1H 2012 compared to $4,447 in 1H 2011. The most significant differences in the two periods were a net income increase of $1,871, a benefit to cash of $714 from changes in inventories, $603 from a larger increase in accounts payable, and $538 from amortization of identifiable intangibles for two quarters in 2012 compared to approximately one quarter in 2011, offset by a $704 use of cash from a larger increase in accounts receivable in 1H 2012.

The Company's payment of $41,084 to acquire Femcare in March 2011 was the most significant use of cash in either period. UTMD liquidated a net of $14,655 of investments to help finance the acquisition. The Company borrowed an additional $26,934 in 1H 2011 to help finance the purchase of Femcare.

Capital expenditures for plant, property and equipment (PP&E) were $133 in 1H 2012 compared to $158 in 1H 2011. Depreciation of PP&E was $334 in 1H 2012 and $354 in 1H 2011.

In 1H 2012, UTMD received $978 and issued 44,588 shares of stock upon the exercise of employee stock options, net of 3,169 shares retired upon employees trading those shares in payment of the option exercise price. Option exercises in 1H 2012 were at an average price of $22.47 per share. In comparison, the Company received $375 from issuing 15,949 shares of stock on the exercise of employee stock options in 1H 2011. UTMD did not repurchase any of its own shares in the open market during either 1H 2012 or 1H 2011.

UTMD repaid $5,221 on its notes payable during 1H 2012, compared to $1,927 during 1H 2011, and paid $878 in dividends in 1H 2012, compared to $851 in 1H 2011. All of UTMD's notes payable are scheduled to be repaid by April, 2016.

Management believes that income from operations and effective management of working capital will provide the liquidity needed to finance its internal growth plans. Planned capital expenditures during the remainder of 2012 are expected to be less than depreciation of current PP&E. The Company will continue to keep facilities, equipment and tooling in good working order. In addition, the Company may use cash for marketing or product manufacturing rights to broaden the Company's product offerings; for continued share repurchases when the price of the stock is undervalued; and if available for a reasonable price, an acquisition that might strategically fit UTMD's business model and be accretive to performance.

k) Assets and Liabilities

June 30, 2012 total assets increased $491 from December 31, 2011, including an increase in current assets of $1,636 and decreases in net intangible assets and net PP&E assets of $873 and $272 respectively. PP&E in Ireland declined $150, because of $78 in normal depreciation of fixed assets and $72 from valuing EURO assets in stronger USD exchange rate terms.

Working capital (current assets minus current liabilities) was $7,901 at June 30, 2012, a $516 increase from $7,385 at 2011 year-end. Current assets included a cash and investments increase of $1,385, an accounts receivable increase of $355 and an inventories decrease of $170. June 30, 2012 inventory and receivables balances were within management's asset productivity targets. Current liabilities increased $1,120, including a $715 increase in accrued expenses as a result of paying the 4Q 2011 dividend before 2011 year-end, but not paying the 2Q 2012 dividend to shareholders until early July. The dividend accrual on June 30, 2012 was $884. Accounts payable increased $427. UTMD has maintained a current ratio of at least 1.7 for all calendar quarters since June 30, 2011. UTMD believes its working capital remains sufficient to meet normal operating needs, debt service requirements and cash dividend payments to shareholders.

Intangible assets decreased $873. The decrease was due to amortization of identifiable intangible assets of $1,305 in 1H 2012, offset by valuing remaining intangible assets with a weaker USD relative to the Great Britain Pound at June 30, 2012 compared to December 31, 2011. At June 30, 2012, net intangible assets including goodwill were 65% of total assets compared to 66% at year-end 2011.

On March 18, 2011, UTMD borrowed £8,000 ($12,934) in the UK and $14,000 in the U.S. from JP Morgan Chase Bank to help fund the Femcare acquisition. The principal balance on those loans as of June 30, 2012 was £6,000 ($9,410) and $6,800, respectively. The JP Morgan Chase loan principal balances at December 31, 2011 were reduced by £800 in the UK and $3,700 in the U.S. as of June 30, 2012.

The principal balance on the Bank of Ireland €4,500 ($5,336) loan initiated in December 2005 for purposes of repatriating accumulated profits back to the U.S. was €277 ($350) on June 30, 2012. The June 30, 2012 Ireland note principal balance declined €172 from the end of 2011.

The deferred tax liability balance for Femcare identifiable intangible assets . . .