F O C U S E D O N S O L U T I O N S
A
N
N
U
A
L
R
E
P
O
R
T
2
0
0
2
We are a company focused on providing solutions. As a leading supplier of medical
devices and components to niche markets primarily in the health care and
medical industry, we work to provide products and solutions that
assure the highest quality, precision and performance. Our
commitment to innovation makes us a proactive force in the
development of new products and the improvement of existing
products. Our commitment to safety means that we understand
and share the responsibility for safeguarding the people who
use our products. Our commitment to being a leading provider of solutions means
that we are continually seeking to bring new ideas to our customers, new approaches
to our markets and new avenues of growth to our company.
Financial Highlights
Letter to Stockholders
Financial Information
1
2
7
Corporate Information
24
2 0 0 2
F I N A N C I A L H I G H L I G H T S
Earnings Per Diluted Share
From
Continuing Operations
Revenues
in millions
Operating Income
in millions
$2.50
2.00
1.50
1.00
.50
$60
50
40
30
20
10
$6.0
5.0
4.0
3.0
2.0
1.0
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
1
For the year ended December 31,
2002
2001
Revenues from continuing operations
$
59,533,000
$
57,605,000
Operating income
Income from continuing operations
5,782,000
4,065,000
5,820,000
4,262,000
Earnings per diluted share from continuing operations
$
2.18
$
1.88
Weighted average diluted shares outstanding
1,863,000
2,272,000
As of December 31,
Total assets
Working capital
Long-term debt
Stockholders’ equity
2002
2001
$
60,807,000
$
64,287,000
14,787,000
10,337,000
15,232,000
17,125,000
$
41,691,000
$
39,175,000
T O O U R S T O C K H O L D E R S
Like most American businesses, our company faced
the challenges of operating in a weak economic
environment in 2002. Despite this, and its inevitable
impact on sales in some markets, we made notable
progress. Revenues were up. Debt was reduced.
Earnings per share increased. New products were
developed for market rollout. In short, 2002 was a
good year for our company.
Focused on Financial Strength
Our company has always maintained a resolute
focus on building financial strength. In 2002, our
performance demonstrated that we have laid the
foundation for continuing growth and stability,
evidenced by progress in several key indicators of
financial strength.
• Growth in earnings per diluted share from
continuing operations increased by 16 percent over
2001, from $1.88 in 2001 to $2.18 in 2002.
Excluding a 2001 gain from the sale of a patent, the
increase in earnings per diluted share was 24
percent over the prior year.
2
• With increased sales in most of our product lines,
revenues improved by three percent over 2001.
While this growth is not as robust as we
would
to
maintain strength and deliver
positive performance through a
down market.
signifies our ability
like,
it
$6
• We reduced debt from $17.1
million at year-end 2001
to $10.3 million at the end
of 2002.
EBITDA Per Diluted Share From
Continuing Operations
5
4
3
2
1
$2.70
$1.54
$3.92
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
• We continued to generate strong cash flow and to
utilize it in ways that build strength and deliver
value to our stockholders.
Our commitment to maintaining financial
strength is evident in our ability to manage
resources well in a difficult operating environment.
In 2002, we reduced our general and administrative
expenses through cost reduction measures and
operational improvements. We took steps to make
our sales and marketing efforts more efficient and
effective. Our financial performance also reflected
the positive impact of higher credits from tax
incentives for exports and R&D expenditures, the
elimination of goodwill amortization through the
adoption of a new accounting principle, and the
smaller number of outstanding shares as a result of
our stock repurchase program. Together, these
factors enabled us to achieve a healthy increase in
diluted earnings per share from continuing
operations.
significant
achievement, against the backdrop of a lagging
economy that negatively impacted our revenue
growth, along with the challenges of rising
operating costs such as insurance.
represents
This
a
Being good stewards of our financial resources
enhances our ability to generate strong cash flow,
fund our operating needs, underwrite capital
improvements, pursue new product
development, reduce debt, and
invest in value-creating initiatives
such as the repurchase of our
company stock. Over the last
several years, we have completed
$4.78
$5.48
In today’s world, safety has
become a rising concern in
virtually every industry. In the
health care arena, where we
market the majority of our
products, we deliver solutions
F O C U S E D O N S A F E T Y
that promote a safer working
environment and help meet
increasing regulatory requirements.
We are developing products that
protect medical personnel against
the risk of infection by inadvertent
needle-sticks. The MPS Myocardial
Protection System provides added
safety for the patient during open-
heart surgery. Our life-saving
automatic inflator, approved by the
U.S. Coast Guard as a primary
safety device, is used to inflate
life vests upon contact with water.
We manufacture many other
products that reduce risks, make
medical procedures safer for both
patient and medical personnel, and
provide less invasive ways to
deliver health care.
3
4
the buyback of approximately 1.8 million shares of
our stock, accomplished through the use of available
cash in combination with borrowings at low interest
rates. In early 2003, we announced a tender offer to
purchase up to 350,000 additional shares of the
company’s common stock. We believe this is a wise
use of our financial resources and a good value for
our company and our stockholders.
Focused on Our Markets
In the wide realm of businesses that serve the
health care industry, Atrion is a relatively small
company. However, we have earned a reputation for
quality, precision and dependability that has
enabled us to attain a leading market position in a
number of our product lines. Our products, ranging
from cardiovascular and ophthalmology products to
fluid delivery devices, are sold to end-users,
distributors and other manufacturers worldwide.
Currently, Atrion is a leading U.S. manufacturer of
soft contact lens disinfection cases, clamps for IV
sets, cardiac surgery vacuum relief valves,
minimally invasive surgical tapes, and check valves.
Our experience and reputation in manufacturing
valves for medical applications carried us into
another important market, marine and aviation
safety, where we are the leading supplier of valves
and inflation devices used in life vests, inflatable
boats and life rafts. In addition, our LacriCATH
in
balloon
ophthalmic procedures to treat
blockages of the tear duct, is the
only such product approved by
the FDA for this application.
catheter, used
CARDIOVASCULAR
22%
Although we develop and manufacture a diverse
range of products, there is one common thread:
Each of our products represents a sound, working
solution designed to meet the needs of a specific
niche market.
The leadership position we have carved out for
many of our products offers an important advantage.
It creates a stable and diversified revenue base that
affords a measure of protection against the ups and
downs of the economy, as well as the fluctuating
demand of individual markets. We saw this clearly at
work in 2002. On the heels of record sales in 2001
for one of our products—in response to the
inventory-building strategy of a major customer in
the retail market—we experienced a significant
decline in shipments of that product for 2002. In
addition, the slowdown in the aviation industry
following the tragic events of September 11 had a
negative impact on sales of our valve and inflation
products to this market. However, these deficits were
more than offset by increased sales in other Atrion
product lines serving the medical and health care
industry. As a result, we ended the year with
increased sales overall, proving again the value of
our strength in product diversity and market
leadership.
Focused on Growth
Our growth depends on our ability to continue
developing solutions for our
customers and our markets. It
also depends on our ability to
sustain financial strength and
provide the resources to fuel
OTHER
25%
2002 Revenues by Product Line
29%
OPHTHALMOLOGY
24%
FLUID DELIVERY
Finding new ways to meet the
needs of our markets is the heart
of our business at Atrion. With a
keen eye on emerging
marketplace trends and a
constant focus on research and
development, we work to
F O C U S E D O N I N N O V A T I O N
5
identify opportunities for new
products and new applications of
our technology. Over the years, we
have developed products such as
special valves that provide many
benefits in convenience and
safety. We developed the MPS
Myocardial Protection System to
provide surgeons with greater
assurance and control over the
delivery of fluids and medications
during open-heart surgery. Other
products like the swabbable valve,
the automatic inflator and the
LacriCATH catheter have been
designed to bring new solutions
to the markets we serve. As a
result, we are meeting the market
with the kind of innovation and
creativity that makes our company
a leading provider of many
medical components and devices.
6
future growth. We work diligently to meet both
these objectives as we bring new products and
solutions to our markets.
our
lines,
leading product
In 2002, we achieved sales growth in the majority
including
of
cardiovascular and fluid delivery products. We
continued to see growth in sales of the MPS
Myocardial Protection System, a proprietary
technology that delivers essential fluids and
medications to the heart during open-heart surgery.
Placements of the MPS unit as well as MPS disposable
product sales continued to gain ground in the
market. The outlook is favorable for growth in most
of our product lines, complemented by the prospects
for additional opportunity through new products
scheduled for market introduction in 2003. Among
these are a new version of the LacriCATH balloon
catheter aimed at expanding our market for this
successful product line; a swabbable valve that can
be sterilized before each use, eliminating the use of
needles for intravenous procedures and minimizing
the risk of needle-sticks for medical personnel; and
a U.S. Coast Guard-approved automatic inflator for
the marine and aviation market, used to inflate life
vests upon contact with water. Among the products
in development for future release is a needle vise
which securely captures used needles during
surgery, providing added safety for both patient and
health care professionals in the
surgical suite.
Research and development
continues to be the critical
underpinning of our quest for
growth and leadership, as we
work to design, develop and
manufacture new products for the markets we serve.
In 2002, we continued to devote approximately 25
percent of our operating profits before taxes and
R&D expenditures to the research and development
effort. This demonstrates our commitment to this
important aspect of our business, even
in
challenging economic times.
Focused on the Future
As we look toward the future, we see opportunity
for continued growth in the majority of our product
lines and, as always, opportunity for improved
efficiency in the way we operate our business. As a
result, we have set a target of 15 percent annual
growth in earnings per share from continuing
operations, a goal we believe is attainable for at
least the next several years.
Our performance is securely rooted in our ability
to provide solutions for the markets we serve. We
are working to maintain financial strength, to
utilize our assets and resources in the best manner,
to increase sales and to reduce costs. We are
diligent in our pursuit of innovative new products
that will expand our market opportunity and open
new avenues for growth. Our constancy and resolve
on all these fronts have served us well over the
years and we believe they will carry us into the
future with great opportunity for continued growth
and profitability.
Sincerely,
Emile A. Battat
Chairman of the Board
and President
F I N A N C I A L I N F O R M A T I O N
S E L E C T E D
F I N A N C I A L D A T A
(In thousands, except per share amounts)
7
Revenues
$ 59,533
$ 57,605
$ 51,447
$ 49,917
$
43,397
2002
2001
2000
1999
1998
Income from continuing operations
Net income
Total assets
Long-term debt
Income from continuing
operations, per basic share
Net income per basic share
Dividends per share
Average basic shares outstanding
4,065
2,589(a)
60,807
10,337
2.37
1.51(a)
—
1,711
4,262
9,754(b)
65,555
17,125
2.10
4.80(b)
—
2,033
2,663
2,792
63,690
7,400
1.30
1.36
—
2,047
2,128
2,293
64,640
10,417
0.82
0.88
—
2,593
1,478
2,140
60,415
—
0.46
0.67
—
3,203
(a) Includes a $1.6 million after-tax goodwill impairment charge ($ .96 per share) (see Note 2)
(b) Includes a $5.5 million after-tax gain ($ 2.70 per share) from discontinued operations (See Note 3)
(For the years ended December 31, 2002, 2001 and 2000)
Revenues
Cost of Goods Sold
Gross Profit
Operating Expenses:
Selling
General and administrative
Research and development
Operating Income
Interest Income
Interest Expense
Other Income (Expense), net
Income from Continuing Operations before
Provision for Income Taxes
8
Income Tax Provision
Income from Continuing Operations
Gain on Disposal of Discontinued Operations, net of tax
Cumulative Effect of Accounting Change, net of tax
Net Income
Income Per Basic Share:
Continuing operations
Discontinued operations
Cumulative effect of accounting change
C O N S O L I D A T E D
S T A T E M E N T S O F I N C O M E
2002
2001
2000
(In thousands, except per share amounts)
$ 59,533
$
57,605
$
51,447
39,236
20,297
5,343
6,992
2,180
14,515
5,782
78
(432)
40
5,468
(1,403)
4,065
165
(1,641)
$
$
$
2,589
$
2.37
.10
(.96)
35,777
21,828
6,248
7,849
1,911
16,008
5,820
77
(300)
468
6,065
(1,803)
4,262
5,492
—
9,754
2.10
2.70
—
31,561
19,886
7,010
6,576
2,054
15,640
4,246
94
(748)
(6)
3,586
(923)
2,663
129
—
2,792
1.30
.06
—
$
$
Net Income Per Basic Share
$
1.51
$
4.80
$
1.36
Weighted Average Basic Shares Outstanding
1,711
2,033
2,047
Income Per Diluted Share:
Continuing operations
Discontinued operations
Cumulative effect of accounting change
$
2.18
$
.09
(.88)
1.88
2.42
—
$
1.25
.06
—
Net Income Per Diluted Share
$
1.39
$
4.30
$
1.31
Weighted Average Diluted Shares Outstanding
1,863
2,272
2,135
The accompanying notes are an integral part of these statements.
C O N S O L I D A T E D
B A L A N C E S H E E T S
(As of December 31, 2002 and 2001)
Assets:
Current Assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
of $151 and $113 in 2002 and 2001, respectively
Inventories
Prepaid expenses
Deferred income taxes
Property, Plant and Equipment
Less accumulated depreciation and amortization
Other Assets and Deferred Charges:
Patents, net of accumulated amortization of $6,847 and
$6,543 in 2002 and 2001, respectively
Goodwill, net of accumulated amortization of
$6,600 and $4,114 in 2002 and 2001, respectively
Other
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable and accrued liabilities
Accrued income and other taxes
Line of Credit
Other Liabilities and Deferred Credits:
Deferred income taxes
Other
Commitments and Contingencies
Stockholders’ Equity:
Common stock, par value $0.10 per share, authorized 10,000 shares,
issued 3,420 shares
Additional paid-in capital
Retained earnings
Treasury shares, 1,714 shares in 2002 and 1,732 shares in 2001, at cost
2002
2001
(In thousands)
$
353
$
542
6,721
10,311
2,273
1,018
20,676
42,661
18,211
24,450
7,559
11,114
1,463
1,268
21,946
39,866
14,488
25,378
2,403
2,707
9,730
3,548
15,681
12,216
3,308
18,231
9
$ 60,807
$
65,555
$
5,030
$
5,337
859
5,889
10,337
2,115
775
2,890
—
342
8,222
64,249
(31,122)
41,691
109
5,446
17,125
2,844
965
3,809
—
342
7,991
61,660
(30,818)
39,175
The accompanying notes are an integral part of these statements.
$ 60,807
$
65,555
C O N S O L I D A T E D
S T A T E M E N T S O F C A S H F L O W S
(For the years ended December 31, 2002, 2001 and 2000)
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change, net of tax
Gain on disposal of discontinued operations
Depreciation and amortization
Deferred income taxes
Tax benefit related to stock plans
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses
Other non-current assets
10
Accounts payable and current liabilities
Accrued income and other taxes
Other non-current liabilities
Net cash provided by continuing operations
Net cash provided by discontinued operations
Cash Flows From Investing Activities:
2002
2001
2000
(In thousands)
$
2,589
$
9,754
$
2,792
1,641
(165)
4,384
366
82
127
9,024
838
803
(810)
(240)
(307)
750
(190)
9,868
165
10,033
—
(5,492)
4,569
316
1,238
(428)
9,957
(384)
(1,004)
(888)
301
934
(78)
(135)
8,703
165
8,868
—
(129)
4,119
77
13
164
7,036
592
(1,004)
252
(43)
582
166
(199)
7,382
165
7,547
Property, plant and equipment additions
(3,279)
(2,808)
(3,289)
Patent sale
Proceeds from disposal of discontinued operations
Cash Flows From Financing Activities:
Net change in line of credit
Issuance of treasury stock
Purchase of treasury stock
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
—
—
428
—
—
199
(3,279)
(2,380)
(3,090)
(6,788)
409
(564)
(6,943)
(189)
542
353
9,725
1,778
(17,608)
(6,105)
383
159
542
$
(3,017)
85
(1,436)
(4,368)
89
70
$
159
Cash paid for:
Interest
Income taxes (net of refunds)
The accompanying notes are an integral part of these statements.
$
418
$
272
$
746
(340)
1,217
4
C O N S O L I D A T E D
S T A T E M E N T O F S T O C K H O L D E R S ’ E Q U I T Y
(For the years ended December 31, 2002, 2001 and 2000)
Common Stock
Shares
Treasury Stock
Outstanding Amount
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Total
(In thousands)
Balance, January 1, 2000
2,098
$ 342
1,322
$ (13,287)
$ 6,403
$ 49,114
$ 42,572
Net income
Tax benefit from exercise
of stock options
Exercise of stock options
Purchase of treasury stock
9
(115)
(9)
115
70
(1,436)
2,792
2,792
13
2
13
72
(1,436)
Balance, December 31, 2000
1,992
342
1,428
(14,653)
6,418
51,906
44,013
Net income
Tax benefit from exercise
of stock options
Exercise of stock options
Shares surrendered in
option exercises
Purchase of treasury stock
1,238
335
235
(27)
(512)
(235)
2,077
27
512
(634)
(17,608)
9,754
9,754
1,238
2,412
(634)
(17,608)
11
Balance, December 31, 2001
1,688
342
1,732
(30,818)
7,991
61,660
39,175
Net income
Tax benefit from exercise
of stock options
Exercise of stock options
Shares surrendered in option
exercises
Purchase of treasury stock
82
149
53
(9)
(26)
(53)
443
9
26
(183)
(564)
2,589
2,589
82
592
(183)
(564)
Balance, December 31, 2002
1,706
$ 342
1,714
$ (31,122)
$ 8,222
$ 64,249
$ 41,691
The accompanying notes are an integral part of this statement.
N O T E S T O
C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
(1) Summary of Significant Accounting Policies
Atrion Corporation designs, develops, manufactures and markets
products primarily for the medical and health care industry. The
Company markets its products throughout the United States and
internationally. The Company’s customers include hospitals,
distributors, and other manufacturers. As of December 31, 2002, the
principal subsidiaries of the Company through which it conducted its
operations were Atrion Medical Products, Inc. (“Atrion Medical
Products”), Halkey-Roberts Corporation (“Halkey-Roberts”) and
Quest Medical, Inc. (“Quest Medical”).
Principles of Consolidation
The consolidated financial statements include the accounts of Atrion
Corporation and its subsidiaries (the “Company”). All significant
intercompany transactions and balances have been eliminated in
consolidation.
Fair Value
The carrying amounts of cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to the
short-term nature of these items. The carrying amount of debt
approximates fair value as the interest rate is tied to market rates.
12
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the
financial statements and the reported amount of revenues and
expenses during the reporting periods. Actual results could differ
from those estimates.
Financial Presentation
Certain prior-year amounts have been reclassified to conform with
current-year presentation.
Cash and Cash Equivalents
Cash equivalents are securities with original maturities of 90 days or
less.
Trade Receivables
Trade accounts receivable are recorded at the original sales price to
the customer. The Company maintains an allowance for doubtful
accounts to reflect estimated losses resulting from the inability of
customers to make required payments. On an ongoing basis, the
collectibility of accounts receivable is assessed, based upon
historical collection trends, current economic factors, and the
assessment of the collectibility of specific accounts. The Company
evaluates the collectibility of specific accounts using a combination
of factors, including the age of the outstanding balances, evaluation
of customers’ current and past financial condition, recent payment
history, current economic environment, and discussions with
appropriate Company personnel and with the customers directly.
Accounts are written off when it is determined the receivable will not
be collected.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by using the first-in, first-out method. The following
table details the major components of inventory (in thousands):
December 31,
2002
$ 6,082
2,818
1,411
$10,311
2001
$ 6,089
4,136
889
$ 11,114
Raw materials
Finished goods
Work in process
Total inventories
Income Taxes
The Company utilizes the asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax
assets and liabilities are computed annually for differences between
the financial reporting basis and the tax basis of the Company’s other
assets and liabilities. These amounts are based on enacted tax laws
and rates applicable to the periods in which the differences are
expected to affect taxable income.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated
using the straight-line method over the estimated useful lives of the
related assets. Expenditures for repairs and maintenance are charged
to expense as incurred. The following table represents a summary of
property, plant and equipment at original cost (in thousands):
December 31,
2002
$ 1,506
8,683
2001
$ 1,506
8,576
Useful
Lives
—
30-40 yrs
32,472
29,784
3-10 yrs
Land
Buildings
Machinery and
equipment
Total property, plant
and equipment
$42,661
$ 39,866
Depreciation expense of $4,080,000, $3,743,000 and $3,225,000
was recorded for the years ended December 31, 2002, 2001 and
2000, respectively.
Patents
Cost for patents acquired is determined at acquisition date. Patents
are being amortized over the remaining lives of the individual
patents, which are five to 15 years. Patents are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable.
Goodwill
Goodwill represents the excess of cost over the fair market value of
tangible and identifiable intangible net assets acquired. Through
December 31, 2001, goodwill was being amortized over 25 years.
Beginning January 1, 2002, accounting for goodwill was changed to
conform to Statement of Financial Accounting Standards (“SFAS”)
No. 142, “Goodwill and Other Intangible Assets” as outlined below
and in Note 2. Annual impairment testing for goodwill is done in
accordance with SFAS No. 142 using a fair value-based test. Goodwill
is also reviewed periodically for impairment whenever events or
changes in circumstances indicate a change in value may have
occurred.
Revenues
Revenue is recognized at the time products are shipped and title has
passed to the customer. Net sales represent gross sales invoiced to
customers, less certain related charges, including discounts, returns
and other allowances.
Shipping and Handling Policy
Shipping and handling fees charged to customers are reported as
revenue and all shipping and handling costs incurred related to
products sold are reported as cost of goods sold.
Research and Development Costs
Research and development costs relating to the development of new
products and improvements of existing products are expensed as
incurred.
Stock-Based Compensation
At December 31, 2002, the Company had three stock-based employee
compensation plans, which are described more fully in Note 8. The
Company accounts for those plans under the recognition and
measurement principles of Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees,” and
related interpretations. No stock-based employee compensation cost
is reflected in net income, as all options granted under those plans
had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates
the effect on net income and income per share if the Company had
applied the fair value recognition provisions of Financial Accounting
Standards Board (“FASB”) SFAS No. 123, “Accounting for Stock-Based
Compensation,” to stock-based employee compensation:
Year ended December 31,
2001
2000
2002
(In thousands,
except per share amounts)
Net income, as reported $ 2,589
Deduct: Total stock-based
employee compensation
expense determined
under fair value-based
methods for all awards,
net of tax effects
Pro forma net income
(691)
$ 1,898
Income per share:
$ 9,754
$ 2,792
(275)
$ 9,479
(518)
$ 2,274
Basic – as reported
$ 1.51
$
4.80
Basic – pro forma
$ 1.11
$ 4.66
Diluted – as reported $ 1.39
$ 4.30
Diluted – pro forma
$ 1.02
$ 4.17
$
$
$
$
1.36
1.11
1.31
1.07
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, “Business
Combinations,” and SFAS No. 142. SFAS No. 141 eliminates pooling
of interest accounting and requires that all business combinations
initiated after June 30, 2001, be accounted for using the purchase
method. SFAS No. 142 eliminates the amortization of goodwill and
certain other intangible assets and requires the Company to evaluate
goodwill for impairment on an annual basis by applying a fair value
test. SFAS No. 142 also requires that an identifiable intangible asset
which is determined to have an indefinite useful economic life not
be amortized, but separately tested for impairment using a fair
value-based approach. As of December 31, 2002, the Company had
not recorded any identifiable intangible assets other than goodwill
that have an indefinite useful life. See Note 2 below for a review of
the impact on the Company from the adoption of SFAS No. 142.
In December 2002, the FASB issued SFAS No. 148, “Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment
of SFAS No. 123.” SFAS No. 148 was issued to provide alternative
methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS
No. 123 to require disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. Entities are still permitted to account for stock-
based compensation programs using the intrinsic value method
prescribed in APB Opinion No. 25. The Company currently accounts
for stock-based compensation using the intrinsic value method. The
interim disclosure requirements prescribed by SFAS No. 148 are
required for interim periods beginning after December 15, 2002.
13
(2) Goodwill and Intangible Assets
Intangible assets consist of the following (dollars in thousands):
The Company adopted SFAS No. 142 effective January 1, 2002, and
has identified three reporting units where goodwill was recorded for
purposes of testing goodwill impairment: (1) Atrion Medical Products
(2) Halkey-Roberts and (3) Quest Medical. The Company completed
its impairment analysis by obtaining an independent third party
valuation of the fair value of the reporting units. This analysis
revealed that the Quest Medical reporting unit was impaired,
resulting in a write-down of goodwill in the first quarter of 2002 of
$1.64 million, net of an income tax benefit of $845,000. The charge
reflected a $2.5 million reduction in the goodwill resulting from the
acquisition of Quest Medical in February 1998. The remaining
goodwill asset balance for the Company totaled $9.7 million at
December 31, 2002. The impairment loss was recorded as a
cumulative effect of a change in accounting principle. Net income
from continuing operations for the years 2002, 2001 and 2000
adjusted as though the non-amortization provisions of SFAS No. 142
had been in effect at January 1, 2000, are as follows:
Year ended December 31,
2001
2000
2002
(In thousands,
except per share amounts)
Income from continuing
operations
$ 4,065
$ 4,262
$ 2,663
14
Add back: Goodwill
amortization,
net of tax
Adjusted income from
continuing operations
Adjusted income per
basic share:
Income from continuing
—
425
425
$ 4,065
$ 4,687
$ 3,088
operations
$ 2.37
$
2.10
$
1.30
December 31, 2002
Gross
December 31, 2001
Gross
Carrying Accumulated Carrying Accumulated
(years) Amount Amortization Amount Amortization
Average
Life
Amortizable
intangible
assets:
Patents
12.85 $ 9,250 $ 6,847 $ 9,250 $ 6,543
Intangible
assets not
subject to
amortization:
Goodwill
$ 16,330 $ 6,600 $ 16,330 $ 4,114
Aggregate amortization expense for patents and goodwill was
$304,000, $907,000 and $907,000 for 2002, 2001 and 2000,
respectively.
Estimated future amortization expense for each of the years ending
December 31, is as follows (in thousands):
2003
2004
2005
2006
2007
$ 304
$ 304
$ 271
$ 169
$ 144
The change in the carrying amounts of goodwill for 2002 is as follows
(in thousands):
Balance as of January 1, 2002
Impairment loss
Balance as of December 31, 2002
$ 12,216
2,486
$ 9,730
—
.21
.21
(3) Discontinued Operations
$ 2.37
$
2.31
$
1.51
Add back: Goodwill
amortization,
net of tax
Adjusted income from
continuing operations
Adjusted income per
diluted share:
Income from continuing
operations
$ 2.18
$
1.88
$
1.25
Add back: Goodwill
amortization,
net of tax
Adjusted income from
continuing operations
—
.19
.20
$ 2.18
$
2.07
$
1.45
During 1997, the Company sold all of its natural gas operations. The
consolidated financial statements presented herein reflect the
Company’s natural gas operations as discontinued operations for all
periods presented. The consolidated financial statements reflect a
gain on disposal of these discontinued operations of $165,000,
$5,492,000 and $129,000 in 2002, 2001 and 2000, respectively.
These amounts include an income tax benefit of $5,126,000 in 2001,
and are net of income tax expense of $85,000 and $67,000 in 2002
and 2000, respectively.
In addition to the initial consideration received in 1997 upon the
sale of the natural gas operations, certain annual contingent
deferred payments of up to $250,000 per year were to be paid to the
Company over an eight-year period which began in 1999, with the
amount paid each year to be dependent upon revenues received by
the purchaser from certain gas transportation contracts. The
Company received deferred payments of $250,000 each, before tax,
from the purchaser in April 2002, 2001 and 2000 which are reflected
in each year as a gain from discontinued operations of $165,000, net
of tax. The 2001 gain also includes a $5,327,000 non-cash gain from
reversal of a reserve established when the Company disposed of its
natural gas operations in 1997. This reversal in the third quarter of
2001 followed the resolution of an outstanding contingency related
to the sale of those assets. The 2000 gain reflected above is net of
a $36,000 loss, net of tax, related to the sale of certain residual
properties associated with the Company’s natural gas operations.
(4) Line of Credit
The Company has a revolving credit facility (“Credit Facility”) with a
regional bank. In December 2001, the Credit Facility arrangement
was amended to increase the credit line under the Credit Facility
from $18.5 million to $25.0 million. Under the Credit Facility, the
Company and certain of its subsidiaries have a line of credit which is
secured by substantially all inventory, equipment and accounts
receivable of the Company. Interest under the Credit Facility is
assessed at 30-day, 60-day or 90-day LIBOR, as selected by the
Company, plus one percent (2.425 percent at December 31, 2002)
and is payable monthly. At December 31, 2002, and 2001, $10.3
million and $17.1 million, respectively, was outstanding under the
line of credit. The Credit Facility expires November 12, 2004, and
may be extended under certain circumstances. At any time during the
term, the Company may convert any or all outstanding amounts
under the Credit Facility to a term loan with a maturity of two years.
The Company’s ability to borrow funds under the Credit Facility from
time to time is contingent on meeting certain covenants in the loan
agreement, the most restrictive of which is the ratio of total debt to
earnings before interest, income tax, depreciation and amortization.
At December 31, 2002, the Company was in compliance with all
financial covenants.
(5) Income Taxes
The items comprising income tax expense for continuing operations
are as follows (in thousands):
Current — Federal
— State
Deferred — Federal
— State
Year ended December 31,
2001
$ 1,520
188
1,708
2002
$ 1,081
(44)
1,037
$
579
85
664
2000
327
39
366
74
21
95
225
34
259
Total income tax
expense
$ 1,403
$ 1,803
$
923
Temporary differences and carryforwards which have given rise to
deferred income tax assets and liabilities as of December 31, 2002
and 2001 are as follows (in thousands):
Deferred tax assets:
Patents and goodwill
Benefit plans
Inventories
Tax credits
Other
Total deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Pensions
Other
Total deferred tax liabilities
2002
2001
$ 1,041
639
342
451
60
$ 2,533
$
628
620
222
816
55
$ 2,341
3,253
362
15
$ 3,630
2,654
333
930
$ 3,917
Net deferred tax liability
$ 1,097
$ 1,576
Balance Sheet classification:
Non-current deferred income
tax liability
Current deferred income tax asset
Net deferred tax liability
$ 2,115
1,018
$ 1,097
$ 2,844
1,268
$ 1,576
The deferred tax assets as of December 31, 2002 reflected in the
table above include alternative minimum tax credit carryforwards of
$415,000 and research and development (R&D) tax credit
carryforwards of $36,000. The R&D tax credit carryforwards expire in
2022.
Total income tax expense for continuing operations differs from the
amount that would be provided by applying the statutory federal
income tax rate to pretax earnings as illustrated below (in
thousands):
15
Year ended December 31,
2001
2002
2000
Income tax expense
at the statutory
federal income tax rate $ 1,858
$ 2,062
$ 1,219
Increase (decrease)
resulting from:
State income taxes
Decrease in valuation
80
220
141
allowance
R & D credit
Foreign sales benefit
Other, net
—
(164)
(244)
(127)
Total income tax expense $ 1,403
(68)
(52)
(352)
(7)
$ 1,803
$
(63)
(130)
(265)
21
923
For the years ended December 31, 2002, 2001 and 2000, stock
options of approximately 40,625, 7,800 and 241,775 respectively,
were not included in the computation of diluted income per share
because their effect would have been antidilutive.
(8) Stock Option Plans
The Company’s 1997 Stock Incentive Plan provides for the grant to
key employees of incentive and nonqualified stock options, stock
appreciation rights, restricted stock and performance shares. In
addition, under the 1997 Stock Incentive Plan, outside directors
(directors who are not employees of the Company or any subsidiary)
receive automatic annual grants of nonqualified stock options to
purchase 2,000 shares of common stock. There are 624,425 shares in
the aggregate of common stock reserved for grants under the 1997
Stock Incentive Plan. The purchase price of shares issued on the
exercise of incentive options must be at least equal to the fair market
value of such shares on the date of grant. The purchase price for
shares issued on the exercise of nonqualified options and restricted
and performance shares is fixed by the Compensation Committee of
the Board of Directors. The options granted become exercisable as
determined by the Compensation Committee and expire no later than
10 years after the date of grant.
During 1994, the stockholders of the Company approved the
adoption of the Company’s 1994 Key Employee Stock Incentive Plan,
which provided for the grant to key employees of incentive and
nonqualified options to purchase shares of common stock of the
Company. During 1998, the Company’s stockholders approved the
adoption of the Company’s 1998 Outside Directors Stock Option Plan
which, as amended, provided for the automatic grant on February 1,
1998 and February 1, 1999 of nonqualified stock options to the
Company’s outside directors. Although no additional options may be
granted under the 1994 Key Employee Stock Incentive Plan or the
1998 Outside Directors Stock Option Plan, all outstanding options
under those plans continue to be governed by the terms and
conditions of those plans and the existing option agreements for
those grants.
(6) Common Stock
The Board of Directors of the Company has at various times
authorized repurchases of Company stock in open-market or
negotiated transactions at such times and at such prices as
management may from time to time decide. The Company has
effected a number of open-market or negotiated transactions to
purchase its stock during the past three years. These repurchases
totaled 26,000, 10,300 and 114,500 shares during the years 2002,
2001 and 2000, respectively, at per share prices ranging from $7.77
to $23.32. As of December 31, 2002, authorization for the
repurchase of 114,200 additional shares remained. The Company
purchased 502,229 shares of its common stock at $34.50 per share
in December 2001 pursuant to a tender offer. All shares purchased in
the tender offer and in the open-market or negotiated transactions
became treasury shares upon repurchase by the Company.
The Company has a Common Share Purchase Rights Plan, which is
intended to protect the interests of stockholders in the event of a
hostile attempt to take over the Company. The rights, which are not
presently exercisable and do not have any voting powers, represent
the right of the Company’s stockholders to purchase at a substantial
discount, upon the occurrence of certain events, shares of common
stock of the Company or of an acquiring company involved in a
business combination with the Company. In January 2000, this plan,
which was adopted in February 1990, was extended until February
2005.
16
(7) Income Per Share
The following is the computation for basic and diluted income per
share from continuing operations:
Year ended December 31,
2001
2000
2002
(In thousands, except per share amounts)
Income from continuing
operations
$ 4,065
$ 4,262
$ 2,663
Weighted average basic
shares outstanding
Add: Effect of dilutive
securities (options)
Weighted average
diluted shares
outstanding
Income per share from
continuing operations:
1,711
2,033
2,047
152
239
88
1,863
2,272
2,135
Basic
Diluted
$ 2.37
$ 2.18
$
$
2.10
1.88
$
$
1.30
1.25
Option transactions for the three years in the period ended December
31, 2002 are as follows:
of grant using a Black-Scholes option pricing model with the
following weighted average assumptions for 2002, 2001 and 2000:
Options outstanding at
January 1, 2000
Granted in 2000
Expired in 2000
Exercised in 2000
Options outstanding at
December 31, 2000
Granted in 2001
Expired in 2001
Exercised in 2001
Options outstanding at
December 31, 2001
Granted in 2002
Expired in 2002
Exercised in 2002
Options outstanding at
December 31, 2002
Exercisable options at
December 31, 2000
Exercisable options at
December 31, 2001
Exercisable options at
December 31, 2002
Weighted
Average
Exercise
Price
Shares
491,550
48,300
(38,300)
(9,200)
$ 10.38
$ 11.75
$ 11.11
7.79
$
$ 10.50
492,350
$ 15.31
81,000
(13,600)
$ 10.84
(234,900) $ 10.46
324,850
201,500
(5,500)
(53,500)
$ 11.62
$ 21.05
$
8.34
$ 11.06
467,350
$ 15.82
356,100
$ 10.57
174,350
$ 11.89
261,100
$ 13.81
As of December 31, 2002, there remained 81,984 shares for which
options may be granted in the future under the 1997 Stock Incentive
Plan. The following table summarizes information about stock
options outstanding at December 31, 2002:
Options Outstanding
Options Exercisable
Range of
exercise prices outstanding
$6.875-$14.063
$14.875-$22.50
$26.13-$31.39
Number
Weighted
average Weighted
remaining average
contractual exercise
price
life
247,850 6.2 years $11.33
168,000 5.0 years $18.05
51,500 5.6 years $30.16
467,350
Weighted
average
exercise
Number
exercisable
price
156,100 $10.28
93,000 $18.15
12,000 $26.13
261,100
Pro forma information regarding net income and income per share as
required by SFAS No. 123 has been determined as if the Company had
accounted for its stock options under the fair value method of that
statement. The fair value for these options was estimated at the date
Risk-free interest rate
Dividend yield
Volatility factor
Expected life
2002
2.7%
0.0%
50.3%
2.7 years
2001
5.2%
0.0%
33.0%
7 years
2000
6.6%
0.0%
30.0%
7 years
The resulting estimated weighted average fair values of the options
granted in 2002, 2001 and 2000 were $7.25, $7.06 and $5.57,
respectively.
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
expected stock price volatility.
(9) Revenues From Major Customers
The Company had one major customer which represented
approximately $7.4 million (12.4 percent), $11.0 million (19.1
percent), and $8.9 million (17.3 percent) of the Company’s operating
revenues during the years 2002, 2001 and 2000, respectively.
17
(10) Industry Segment and Geographic Information
for
SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information,” establishes standards
reporting
information about operating segments in annual financial
statements and requires reporting selected information about
operating segments in interim financial reports issued to
stockholders. The Company operates in one reportable industry
segment: designing, developing, manufacturing and marketing
products for the medical and health care industry and has no foreign
operating subsidiaries. The Company’s product lines include pressure
relief valves and inflation systems which are sold primarily to the
aviation and marine industries. Due to the similarities in product
technologies and manufacturing processes, these products are
managed as part of the medical products segment. The Company
recorded incidental revenues from its oxygen pipeline, which totaled
approximately $950,000 in each of the years of 2002, 2001 and
2000. Pipeline net assets totaled $2,664,000 and $2,737,000 at
December 31, 2002 and 2001, respectively. Company revenues from
sales to parties outside the United States totaled approximately 25,
33 and 22 percent of the Company’s total revenues in 2002, 2001
and 2000, respectively. No Company assets are located outside the
United States. A summary of revenues by geographic territory for the
three years 2002, 2001 and 2000 is as follows (in thousands):
United States
Canada
United Kingdom
Other
Total
Year ended December 31,
2001
$ 38,805
10,635
2,182
5,983
$ 57,605
2000
$ 40,085
5,446
1,837
4,079
$ 51,447
2002
$44,454
6,938
1,693
6,448
$59,533
(11) Employee Retirement and Benefit Plans
A noncontributory defined benefit retirement plan is maintained for
all regular employees of the Company except those of Quest Medical.
This plan was amended effective January 1, 1998 to become a cash
balance pension plan. The Company’s funding policy is to make the
annual contributions required by applicable regulations and
recommended by its actuary.
The changes in the plan’s projected benefit obligation (“PBO”) as of
December 31, 2002 and 2001 are as follows (in thousands):
Change in Benefit Obligation:
Benefit obligation, January 1
Service cost
Interest cost
Amendments
Actuarial (gain)/loss
Benefits paid
Benefit obligation, December 31
2002
2001
$ 4,599
320
307
(616)
(93)
(347)
$ 4,170
$ 4,268
369
296
—
12
(346)
$ 4,599
In December 2002, the plan was amended to reduce benefit accruals
for future service by plan participants by approximately 50 percent.
This amendment caused a reduction in the PBO of approximately
$616,000, and is reflected as a reduction in pension expense over
the estimated employee service lives.
18
The changes in the fair value of plan assets, funded status of the
plan and the status of the prepaid pension benefit recognized, which
is included in the Company’s balance sheets as of December 31, 2002
and 2001 are as follows (in thousands):
Change in Plan Assets:
Fair value of plan assets,
January 1
Actual return on plan assets
Actual contributions
Benefits paid
Fair value of plan assets,
December 31
Funded status of plan
Unrecognized actuarial loss
Unrecognized prior service cost
Unrecognized net transition
obligation
Net amount recognized as
other assets
2002
2001
$ 4,550
(750)
930
(347)
$ 5,497
(601)
—
(346)
$ 4,383
$ 4,550
$
213
2,154
(539)
$
(49)
1,118
84
(132)
(175)
$ 1,696
$
978
The components of net periodic pension cost for 2002, 2001 and
2000 were as follows (in thousands):
Components of Net
Periodic Pension Cost:
Service cost
Interest cost
Expected return on assets
Prior service cost
amortization
Actuarial (gain)/loss
Transition amount
amortization
Net periodic pension cost $
Year ended December 31,
2001
2000
2002
$
$
320
307
(405)
369
296
(477)
$
383
271
(506)
7
28
6
—
6
(9)
(44)
213
$
(44)
150
$
(44)
101
Actuarial assumptions used to determine the values of the PBO at
December 31, 2002 and 2001 and the benefits cost for 2002, 2001
and 2000 included the following: a discount rate of 7.0 percent for
2002, and a discount rate of 7.25 percent for 2001 and 2000; an
estimated long-term rate of return on plan assets of 9 percent in
2002, 2001 and 2000; and an estimated weighted average rate of
(13) Quarterly Financial Data (Unaudited)
Quarterly financial data for 2002 and 2001 are as follows:
Quarter
Ended
Operating
Revenue
Operating
Income
Net
Income/
(Loss)
Income/
(Loss)
Per Basic
Share
03/31/02
06/30/02
09/30/02
12/31/02
(In thousands, except per share amounts)
$ 1,554
$ 14,825
1,401
14,775
1,385
14,662
1,442
15,271
1,095
1,097
1,031
.64
.64
.60
$ (634)(a) $ (.37)(a)
03/31/01
06/30/01
09/30/01
12/31/01
$ 14,803
14,776
15,418
12,608
$ 1,413
1,513
1,733
1,161
$ 905
$ .45
1,433(b)
6,503(c)
913
.71(b)
3.17(c)
.44
(a) Includes a $1.6 million after-tax charge ($ .96 per share) from
goodwill impairment (See Note 2)
(b) Includes a $.3 million after-tax gain ($.13 per share) from the
sale of a patent
(c) Includes a $5.3 million after-tax gain ($ 2.60 per share) from
discontinued operations (See Note 3)
19
compensation increase of 5 percent in 2002, 2001 and 2000. As of
December 31, 2002, the plan’s assets were invested in mutual funds
as follows: equity, 64 percent; fixed income, 28 percent; and money
market, 8 percent.
The Company also sponsors a defined contribution plan for all
employees. Each participant may contribute certain amounts of
eligible compensation. The Company makes a matching contribution
to the plan. The Company’s contribution under this plan was
$302,000 in 2002, $258,000 in 2001 and $272,000 in 2000.
(12) Commitments and Contingencies
The Company is subject to legal proceedings, third-party claims and
other contingencies related to product liability, regulatory, employee
and other matters that arise in the ordinary course of business. In
the opinion of management, the amount of potential liability with
respect to these actions will not materially affect the Company’s
financial position, results of operations or liquidity.
The Company has arrangements with its executive officers (the
“Executives”) pursuant to which the termination of their
employment under certain circumstances would result in lump sum
payments to the Executives. Termination under such circumstances in
2003 could result in payments aggregating $2.6 million, excluding
any excise tax that may be reimbursable by the Company.
In May 1996, Halkey-Roberts began leasing the land, building and
building improvements in St. Petersburg, Florida, which serve as
Halkey-Roberts’ headquarters and manufacturing facility, under a 10-
year lease. The lease provides for monthly payments, including
certain lease payment escalators, and provides for certain sublease
and assignment rights. The lease also provides the right of either the
landlord or Halkey-Roberts to terminate the lease on 12 months
notice effective at any time after May 21, 2003. The Company has
guaranteed Halkey-Roberts’ payment and performance obligations
under the lease. The lease is being accounted for as an operating
lease, and the rental expense for the years ended December 31,
2002, 2001 and 2000 was $384,000, $372,000 and $361,000,
respectively. Future minimum rental commitments under this lease
are $396,000, $409,000, $422,000 and $166,000 in 2003, 2004,
2005 and 2006, respectively.
R E P O R T O F
I N D E P E N D E N T P U B L I C A C C O U N T A N T S
To the Stockholders and the Board of Directors of Atrion Corporation:
We have audited the accompanying consolidated balance sheet of
Atrion Corporation (a Delaware corporation) and Subsidiaries as of
December 31, 2002, and the related consolidated statements of
income, changes in stockholders’ equity and cash flows for the year
then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion
on these financial statements based on our audit. The financial
statements of Atrion Corporation and Subsidiaries as of and for each
of the two years in the period ended December 31, 2001, were
audited by Arthur Andersen LLP who has ceased operations. Arthur
Andersen LLP expressed an unqualified opinion on those financial
statements in their report dated February 25, 2002.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Atrion Corporation and Subsidiaries as of December 31, 2002 and the
consolidated results of their operations and their consolidated cash
flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
20
As discussed above, the financial statements of Atrion Corporation
and Subsidiaries as of December 31, 2001, and for the two years in
the period then ended were audited by Arthur Andersen LLP who has
ceased operations. As described in Note 2, these financial statements
have been revised to include the transitional disclosures required by
Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, which was adopted by the
Company as of January 1, 2002. Our audit procedures with respect to
the disclosures in Note 2 with respect to 2001 and 2000 included
agreeing the previously reported net income to the previously issued
financial statements and the adjustments to reported net income
representing amortization expense (including any related tax effects)
recognized in those periods related to goodwill to the Company’s
underlying records obtained from management. We also tested the
mathematical accuracy of the reconciliation of adjusted net income
to reported net income, and the related income-per-share amounts.
In our opinion, the disclosures for 2001 and 2000 in Note 2 are
appropriate. However, we were not engaged to audit, review, or apply
any procedures to the 2001 or 2000 financial statements of the
Company other than with respect to such disclosures and,
accordingly, we do not express an opinion or any other form of
assurance on the 2001 or 2000 financial statements taken as a
whole.
Grant Thornton LLP
Dallas, Texas
February 7, 2003
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Atrion Corporation and Subsidiaries Annual Report
for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this Annual Report.
The consolidated balance sheet as of December 31, 2000 and the consolidated statements of income and cash flows for the year ended December
31, 1999 referred to in this report have not been included in the accompanying financial statements.
To the Stockholders and the Board of Directors of Atrion Corporation:
We have audited the accompanying consolidated balance sheets of
Atrion Corporation (a Delaware corporation) and subsidiaries as of
December 31, 2001 and 2000 and the related consolidated statements
of income and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Atrion
Corporation and subsidiaries as of December 31, 2001 and 2000 and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Atlanta, Georgia
February 25, 2002
M A N A G E M E N T ’ S D I S C U S S I O N
A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N
A N D R E S U L T S O F O P E R A T I O N S
Results of Operations
The Company’s income from continuing operations was $4.1 million,
or $2.37 per basic and $2.18 per diluted share, in 2002, compared
to income from continuing operations of $4.3 million, or $2.10 per
basic and $1.88 per diluted share, in 2001 and $2.7 million, or $1.30
per basic and $1.25 per diluted share, in 2000. Net income, including
discontinued operations and cumulative effect of accounting change,
totaled $2.6 million, or $1.51 per basic and $1.39 per diluted share,
in 2002, compared with $9.8 million, or $4.80 per basic and $4.30
per diluted share, in 2001 and $2.8 million, or $1.36 per basic and
$1.31 per diluted share, in 2000. The Company adopted Statement
of Financial Accounting Standards (“SFAS”) No. 142 effective January
1, 2002. The required adoption of SFAS No. 142 as discussed in Note
2 to the Company’s Consolidated Financial Statements included
herein is considered a change in accounting principle and the
cumulative effect of adopting this standard resulted in a $1.6
million, or $0.96 per basic and $0.88 per diluted share, non-cash,
after-tax charge in 2002.
Operating revenues were $59.5 million in 2002, compared with $57.6
million in 2001 and $51.4 million in 2000. The 3 percent revenue
increase in 2002 over the prior year reflected increases in revenues
primarily in products used by hospitals and surgeons partially offset
by a decline in sales of contact lens disinfection cases that the
Company’s customers distribute through retail outlets. The areas
which realized the greatest percentage increases in 2002 were the
Company’s fluid delivery products, kitting operations and
cardiovascular products. The 12 percent revenue increase in 2001
over 2000 reflected increases in revenues in most of the Company’s
major product lines. The areas which realized the greatest percentage
increases during 2001 were the Company’s ophthalmology products,
kitting operations and cardiovascular products.
The Company’s cost of goods sold was $39.2 million in 2002,
compared with $35.8 million in 2001 and $31.6 million in 2000. The
increase in cost of goods sold for 2002 over 2001 was primarily
related to a shift in product mix to products with lower gross margins
and the increase in revenues discussed above. The increase in cost
of goods sold for 2001 over 2000 was primarily related to the
increased sales mentioned above and increased costs of a specialty
resin used in one of the Company’s major products. This increase was
caused by a temporary shortage of supply of the resin caused by an
explosion at the supplier’s plant. This problem was resolved at the
end of 2001 and prices for this resin have since returned to normal.
Gross profit was $20.3 million in 2002, compared with $21.8 million
in 2001 and $19.9 million in 2000. The decrease in gross profit in
2002 from 2001 was primarily due to the above-mentioned shift in
product mix to products with lower gross margins. The increase in
gross profit in 2001 over 2000 was primarily related to increased
revenues. The Company’s gross profit in 2002 was 34 percent of
revenues compared with 38 percent of revenues in 2001 and 39
percent of revenues in 2000. The decline in gross profit percentage
in 2002 from the prior year was primarily due to the above-
mentioned shift in product mix. The decline in gross profit
percentage in 2001 from the prior year was primarily due to
increased costs of a specialty resin used in one of the Company’s
major products mentioned above.
Operating expenses were $14.5 million in 2002, compared with
$16.0 million in 2001 and $15.6 million in 2000. The decrease in
operating expenses in 2002 from 2001 was primarily attributable to
decreased general and administrative ("G&A") and selling ("Selling")
expenses partially offset by increased research and development
("R&D") expenses. G&A expenses for 2002 were $857,000 lower than
G&A expenses for 2001, primarily due to a decrease in amortization
expense as a result of a reduction in goodwill amortization in 2002
due to the adoption of SFAS No. 142 as discussed in Note 2 to the
Company’s Consolidated Financial Statements included herein. In
2002, G&A expense savings from restructuring certain of the
Company’s operations and reduced compensation and outside
services were partially offset by increases in insurance costs. The
decrease in Selling expenses of $905,000 in 2002 from 2001 was
primarily related to the full-year impact of restructuring the sales
force, which began in 2001, and continuing cost reduction efforts.
R&D expenses were $269,000 higher for 2002 compared with 2001.
This increase was primarily related to increased product development
activities. The increase in operating expenses in 2001 from 2000 was
primarily attributable to increased G&A expenses offset partially by
reductions in Selling expenses and, to a lesser extent, R&D expenses.
G&A expenses for 2001 were $1.3 million higher than the prior year,
primarily as a result of higher spending on outside services,
compensation and benefit programs. The decrease in Selling
expenses of $762,000 in 2001 from 2000 was primarily related to
restructuring of the sales force and reduced travel-related expenses.
R&D expenses were $143,000 lower for 2001 compared with 2000,
primarily as a result of reduced spending on outside services and
qualification materials.
The Company’s operating income for 2002 was $5.8 million,
compared with $5.8 million in 2001 and $4.2 million in 2000.
Revenue growth, cost containment and cost reduction activities
during 2002 were offset by lower gross margins, which combined to
cause relatively flat operating results. Revenue growth, cost
containment and cost reduction activities were the major
contributors to the operating income improvements during 2001.
Interest expense was $432,000 in 2002, compared to $300,000 in
2001 and $748,000 in 2000. The increase in 2002 is primarily related
to higher average borrowings during 2002 as compared with 2001
partially offset by a significant reduction in interest rates in 2002.
The higher average borrowing during 2002 is primarily related to
borrowing of funds under the Company’s revolving credit facility in
late December 2001 in connection with its repurchase of outstanding
common stock of the Company under a tender offer. The reduction in
2001 from 2000 was primarily related to lower interest rates and the
Company’s lower average borrowing level in 2001. The other income
in 2001 was primarily related to the Company’s one-time pre-tax gain
of $428,000 on the sale of a patent.
Income tax expense in 2002 totaled $1,403,000, compared with
$1,803,000 in 2001 and $923,000 in 2000. The effective tax rates
for 2002, 2001 and 2000 were 25.7 percent, 29.7 percent and 25.7
21
22
percent, respectively. Benefits from tax incentives for exports and
R&D expenditures totaled $408,000 in 2002, $404,000 in 2001 and
$395,000 in 2000. The lower effective tax rate in 2002 is primarily
a result of benefits from tax incentives for exports and R&D
expenditures being a larger percentage of taxable income in 2002
than in 2001 and the utilization of capital loss carryforwards in
2002. The higher effective tax rate in 2001 is primarily a result of
benefits from tax incentives for exports and R&D expenditures being
a lesser percentage of taxable income in 2001 than in 2000.
The Company believes that 2003 revenues will be higher than 2002
revenues and that the cost of goods sold, gross profit, operating
income and income from continuing operations will each be higher
in 2003 than in 2002. The Company further believes that it will have
continuing growth in most of its product lines in 2003,
complemented by the introduction of new products, and that it will
have annual growth in earnings per share from continuing operations
of 15 percent or more for at least the next several years.
Discontinued Operations
During 1997, the Company sold all of its natural gas operations. The
financial statements presented herein reflect the Company’s natural
gas operations as discontinued operations for all periods presented.
The financial statements also reflect an after-tax gain on disposal of
these discontinued operations of $.2 million, or $.10 per basic and
$.09 per diluted share, in 2002; $5.5 million, or $2.70 per basic and
$2.42 per diluted share, in 2001; and $.1 million, or $.06 per basic
and diluted share, in 2000.
In addition to the initial consideration received in 1997 upon the
sale of the natural gas operations, certain annual contingent
deferred payments of up to $250,000 per year were to be paid to the
Company over an eight-year period which began in 1999, with the
amount paid each year to be dependent upon revenues received by
the purchaser from certain gas transportation contracts. The
Company received deferred payments of $250,000 each, before tax,
from the purchaser in April 2002, 2001 and 2000 which are reflected
in each year as a gain from discontinued operations of $165,000, net
of tax. The 2001 gain also includes a $5,327,000 non-cash gain from
reversal of a reserve established when the Company disposed of its
natural gas operations in 1997. This reversal in the third quarter of
2001 followed the resolution of an outstanding contingency related
to the sale of those assets. The 2000 gain reflected above is net of
a $36,000 loss, net of tax, related to the sale of certain residual
properties associated with the Company’s natural gas operations.
Liquidity and Capital Resources
The Company has a $25 million revolving credit facility (the "Credit
Facility") with a regional bank to be utilized for the funding of
operations and for major capital projects or acquisitions subject to
certain limitations and restrictions (see Note 4 of Notes to
Consolidated Financial Statements). Borrowings under the Credit
Facility bear interest that is payable monthly at 30-day, 60-day or
90-day LIBOR, as selected by the Company, plus one percent. At
December 31, 2002, the Company had outstanding borrowings of
$10.3 million under the Credit Facility. The Credit Facility, which
expires November 12, 2004, and may be extended under certain
circumstances, contains various restrictive covenants, none of which
is expected to impact the Company’s liquidity or capital resources.
As of December 31, 2002, the Company had cash and cash
equivalents of $353,000, compared with $542,000 at December 31,
2001. The Company had long-term debt as of December 31, 2002, of
$10.3 million compared with $17.1 million as of December 31, 2001.
The decrease in long-term debt in 2002 from 2001 is primarily
attributable to the Company’s use of cash flows from continuing
operations to reduce its borrowing level. The long-term debt at
December 31, 2001, was primarily related to a $17.4 million
repurchase by the Company of outstanding common stock of the
Company under a tender offer in December 2001. Cash provided by
continuing operations increased to $9.9 million in 2002, compared
to $8.7 million in 2001 and $7.4 million in 2000. Capital
expenditures for property, plant and equipment for continuing
operations totaled $3.3 million in 2002, compared with $2.8 million
in 2001 and $3.3 million in 2000.
The table below summarizes debt, lease and other minimum
contractual obligations outstanding at December 31, 2002:
Contractual
obligations
Payments due by year
Total
2003
2004
2005
2006
(in thousands)
Credit facility
75 $ 916 $9,346
Operating leases $ 1,393 $ 396 $ 409 $ 422 $ 166
$10,337
— $
The payment schedule for the Credit Facility assumes at maturity,
November 2004, the Company would convert this outstanding debt
to a two year term note as allowed by the terms of the agreement.
The Company adopted SFAS No. 142 effective January 1, 2002. The
required adoption of SFAS No. 142 is considered a change in
accounting principle and the cumulative effect of adopting this
standard resulted in a $1.6 million non-cash, after-tax charge in
2002. This charge had no effect on the Company’s cash position or
the balance of its outstanding indebtedness, and it did not have any
impact on earnings from continuing operations in 2002. As
previously discussed, the Company recorded a non-cash gain from
discontinued operations during 2001 related to the reversal of a
reserve established when the Company disposed of its natural gas
operations in 1997. This gain had no effect on the Company’s cash
position or the balance of its outstanding indebtedness, and it did
not have any impact on earnings from continuing operations in
2001.
The Company believes that its existing cash and cash equivalents,
cash flows from operations and borrowings available under the
Company’s Credit Facility, supplemented, if necessary, with equity or
debt financing, which the Company believes would be available, will
be sufficient to fund the Company’s cash requirements for at least
the foreseeable future.
The Company assesses goodwill for impairment pursuant to SFAS No.
142 which requires that the goodwill be assessed whenever events or
changes in circumstances indicate that the carrying value may not
be recoverable, or, at a minimum, on an annual basis by applying a
fair value test.
Forward-looking Statements
The statements in this Management’s Discussion and Analysis and
elsewhere in this Annual Report that are forward-looking are based
upon current expectations, and actual results may differ materially.
Therefore, the inclusion of such forward-looking information should
not be regarded as a representation by the Company that the
objectives or plans of the Company will be achieved. Such
statements include, but are not limited to, the Company’s
expectations regarding future revenues, cost of goods sold, gross
profit, operating income, income from continuing operations, cash
flows from operations, growth in product lines, annual growth in
earnings per share from continuing operations, and availability of
equity and debt financing. Words such as "anticipates," "believes,"
"intends," "expects" and variations of such words and similar
expressions are intended to identify such forward-looking
statements. Forward-looking statements contained herein involve
numerous risks and uncertainties, and there are a number of factors
that could cause actual results to differ materially, including, but not
limited to, the following: changing economic, market and business
conditions; acts of war or terrorism; the effects of governmental
regulation; the impact of competition and new technologies; slower-
than-anticipated introduction of new products or implementation of
marketing strategies; implementation of new manufacturing
processes or implementation of new information systems; the
Company’s ability to protect its intellectual property; changes in the
prices of raw materials; changes in product mix; product liability
claims and product recalls; the ability to attract and retain qualified
personnel and the loss of any significant customers. In addition,
assumptions relating to budgeting, marketing, product development
and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic review which may
cause the Company to alter its marketing, capital expenditures or
other budgets, which in turn may affect the Company’s results of
operations and financial condition.
23
Companies sometimes establish legal entities for a specific business
transaction or activity in the form of a Special Purpose Entity
(“SPE”). SPEs may be used to facilitate off-balance sheet financing,
acquiring financial assets, raising cash from owned assets and similar
transactions. The Company has no SPEs, no off-balance sheet
financing arrangements or any derivative financial instruments.
In January 1998, the Board of Directors discontinued the payment of
quarterly cash dividends. Such action was taken to facilitate the
Company’s growth strategy as well as to bring the Company’s
dividend policy more in line with other companies in the medical
products industry.
Impact of Inflation
The Company experiences the effects of inflation primarily in the
prices it pays for labor, materials and services. Over the last three
years, the Company has experienced the effects of moderate inflation
in these costs. At times, the Company has been able to offset a
portion of these increased costs by increasing the sales prices of its
products. However, competitive pressures have not allowed for full
recovery of these cost increases.
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued SFAS
No. 148. The impact to the Company for this item is described in
Note 1 of Notes to Consolidated Financial Statements.
Critical Accounting Policies
In the ordinary course of business, the Company has made estimates
and assumptions relating to the reporting of results of operations
and financial condition in the preparation of its financial statements
in conformity with accounting principles generally accepted in the
United States of America. The Company believes the following
discussion addresses the Company's most critical accounting policies,
which are those that are most important to the portrayal of the
Company's financial condition and results and require management's
most difficult, subjective and complex judgments, often as a result
of the need to make estimates about the effect of matters that are
inherently uncertain. Actual results could differ significantly from
those estimates under different assumptions and conditions.
The Company assesses the impairment of its long-lived identifiable
assets excluding goodwill, which is tested for impairment pursuant
to SFAS No. 142 as explained below, whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. This review is based upon projections of anticipated
future cash flows. While the Company believes that its estimates of
future cash flows are reasonable, different assumptions regarding
such cash flows or future changes in the Company’s business plan
could materially affect its evaluations. No such changes are
anticipated at this time.
S
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Emile A. Battat
Chairman of the Board and President
Atrion Corporation
Richard O. Jacobson
Chairman of the Board
Jacobson Companies
Des Moines, Iowa
John H. P. Maley
Chairman of the Board
Magister Corporation
Chattanooga, Tennessee
Jerome J. McGrath
Retired
Formerly Of Counsel to the law firm of
Gallagher, Boland, & Meiburger
Washington, D.C.
Hugh J. Morgan, Jr.
Chairman of the Board
National Bank of Commerce of Birmingham
Birmingham, Alabama
24
Roger F. Stebbing
President and Chief Executive Officer
Stebbing and Associates, Inc.
Signal Mountain, Tennessee
John P. Stupp, Jr.
Chief Operating Officer and
Executive Vice President
Stupp Bros., Inc.
St. Louis, Missouri
Margaret Maxwell Zagel
Co-General Counsel to and Head of the
Corporate Governance, Risk and
Crisis Management Group of
Altheimer & Gray
Chicago, Illinois
Jerome J. McGrath will retire
from his position on the Atrion
Corporation Board of Directors at
the end of his term expiring in
2003. We extend our deepest
gratitude and appreciation for
the extraordinary contribution
and insightful direction he has
brought to our company during
his years of service.
Emile A. Battat
Chairman of the Board and President
Jeffery Strickland
Vice President and Chief Financial
Officer, Secretary and Treasurer
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C O R P O R A T E I N F O R M A T I O N
Corporate Office
Registrar and Transfer Agent
Form 10-K
Atrion Corporation
One Allentown Parkway
Allen, Texas 75002
(972) 390-9800
www.atrioncorp.com
American Stock Transfer and Trust Company
59 Maiden Lane
New York, New York 10007
A copy of the Company’s
2002 Annual Report on Form
10-K, as filed with the
Securities and Exchange
Commission, may be
obtained by any stockholder
without charge by written
request to:
Corporate Secretary
Atrion Corporation
One Allentown Parkway
Allen, Texas 75002
Stock Information
The Company’s common stock is traded on The Nasdaq Stock Market (Symbol: ATRI). As of March 3, 2003,
there were approximately 1,400 stockholders, including beneficial owners holding shares in nominee or
“street” name. The high and low closing prices on The Nasdaq Stock Market for each quarter of 2001 and
2002 are shown below.
2001
Quarter Ended
March 31
June 30
September 30
December 31
2002
Quarter Ended
March 31
June 30
September 30
December 31
$
$
High
15.88
25.74
25.70
38.05
High
38.14
32.51
28.09
23.90
$
$
Low
13.75
15.19
19.51
23.39
Low
26.91
26.82
18.31
17.31
The Company paid no cash dividends on its common stock during 2001 or 2002 and presently has no plans to pay
cash dividends in the future.
MPS and LacriCATH are registered trademarks of Atrion Corporation.
A t r i o n C o r p o r a t i o n • O n e A l l e n t o w n P a r k w a y • A l l e n , Te x a s 7 5 0 0 2 • ( 9 7 2 ) 3 9 0 - 9 8 0 0
w w w. a t r i o n c o r p . c o m