C O N T I N U I N G G R O W T H
2 0 0 4 A N N U A L R E P O R T
A company that meets the market with products that perform, year after year.
A company where dedicated people drive continuing improvement.
A company where earnings have increased by more than 15 percent for six consecutive years.
It all adds up to continuing growth.
Financial Highlights
Letter to Stockholders
Financial Information
3
4
7
Corporate Information
24
2004
FINANCIAL
Earnings Per Diluted Share
From
Continuing Operations
Revenues
in millions
Operating Income
in millions
$3.50
3.00
2.50
2.00
1.50
1.00
.50
$70
60
50
40
30
20
10
$9.0
7.0
5.0
3.0
1.0
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
HIGHLIGHTS
For the year ended December 31,
2004
2003
Revenues
Operating income
Income from continuing operations
$
66,081,000
$
62,803,000
8,596,000
6,305,000
6,923,000
4,892,000
Earnings per diluted share from continuing operations
$
3.41
$
2.66
Weighted average diluted shares outstanding
1,850,000
1,839,000
As of December 31,
Total assets
Working capital
Long-term debt
Stockholders’ equity
2004
2003
$
67,408,000
$
60,050,000
19,206,000
2,936,000
13,803,000
4,287,000
$
50,603,000
$
44,604,000
3
Over the last few years, our country and our economy
were impacted by a rapid-fire series of events. The
tragedy of the September 11 terrorist attacks. The
2001 recession. The corporate governance and
accounting scandals. The turbulence in the stock
market. The war in Iraq. And, most recently, the
sharp rise in energy costs. Each of these left in its
wake an aftermath of adverse developments that
touched every aspect of our economy. As with all
American businesses, our company faced significant
challenges during these times. Our customers and
our suppliers also faced these challenges, further
impacting the company. It is good, finally, to be in
the process of recovery from this challenging period
in U.S. history.
At Atrion, we weathered these unprecedented events
with an unchanged focus on continuing growth. Over
the years, we have worked hard to develop a strong
financial foundation and to employ strategies to
sustain our company through periods of both
challenge and opportunity. We’re pleased to report
that, through the turmoil of recent times, Atrion
continued to produce steady growth in all key
aspects of its business.
$7.26
$6.33
$5.48
$8
7
6
5
4
3
2
1
$4.78
$3.92
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
EBITDA Per Diluted
Share From Continuing
Operations
4
TO OUR
Continuing Financial Strength
On the financial front, 2004 was a good year for our
company. One indication of our ability to deliver
continuing growth can be seen in our earnings per
share performance. In 2004, earnings per diluted
share from continuing operations increased by 28
percent over the prior year, from $2.66 to $3.41.
This marks the sixth consecutive year that we have
posted earnings per share growth in excess of 15
percent, ranging from 16 percent to 50 percent.
Operating income improved by 24 percent in 2004, to
$8.6 million from $6.9 million in 2003.
With increased sales in most of our product lines, our
revenues continued to show steady growth, despite
fluctuating conditions in our markets and the
economy over the past few years. Revenues in 2004
were 5 percent higher, rising to $66.1 million from
$62.8 million for 2003. During the year, we saw
considerable increases in sales of our fluid delivery,
cardiovascular and other products. However, this
growth was masked by a substantial decline in
ophthalmic sales following the completion of a
contract in late 2003.
Our generation of strong cash flow enables us to do a
number of things that we think are fundamental to
our financial strength. In 2004, we made progress in
all these areas: funding the operational needs of our
business, investing in future growth, reducing
indebtedness and returning value to our stockholders.
In 2004, we took the first steps toward the
construction of a new manufacturing facility in St.
Petersburg, Florida, which will provide the much-
needed expansion of production capacity for our
operations there. In early 2005, we entered into an
agreement to purchase 10 acres of land for the two-
STOCKHOLDERS
In 2004 we successfully employed a number of
efficiency improvements which contributed to a 24
percent increase in operating income. We worked to
improve productivity by investing more than $5.6
million in manufacturing equipment and expanded
production capacity. The upgrading of technology
and automation processes enables us to increase
output and improve productivity, providing both
near- and long-term benefit for our operations.
phase development, which is expected to cost
between $16 million and $18 million, including the
land cost. The initial phase calls for a 165,000-sq.-ft.
facility to be completed in 2006. To facilitate a
smooth transition of people and equipment, we
selected a site that is in close proximity to our
current facility, less than four miles away.
Even with capital outlays in 2004 of $5.6 million for
equipment and $3.75 million for a deposit on the
land in St. Petersburg, we further reduced our long-
term debt, from $4.3 million at year-end 2003 to $2.9
million at the end of 2004. We view this as a sign of
continuing financial strength and stewardship.
As always, returning value to our stockholders is a
high priority. In 2004, we continued the payment of
quarterly dividends on the company’s common stock
which we began in September 2003. The quarterly
cash dividend was increased from 12 cents per share
to 14 cents per share in September 2004, reflecting
our continued growth in earnings.
Continuing Operational Improvement
Atrion has three facilities with more than 320,000
square feet devoted to design, engineering,
manufacturing, marketing, and research and
development activities. In a world that is
increasingly inclined toward the outsourcing of all
these functions, we proudly and sensibly keep 100
percent of our manufacturing operations in the
United States.
Our goal is to consistently deliver superior quality
and value, at the right time and the right price.
To achieve that, we must continually look for ways
to improve every aspect of our operations to ensure
that we are making the best use of our assets
and resources.
Continuing Product Improvement
Atrion is a leading supplier of medical devices and
components to niche markets, primarily serving the
cardiovascular, ophthalmic and fluid delivery markets.
Over the years, our experience and reputation have
helped us become the leading U.S. manufacturer of
products in a number of markets, including soft
contact lens disinfection cases, catheters for the
treatment of tear duct obstruction, clamps for IV
sets, vacuum relief valves, surgical tapes used in
minimally invasive surgeries, and check valves. Our
leading position and our reputation for quality in the
medical valve market have taken us into the marine
and aviation market as well, where we are the leading
domestic manufacturer of valves and inflation devices
used in safety products such as life vests and
inflatable boats.
In the cardiovascular arena we continue to increase
market share with our innovative MPS® Myocardial
Protection System, utilized in over 30,000 cardiac
CARDIOVASCULAR
25%
OTHER
25%
2004 Revenues by
Product Line
FLUID DELIVERY
26%
OPHTHALMOLOGY
24%
5
member of our board since 1996, he passed away in
January 2005. He leaves us with the memory of his
energy and character, and the legacy of his wisdom
and advice. We are a better company because of his
presence here and are greatly saddened by his loss.
By its very definition, continuing growth is an
ongoing process. It is something we seek to achieve
day after day and year after year. We know that to
deliver continuing growth, we must keep investing
in things that have a large and lasting impact. Our
products. Our facilities. Our equipment. Our
technology. And, above all, our people. We must
remember that our employees are the drivers of our
success and they should be recognized and valued,
always. We must not waver in our commitment to
our customers or our responsibility to our
stockholders. We look forward to leveraging the
successful principles of our past, fully utilizing the
assets and resources at our disposal, and tapping
the vast reserve of energy and experience of our
people to take us into the future--a future of
continuing growth.
Sincerely,
Emile A. Battat
Chairman of the Board and President
procedures in 2004. This proprietary technology
delivers essential medicated blood solutions at
specific temperatures and pressures to the heart
during cardiac surgery. In 2005 we are introducing
the next-generation product, the MPS 2, which
features an expanded flow range, cyclic flow to mimic
normal blood pressure, and a special low-volume flow
mode for pediatric applications. We expect the
increased awareness of best practices and the
introduction of the MPS 2 to drive continued success
in this market.
Our focus on making products that meet the
emerging needs of niche markets in the health care
industry means we are continually developing our
pipeline of new products and extensions of our
existing product lines.
Continuing Growth
In 2004, Atrion was recognized by Fortune magazine
as one of the 100 Fastest Growing Small Companies in
America. While rapid growth is not the primary
objective of our business strategy, steady and
sustainable growth is. We think that the principles
guiding our quest for continuing growth have put us
on a track for progress and performance that will go
on, year after year. These principles, which have
served us well through the changes and challenges of
past years, will be our foundation for future growth.
One of the key drivers of our success is our people.
We are privileged to have the experience and
dedication of many individuals on our team. As we
begin 2005, we pay tribute to John Maley, who
contributed much to our growth over the years. A
6
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)
2004
2003
2002
2001
2000
Revenues
Income from continuing operations
Net income
Total assets
Long-term debt
Income from continuing operations, per diluted share
Net income per diluted share
Cash dividends per common share
Average diluted shares outstanding
$ 66,081
$
62,803
$ 59,533
$ 57,605
$ 51,447
6,305
6,470
67,408
2,936
3.41
3.50
.52
1,850
4,892
5,057
60,050
4,287
2.66
2.75
.24(a)
1,839
4,065
2,589(b)
60,807
10,337
2.18
1.39(b)
—
1,863
4,262
9,754(c)
65,555
17,125
1.88
4.30(c)
—
2,272
2,663
2,792
63,690
7,400
1.25
1.31
—
2,135
(a) Dividends on outstanding common shares paid in the 3rd and 4th quarters at $.12 per share
(b) Includes a $1.6 million after-tax goodwill impairment charge ($.88 per diluted share)
(c) Includes a $5.5 million after-tax gain ($2.42 per diluted share) from discontinued operations
2004 FINANCIAL INFORMATION
R E C O N C I L I A T I O N O F N O N - G A A P F I N A N C I A L M E A S U R E S
EBITDA Per Diluted Share From Continuing Operations
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004
2003
2002
2001
2000
Income from continuing operations
$
6,305
$
4,892
$
4,065
$
4,262
$
2,663
Add:
Interest expense (income), net
Income tax expense
Depreciation and amortization
EBITDA
Average diluted shares outstanding
EBITDA per Diluted Share from Continuing Operations
$
48
2,289
4,792
126
1,879
4,746
354
1,403
4,384
223
1,803
4,569
$ 13,434
$
11,643
1,850
7.26
1,839
6.33
$
$
$
10,206
$
10,857
1,863
5.48
$
2,272
4.78
$
$
654
923
4,119
8,359
2,135
3.92
EBITDA per diluted share from continuing operations, a non-GAAP financial measure, is computed by the Company as EBITDA divided by weighted average diluted shares
outstanding. The company computes EBITDA by adding income from continuing operations, net interest expense/(income), income tax expense, depreciation and
amortization.
7
7
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
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
Net Income Per Basic Share
Weighted Average Basic Shares Outstanding
Income Per Diluted Share:
Continuing operations
Discontinued operations
Cumulative effect of accounting change
Net Income Per Diluted Share
Weighted Average Diluted Shares Outstanding
The accompanying notes are an integral part of these statements.
8
8
FOR THE YEAR ENDED DECEMBER 31,
2004
2003
2002
$ 66,081
$ 62,803
$ 59,533
40,804
25,277
5,676
8,631
2,374
16,681
8,596
45
(93)
46
8,594
(2,289)
6,305
165
—
6,470
3.68
.10
—
3.78
1,711
3.41
.09
—
3.50
$
$
$
$
$
40,564
22,239
5,594
7,576
2,146
15,316
6,923
69
(195)
(26)
6,771
(1,879)
4,892
165
—
5,057
2.86
.10
—
2.96
1,711
2.66
.09
—
2.75
$
$
$
$
$
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)
1.51
1,711
2.18
.09
(.88)
1.39
$
$
$
$
$
1,850
1,839
1,863
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A S S E T S
Current Assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
of $118 and $103 in 2004 and 2003, respectively
Inventories
Prepaid expenses
Land deposit
Deferred income taxes
Property, Plant and Equipment
Less accumulated depreciation and amortization
Other Assets and Deferred Charges:
Patents, net of accumulated amortization of $7,535 and $7,151 in 2004 and 2003, respectively
Goodwill
Other
L I A B I L I T I E S A N D S T O C K H O L D E R S ’ E Q U I T Y
Current Liabilities:
Accounts payable
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 $.10 per share, authorized 10,000 shares, issued 3,420 shares
Additional paid-in capital
Retained earnings
Treasury shares, 1,701 shares in 2004 and 1,720 shares in 2003, at cost
AS OF DECEMBER 31,
2004
2003
$
255
$
298
7,588
14,013
1,028
3,750
1,039
27,673
50,402
25,071
25,331
1,714
9,730
2,960
6,226
11,314
1,894
—
760
20,492
45,767
21,578
24,189
2,099
9,730
3,540
14,404
15,369
$ 67,408
$ 60,050
$
3,788
3,358
1,321
8,467
2,936
4,263
1,139
5,402
—
$
2,778
3,260
651
6,689
4,287
3,496
974
4,470
—
342
10,013
74,479
342
9,673
68,900
(34,231)
(34,311)
50,603
44,604
$ 67,408
$ 60,050
The accompanying notes are an integral part of these statements.
9
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
C A S H F L O W S F R O M O P E R A T I N G A C T I V I T I E S :
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
Accounts payable and accrued liabilities
Accrued income and other taxes
Other non-current liabilities
Net cash provided by continuing operations
Net cash provided by discontinued operations
C A S H F L O W S F R O M I N V E S T I N G A C T I V I T I E S :
Property, plant and equipment additions
Deposit on land purchase
C A S H F L O W S F R O M F I N A N C I N G A C T I V I T I E S :
Net change in line of credit
Issuance of treasury stock
Purchase of treasury stock
Dividends paid
N E T C H A N G E I N C A S H A N D C A S H E Q U I V A L E N T S
C A S H A N D C A S H E Q U I V A L E N T S , B E G I N N I N G O F Y E A R
C A S H A N D C A S H E Q U I V A L E N T S , E N D O F Y E A R
C A S H P A I D F O R :
Interest
Income taxes (net of refunds)
The accompanying notes are an integral part of these statements.
10
FOR THE YEAR ENDED DECEMBER 31,
2004
2003
2002
$
6,470
$
5,057
$
2,589
—
(165)
4,792
487
90
20
—
(165)
4,746
1,639
515
34
1,641
(165)
4,384
366
82
127
11,694
11,826
9,024
(1,362)
(2,698)
866
580
1,109
670
165
11,024
165
11,189
(5,570)
(3,750)
(9,320)
(1,351)
414
(84)
(891)
(1,912)
(43)
298
255
96
716
$
$
495
(1,003)
379
8
1,008
(208)
199
12,704
165
12,869
838
803
(810)
(240)
(307)
750
(190)
9,868
165
10,033
(4,215)
(3,279)
—
—
(4,215)
(3,279)
(6,050)
2,656
(4,909)
(406)
(8,709)
(55)
353
298
207
554
$
$
(6,788)
409
(564)
—
(6,943)
(189)
542
353
418
(340)
$
$
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
SHARES
OUTSTANDING
AMOUNT
SHARES
AMOUNT
ADDITIONAL
PAID-IN CAPITAL
RETAINED
EARNINGS
TOTAL
COMMON STOCK
TREASURY STOCK
Balance, January 1, 2002
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
53
(9)
(26)
82
149
(53)
443
9
26
(183)
(564)
Balance, December 31, 2002
1,706
342
1,714
(31,122)
8,222
Net income
Tax benefit from exercise
of stock options
Exercise of stock options
Purchase of treasury stock
Dividends
187
(193)
(187)
193
1,720
(4,909)
515
936
Balance, December 31, 2003
1,700
342
1,720
(34,311)
9,673
Net income
Tax benefit from exercise
of stock options
Exercise of stock options
Purchase of treasury stock
Dividends
21
(2)
(21)
2
164
(84)
90
250
2,589
2,589
82
592
(183)
(564)
41,691
5,057
515
2,656
(4,909)
(406)
44,604
6,470
90
414
(84)
(891)
64,249
5,057
(406)
68,900
6,470
(891)
B A L A N C E , D E C E M B E R 3 1 , 2 0 0 4
1,719
$
342
1,701
$ (34,231)
$ 10,013
$ 74,479
$ 50,603
The accompanying notes are an integral part of this statement.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S
Atrion Corporation designs, develops, manufactures, sells and distributes 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, 2004, 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”).
P R I N C I P L E S O F C O N S O L I D A T I O N
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.
F A I R V A L U E
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.
E S T I M A T E S
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.
F I N A N C I A L P R E S E N T A T I O N
Certain prior-year amounts have been reclassified to conform with the current-year presentation.
C A S H A N D C A S H E Q U I V A L E N T S
Cash equivalents are securities with original maturities of 90 days or less.
T R A D E R E C E I V A B L E S
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.
I N V E N T O R I E S
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,
Raw materials
Finished goods
Work in process
Total inventories
12
$
2004
5,665
4,595
3,753
$
2003
4,705
3,793
2,816
$ 14,013
$ 11,314
I N C O M E T A X E S
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 tax laws and rates applicable to the periods in which the differences are expected to
affect taxable income.
P R O P E R T Y , P L A N T A N D E Q U I P M E N T
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):
Land
Buildings
Machinery and equipment
Total property, plant and equipment
DECEMBER 31,
DECEMBER 31,
$
2004
1,506
9,147
$
2003
1,506
8,981
39,749
35,280
$ 50,402
$ 45,767
USEFUL
LIVES
—
30-40 yrs
3-10 yrs
Depreciation expense of $4,408,000, $4,442,000 and $4,080,000 was recorded for the years ended December 31, 2004, 2003 and 2002,
respectively.
P A T E N T S
Cost for patents acquired is determined at acquisition date. Patents are amortized over the remaining lives of the individual patents,
which are three to 13 years. Patents are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable.
G O O D W I L L
Goodwill represents the excess of cost over the fair 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 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.
R E V E N U E S
The Company recognizes revenue when its products are shipped to its customers and distributors, provided an arrangement exists, the
fee is fixed and determinable and collectibility is reasonably assured. Net sales represent gross sales invoiced to customers, less certain
related charges, including discounts, returns and other allowances. Returns, discounts and other allowances have been insignificant
historically.
S H I P P I N G A N D H A N D L I N G P O L I C Y
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.
R E S E A R C H A N D D E V E L O P M E N T C O S T S
Research and development costs relating to the development of new products and improvements of existing products are expensed as
incurred.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
S T O C K - B A S E D C O M P E N S A T I O N
At December 31, 2004, the Company had two 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.
In December 2004, the Financial Accounting Standards Board issued a revision of FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123R"). SFAS No. 123R supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and
requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, and recognize that cost over the vesting period. SFAS No. 123R is effective for the first interim or
annual period beginning after June 15, 2005. The Company will begin recognizing option expense starting July 1, 2005. Since most
of the Company’s outstanding options will have vested prior to July 1, 2005, the amount of expense to be recognized for options starting
in the third quarter of 2005 is not expected to be significant.
The following table illustrates the effect on net income and income per share if the Company had applied the fair value recognition
provisions of SFAS No. 123R to stock-based employee compensation:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income, as reported
Deduct: Total stock-based employee compensation expense determined under
fair value-based methods for all awards, net of tax effects
Pro forma net income
Income per share:
Basic — as reported
Basic — pro forma
Diluted — as reported
Diluted — pro forma
YEAR ENDED DECEMBER 31,
2004
2003
2002
$
6,470
$
5,057
$
2,589
(658)
(526)
(691)
$
5,812
$
4,531
$
1,898
$
$
$
$
3.78
3.40
3.50
3.14
$
$
$
$
2.96
2.65
2.75
2.46
$
$
$
$
1.51
1.11
1.39
1.02
N E W A C C O U N T I N G P R O N O U N C E M E N T S
In addition to SFAS No. 123R more fully discussed above, the FASB issued SFAS No. 151, “Inventory Costs,” which amends Accounting
Research Bulletin 43, Chapter 4, “Inventory Pricing,” to clarify that abnormal amounts of idle facility expense, freight, handling costs
and spoilage should be recognized as current period expenses. Also, the Statement requires fixed overhead costs to be allocated to
inventory based on normal production capacity. SFAS No. 151 is effective for inventory costs incurred in fiscal years beginning after
June 15, 2005. The Company does not expect a material effect from adoption of this pronouncement.
2
G O O D W I L L A N D I N T A N G I B L E A S S E T S
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. In connection with its
adoption of SFAS No. 142, the Company conducted an impairment analysis that revealed that the Quest Medical reporting unit was
impaired, resulting in a write-down of goodwill in the first quarter of 2002 of $1.6 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 for the Company totaled $9.7 million at December 31, 2004.
14
Intangible assets consist of the following (dollars in thousands):
Amortizable intangible assets:
Patents
Intangible assets not subject to amortization:
Goodwill
AVERAGE
LIFE
(YEARS)
12.85
DECEMBER 31, 2004
DECEMBER 31, 2003
GROSS
CARRYING
AMOUNT
ACCUMULATED
AMORTIZATION
GROSS
CARRYING
AMOUNT
ACCUMULATED
AMORTIZATION
$
$
9,250
$
7,535
9,730
—
$
$
9,250
$
7,151
9,730
—
Aggregate amortization expense for patents was $384,000 for 2004 and $304,000 for each of 2003 and 2002.
Estimated future amortization expense for each of the years set below ending December 31, is as follows (in thousands):
2005
2006
2007
2008
$
$
$
$
205
155
144
144
There was no change in the carrying amounts of goodwill for 2004 or 2003.
3
D I S C O N T I N U E D O P E R A T I O N S
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 in each of 2004, 2003 and 2002. These amounts are net of income tax
expense of $85,000 in each of the three years.
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 2004, 2003 and 2002 which are reflected in each
year as a gain from discontinued operations of $165,000, net of tax.
4
L I N E O F C R E D I T
The Company has a revolving credit facility (“Credit Facility”) with a money center bank. Under the Credit Facility, the Company and
certain of its subsidiaries have a line of credit of $25 million which is secured by substantially all inventories, 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 (3.38 percent at December 31, 2004) and is payable monthly. At December 31, 2004 and 2003, $2.9 million and $4.3
million, respectively, was outstanding under the line of credit. The Credit Facility expires November 12, 2006 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, 2004, the Company was in compliance with all financial
covenants.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
I N C O M E T A X E S
The items comprising income tax expense for continuing operations are as follows (in thousands):
Current — Federal
— State
Deferred — Federal
— State
YEAR ENDED DECEMBER 31,
2004
$
1,807
$
91
1,898
380
11
391
2003
914
32
946
912
21
933
2002
$
1,081
(44)
1,037
327
39
366
Total income tax expense
$
2,289
$
1,879
$
1,403
Temporary differences and carryforwards which have given rise to deferred income tax assets and liabilities as of December 31, 2004 and
2003 are as follows (in thousands):
2004
2003
$
$
$
$
$
$
$
187
517
413
443
1,560
4,222
562
4,784
3,224
4,263
1,039
3,224
$
$
$
$
$
$
$
654
492
374
208
1,728
3,838
626
4,464
2,736
3,496
760
2,736
D E F E R R E D T A X A S S E T S :
Patents and goodwill
Benefit plans
Inventories
Other
Total deferred tax assets
D E F E R R E D T A X L I A B I L I T I E S :
Property, plant and equipment
Pensions
Total deferred tax liabilities
Net deferred tax liability
B A L A N C E S H E E T C L A S S I F I C A T I O N :
Non-current deferred income tax liability
Current deferred income tax asset
Net deferred tax liability
16
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):
Income tax expense at the statutory federal income tax rate
$
2,922
$
2,298
$
1,858
YEAR ENDED DECEMBER 31,
2004
2003
2002
Increase (decrease) resulting from:
State income taxes
R&D credit
Foreign sales benefit
Other, net
Total income tax expense
6
S T O C K H O L D E R S ’ E Q U I T Y
67
(75)
(441)
(184)
34
(100)
(250)
(103)
80
(164)
(244)
(127)
$
2,289
$
1,879
$
1,403
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 1,900, 20,200 and
26,000 shares during the years 2004, 2003 and 2002, respectively, at per share prices ranging from $20.51 to $44.16. As of December
31, 2004, authorization for the repurchase of 92,100 additional shares remained. The Company purchased 173,614 shares of its common
stock at $23.00 per share in April 2003 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.
In September 2003, the Company announced that it had adopted a policy for the payment of regular quarterly cash dividends on the
Company's common stock. The Company began paying a quarterly cash dividend of $.12 per common share starting in September of 2003.
The quarterly dividend was increased to $.14 per common share in September of 2004.
7
I N C O M E P E R S H A R E
The following is the computation for basic and diluted income per share from continuing operations:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income from continuing operations
Weighted average basic shares outstanding
Add: Effect of dilutive securities (options)
Weighted average diluted shares outstanding
Income per share from continuing operations:
Basic
Diluted
YEAR ENDED DECEMBER 31,
2004
6,305
1,711
139
1,850
3.68
3.41
$
$
$
2003
4,892
1,711
128
1,839
2.86
2.66
$
$
$
2002
4,065
1,711
152
1,863
2.37
2.18
$
$
$
For the years ended December 31, 2004, 2003 and 2002, options to purchase approximately 26,000, 25,250 and 40,625 shares of
common stock, respectively, were not included in the computation of diluted income per share because their effect would have been
antidilutive.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
S T O C K O P T I O N P L A N S
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. Under the 1997 Stock Incentive Plan, 624,425 shares, in the aggregate, of common stock were
reserved for grants. 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 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 1998 Outside Directors Stock Option Plan, all outstanding
options under this plan continue to be governed by the terms and conditions of the plan and the existing option agreements for those
grants.
Option transactions for the three years in the period ended December 31, 2004 are as follows:
WEIGHTED AVERAGE
SHARES
EXERCISE PRICE
324,850
201,500
(5,500)
(53,500)
467,350
12,000
(4,550)
(187,200)
287,600
62,000
(21,100)
328,500
261,100
217,000
287,250
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
11.62
21.05
8.34
11.06
15.82
29.30
20.18
14.19
17.38
44.39
19.63
22.33
13.81
15.41
22.32
Options outstanding at January 1, 2002
Granted in 2002
Expired in 2002
Exercised in 2002
Options outstanding at December 31, 2002
Granted in 2003
Expired in 2003
Exercised in 2003
Options outstanding at December 31, 2003
Granted in 2004
Exercised in 2004
Options outstanding at December 31, 2004
Exercisable options at December 31, 2002
Exercisable options at December 31, 2003
Exercisable options at December 31, 2004
18
As of December 31, 2004, there remained 12,534 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, 2004:
RANGE OF EXERCISE PRICES
$6.875-$14.063
$14.875-$22.50
$26.13-$31.39
$43.75-$44.58
OPTIONS OUTSTANDING
OPTIONS EXERCISABLE
WEIGHTED
AVERAGE
NUMBER
REMAINING
OUTSTANDING
CONTRACTUAL LIFE
130,800
85,000
50,700
62,000
328,500
4.4 years
3.2 years
4.2 years
5.0 years
$
$
$
$
WEIGHTED
AVERAGE
EXERCISE
PRICE
11.44
18.28
30.23
44.39
WEIGHTED
AVERAGE
EXERCISE
PRICE
10.93
18.28
29.49
44.39
$
$
$
$
NUMBER
EXERCISABLE
109,300
85,000
30,950
62,000
287,250
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 of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2004, 2003 and 2002:
Risk-free interest rate
Dividend yield
Volatility factor
Expected life
2004
2.1%
1.1%
47.7%
2.8 years
2003
3.2%
0.0%
39.1%
7 years
2002
2.7%
0.0%
50.3%
2.7 years
The resulting estimated weighted average fair values of the options granted in 2004, 2003 and 2002 were $13.45, $13.51 and $7.25,
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. The option grants in 2003 and 2002 occurred prior to the declaration of dividends by the Company.
9
R E V E N U E S F R O M M A J O R C U S T O M E R S
The Company had one major customer which represented approximately $9.6 million (14.5 percent), $9.1 million (14.4 percent) and $7.4
million (12.4 percent) of the Company’s operating revenues during the years 2004, 2003 and 2002, respectively.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10 I N D U S T R Y S E G M E N T A N D G E O G R A P H I C I N F O R M A T I O N
The Company operates in one reportable industry segment: designing, developing, manufacturing, selling and distributing 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 2004, 2003 and 2002. Pipeline net
assets totaled $2.6 million at December 31, 2004 and 2003. Company revenues from sales to parties outside the United States totaled
approximately 30 percent, 26 percent and 25 percent of the Company’s total revenues in 2004, 2003 and 2002, respectively. No Company
assets are located outside the United States. A summary of revenues by geographic territory for the three years 2004, 2003 and 2002 is
as follows (in thousands):
United States
Canada
United Kingdom
Japan
Other
Total
YEAR ENDED DECEMBER 31,
2004
2003
2002
$ 46,375
$ 46,721
$ 44,454
9,113
1,883
1,739
6,971
8,620
1,547
902
5,013
6,938
1,693
865
5,583
$ 66,081
$ 62,803
$ 59,533
11
E M P L O Y E E R E T I R E M E N T A N D B E N E F I T P L A N S
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 Company uses a December 31 measurement
date for the plan.
The changes in the plan’s projected benefit obligation (“PBO”) as of December 31, 2004 and 2003 are as follows (in thousands):
C H A N G E I N B E N E F I T O B L I G A T I O N :
Benefit obligation, January 1
Service cost
Interest cost
Actuarial loss
Benefits paid
Benefit obligation, December 31
2004
2003
$
4,878
$
4,170
241
311
423
214
298
529
(314)
(333)
$
5,539
$
4,878
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.
20
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, 2004 and 2003 are as follows (in thousands):
C H A N G E I N P L A N A S S E T S :
Fair value of plan assets, January 1
Actual return on plan assets
Employer 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
2004
2003
$
5,413
$
4,383
$
$
562
—
(314)
5,661
122
2,122
(465)
(44)
$
$
963
400
(333)
5,413
535
1,941
(502)
(88)
$
1,735
$
1,886
The accumulated benefit obligation for the pension plan was $5,447,000 and $4,801,000 at December 31, 2004 and 2003, respectively.
The components of net periodic pension cost for 2004, 2003 and 2002 were as follows (in thousands):
C O M P O N E N T S O F N E T P E R I O D I C P E N S I O N C O S T :
Service cost
Interest cost
Expected return on assets
Prior service cost amortization
Actuarial loss
Transition amount amortization
Net periodic pension cost
YEAR ENDED DECEMBER 31,
2004
2003
2002
$
$
241
311
(423)
(37)
103
(44)
151
$
$
214
298
(349)
(37)
128
(44)
210
$
$
320
307
(405)
7
28
(44)
213
Actuarial assumptions used to determine benefit obligations at December 31 were as follows:
Discount rate
Rate of compensation increase
Actuarial assumptions used to determine net periodic pension cost were as follows:
Discount rate
Expected long-term return on assets
Rate of compensation increase
2004
6.00%
5.00%
YEAR ENDED DECEMBER 31,
2004
6.50%
8.00%
5.00%
2003
7.00%
8.00%
5.00%
2003
6.50%
5.00%
2002
7.25%
9.00%
5.00%
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s expected long-term rate of return assumption is based upon the plan’s actual long-term investment results as well as the
long-term outlook for investment returns in the marketplace at the time the assumption is made.
The Company’s pension plan assets at December 31, 2004 and 2003 were invested in the following asset categories:
A S S E T C A T E G O R Y :
Equity securities
Debt securities
Other
Total
2004
2003
74%
25%
1%
100%
73%
25%
2%
100%
It is the Company’s investment policy to maintain 66 percent to 79 percent of the plan’s assets in equity securities and 21 percent to
31 percent of its assets in debt securities with the balance invested in a money market account to meet liquidity requirements for
distributions. The asset allocation at December 31, 2004 represents the targeted asset allocation at that time. Based upon the plan’s
current funded position, the Company expects to make $200,000 in contributions to its pension plan in 2005.
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 $214,000,
$202,000 and $302,000 in 2004, 2003 and 2002, respectively.
12
C O M M I T M E N T S A N D C O N T I N G E N C I E S
The Company is subject to legal proceedings, third-party claims and other contingencies related to patent infringement, product liability,
regulatory, employee and other matters that arise in the ordinary course of business. During 2004, Halkey-Roberts became a party to
patent litigation with Filtertek, Inc., a subsidiary of ESCO Technologies, Inc. Filtertek has claimed that swabable valves manufactured
by Halkey-Roberts infringe on Filtertek's patent. The ongoing litigation before the United States District Court in Tampa, Florida is
expected to take a year or longer to be resolved. Filtertek is seeking, among other things, damages and injunctive relief. Halkey-Roberts
has asked the court to declare that Filtertek’s claims are without merit. Halkey-Roberts has also asked the court to invalidate Filtertek’s
patent. The Company intends to vigorously defend its right to manufacture and sell these swabable valves and believes that it has
meritorious defense to the claims in this action. However, there is a risk of an adverse decision that would negatively affect the
Company’s results of operations, financial condition and cash flows. During 2004, the Company accrued for legal costs associated with
this litigation as well as for two other legal proceedings. The Company believes these accruals are adequate to cover the legal fees and
expenses associated with litigating these matters. [The total amount accrued for these costs as of December 31, 2004 was $1.2 million.]
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 2005 could
result in payments aggregating $1.4 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. 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, 2004, 2003 and 2002 was $409,000, $396,000 and $384,000, respectively. Future minimum rental commitments
under this lease are $422,000 and $166,000 in 2005 and 2006, respectively.
During 2004, the Company began planning for the construction of a new facility for its Halkey-Roberts operation to be located
approximately four miles from its current facility. In 2004, the Company made a $3.75 million deposit required in connection with a
proposed purchase of ten acres of land to be used for the construction of this new facility. In early 2005, the Company entered into an
agreement to purchase that property. The Company anticipates spending an additional $12 million to $14 million for the construction
of a new facility for Halkey-Roberts at this site. The Company is planning to complete the construction of this new facility and move
the Halkey-Roberts operation into the new facility during 2006.
22
13 Q U A R T E R L Y F I N A N C I A L D A T A ( U N A U D I T E D )
The following table shows selected unaudited quarterly financial data for 2004 and 2003:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
03/31/04
06/30/04
09/30/04
12/31/04
03/31/03
06/30/03
09/30/03
12/31/03
OPERATING
REVENUE
$ 16,789
16,417
16,704
16,171
$ 15,721
16,175
16,117
14,790
OPERATING
INCOME
$ 1,901
2,064
2,217
2,414
$ 1,724
1,705
1,855
1,639
NET
INCOME
$
1,287
1,608
1,756
1,819
$
1,150
1,313
1,330
1,264
INCOME PER
BASIC SHARE
$
$
.76
.94
1.02
1.06
.65
.77
.79
.74
The quarterly information presented above reflects, in the opinion of management, all adjustments necessary for a fair presentation of
the results for the interim periods presented.
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
T O T H E S T O C K H O L D E R S A N D T H E B O A R D O F D I R E C T O R S O F A T R I O N C O R P O R A T I O N :
We have audited the accompanying consolidated balance sheets of Atrion Corporation (a Delaware corporation) and Subsidiaries as
of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders’ equity and cash flows
for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (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 consolidated financial position
of Atrion Corporation and Subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations and their
consolidated cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
Dallas, Texas
February 18, 2005
24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
O V E R V I E W
The Company designs, develops, manufactures, sells and
distributes products and components, primarily for the medical
and health care industry. The Company markets components to
other equipment manufacturers for incorporation in their
products and sells finished devices to physicians, hospitals,
including group health benefits. The Company has been
successful in consistently generating cash from operations and
has used that cash to reduce indebtedness, to fund capital
expenditures, to repurchase stock and, starting in 2003, to pay
dividends. During 2004, the Company reduced debt by
approximately 31.5 percent.
clinics and other treatment centers. The Company’s medical
The Company's strategic objective is to further enhance its
products primarily range from ophthalmology and cardiovascular
position in its served markets by:
products to fluid delivery devices. The Company’s other medical
and non-medical products
include obstetrics products,
instrumentation and disposables used in dialysis, contract
• Focusing on customer needs
• Expanding existing product lines and developing new
manufacturing and valves and inflation devices used in marine
products
and aviation safety products. In 2004 approximately 30 percent
of the Company's sales were outside the United States.
• Maintaining a culture of controlling cost
The Company's products are used in a wide variety of applications
• Preserving and fostering a collaborative, entrepreneurial
by numerous customers, the largest of which accounted for
management structure
approximately 14.5 percent of net sales in 2004. The Company
encounters competition in all of its markets and competes
primarily on the basis of product quality, price, engineering,
customer service and delivery time.
For the year ended December 31, 2004, the Company reported
revenues of $66.1 million, income from continuing operations of
$6.3 million and net income of $6.5 million, up 5 percent, 29
percent and 28 percent, respectively, from 2003.
The Company's strategy is to provide a broad selection of
products in the areas in which it competes. The Company focuses
R E S U L T S O F O P E R A T I O N S
its research and development efforts on improving current
products and developing highly engineered products that meet
customer needs and have the potential for broad market
applications and significant sales. Proposed new products may be
subject
to
regulatory clearance or approval prior
to
commercialization and the time period for introducing a new
product to the marketplace can be unpredictable. The Company
also focuses on controlling costs by investing in modern
manufacturing
technologies and controlling purchasing
processes. Over the past three years, the Company has continued
to be faced with increasing costs associated with insurance,
The Company’s income from continuing operations was $6.3
million, or $3.68 per basic and $3.41 per diluted share, in 2004,
compared to income from continuing operations of $4.9 million,
or $2.86 per basic and $2.66 per diluted share, in 2003 and $4.1
million, or $2.37 per basic and $2.18 per diluted share, in 2002.
Net income, including discontinued operations and cumulative
effect of accounting change, totaled $6.5 million, or $3.78 per
basic and $3.50 per diluted share, in 2004, compared with $5.1
million, or $2.96 per basic and $2.75 per diluted share, in 2003
and $2.6 million, or $1.51 per basic and $1.39 per diluted share,
25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
in 2002. The Company adopted Statement of Financial Accounting
than the products with lower revenues. The increase in cost of
Standards (“SFAS”) No. 142 effective January 1, 2002. The
goods sold for 2003 over 2002 was primarily related to the
required adoption of SFAS No. 142 as discussed in Note 2 to the
increase in revenues discussed above and increased insurance
Company’s Consolidated Financial Statements included herein is
costs partially offset by an improvement in manufacturing
considered a change in accounting principle and the cumulative
variances resulting from increased production volumes.
effect of adopting this standard resulted in a $1.6 million, or
$.96 per basic and $.88 per diluted share, non-cash, after-tax
charge in 2002.
Gross profit was $25.3 million in 2004, compared with $22.2
million in 2003 and $20.3 million in 2002. The Company’s gross
profit in 2004 was 38 percent of revenues compared with 35
Revenues were $66.1 million in 2004, compared with $62.8
percent of revenues in 2003 and 34 percent of revenues in 2002.
million in 2003 and $59.5 million in 2002. The 5 percent revenue
The increase in gross profit percentage in 2004 from the prior
increase in 2004 over the prior year was primarily attributable to
year was primarily due to the favorable shift in product mix
a 22 percent increase in the revenues of the Company’s
mentioned above, productivity improvements and improved
cardiovascular products, a 17 percent increase from the
manufacturing efficiencies. The increase in gross profit
Company’s fluid delivery products and a 7 percent increase from
percentage in 2003 from the prior year was primarily due to the
the Company’s other medical and non-medical products. These
above-mentioned improvement in manufacturing variances.
revenue increases were generally attributable to higher sales
volumes and were partially offset by an 18 percent decrease in
the revenues from the Company’s ophthalmic products following
the completion of a contract in 2003. The 5 percent revenue
increase in 2003 over the prior year was primarily attributable to
an 8 percent increase in the revenues of the Company’s
ophthalmic products, an 8 percent increase in the revenues of the
Company’s cardiovascular products, a 3 percent increase in the
Company’s fluid delivery products and a 2 percent increase in the
Company’s other medical and non-medical products.
Operating expenses were $16.7 million in 2004, compared with
$15.3 million in 2003 and $14.5 million in 2002. The increase in
operating expenses in 2004 from 2003 was primarily attributable
to increased general and administrative (“G&A”) and research and
development (“R&D”) expenses. G&A expenses consist primarily
of salaries and other related expenses of administrative,
executive and financial personnel and outside professional fees.
The increase in G&A expenses in 2004 was primarily attributable
to increased legal costs and compensation. The Company
anticipates that G&A expenses are likely to increase in the
The Company’s cost of goods sold was $40.8 million in 2004,
foreseeable future but at a rate less than the anticipated rate of
compared with $40.6 million in 2003 and $39.2 million in 2002.
increase in revenues. R&D expenses consist primarily of salaries
The 1 percent increase in cost of goods sold for 2004 over 2003
and other related expenses of the research and development
was primarily related to the revenue increases discussed above,
personnel as well as costs associated with regulatory expenses.
offset by favorable manufacturing efficiencies brought on by
The increase in R&D expenses in 2004 was primarily related to
increased volumes and manufacturing productivity improvements.
increased legal costs related to patents. The Company anticipates
The shift in product mix had a favorable effect on cost of goods
that R&D expenses will continue at approximately the current
sold as the products with increased revenues had lower costs
level for the foreseeable future. Selling (“Selling”) expenses
26
consist primarily of salaries, commissions and other related
for exports and R&D expenditures being a larger percentage of
expenses for sales and marketing personnel, marketing,
taxable income in 2004 than in 2003. The higher effective tax
advertising and promotional expenses. The Company anticipates
rate in 2003 is primarily a result of benefits from tax incentives
that Selling expenses are likely to increase in the foreseeable
for exports and R&D expenditures being a lesser percentage of
future but at a rate less than the anticipated rate of increase in
taxable income in 2003 than in 2002.
revenues. The increase in operating expenses in 2003 from 2002
was primarily attributable to increased G&A and Selling expenses.
The increase in G&A expenses in 2003 was primarily attributable
to increased insurance costs, compensation and other taxes. The
increase in Selling expenses in 2003 was primarily related to
increased compensation costs and travel related expenses.
The Company believes that 2005 revenues will be higher than
2004 revenues and that the cost of goods sold, gross profit,
operating income and income from continuing operations will
each be higher in 2005 than in 2004. In 2005, the Company
further believes that it will have continuing volume growth in
most of its product lines, complemented by the introduction of
The Company’s operating income for 2004 was $8.6 million,
new products, and that it will achieve a double-digit annual rate
compared with $6.9 million in 2003 and $5.8 million in 2002. The
of growth in operating income.
previously mentioned increase in gross profit along with cost
containment and cost reduction activities were the major
D I S C O N T I N U E D O P E R A T I O N S
contributors to the operating income improvements in 2004.
Revenue growth, manufacturing efficiency improvements, cost
containment and cost reduction activities were the major
contributors to the operating income improvements in 2003.
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
Interest expense was $93,000 in 2004 compared to $195,000 in
on disposal of these discontinued operations of $0.2 million, or
2003 and $432,000 in 2002. The decrease in 2004 was primarily
$.10 per basic and $.09 per diluted share, in each of 2004, 2003
related to lower average borrowings during 2004 as compared
and 2002.
with 2003. The decrease in 2003 was primarily related to lower
average borrowings during 2003 as compared with 2002. The
Company’s other income for 2004 was primarily related to the
sale of non-operational assets.
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,
Income tax expense in 2004 totaled $2.3 million, compared with
with the amount paid each year to be dependent upon revenues
$1.9 million in 2003 and $1.4 million in 2002. The effective tax
received by the purchaser from certain gas transportation
rates for 2004, 2003 and 2002 were 26.6 percent, 27.8 percent
contracts. The Company received deferred payments of $250,000
and 25.7 percent, respectively. Benefits from tax incentives for
each, before tax, from the purchaser in April 2004, 2003 and
exports and R&D expenditures totaled $516,000 in 2004,
2002 which are reflected in each year as a gain from discontinued
$350,000 in 2003 and $408,000 in 2002. The lower effective tax
operations of $165,000, net of tax.
rate in 2004 is primarily a result of benefits from tax incentives
27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S
include depreciation and amortization and deferred income taxes.
The Company has a $25 million revolving credit facility (the
“Credit Facility”) with a money center 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 1 percent. At December 31, 2004, the
Company had outstanding borrowings of $2.9 million under the
Credit Facility. At December 31, 2004, the Company was in
compliance with all financial covenants. The Credit Facility,
which expires November 12, 2006, 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.
Working capital items consist primarily of accounts receivable,
accounts payable, inventories and other current assets and other
current liabilities. The $1.7 million increase in working capital
during 2004 was primarily related to increases in accounts
receivable and inventories offset by increases in current
liabilities. The increase in accounts receivable during 2004 was
primarily related to the increase in revenues for the fourth
quarter of 2004 as compared to the fourth quarter of 2003 and
the return of accounts receivable balances to normal, expected
levels. Accounts receivable at December 31, 2003 was lower than
expected primarily as a result of certain customers paying their
accounts receivables earlier than historical norms. The increase in
inventories was primarily attributable to increased stocking
levels necessary to improve customer service and support
increased revenues. Additionally, the Company increased its
inventories during 2004 to mitigate future raw material price
As of December 31, 2004, the Company had cash and cash
increases and take advantage of volume discounts. The increase
equivalents of $255,000, compared with $298,000 at December
in current liabilities was primarily related to standard accruals
31, 2003. The Company had an outstanding balance under the
made in the normal course of operations and accruals for income
Credit Facility as of December 31, 2004, of $2.9 million compared
and other taxes. Capital expenditures for property, plant and
with $4.3 million as of December 31, 2003. The $1.4 million
equipment totaled $5.6 million in 2004, compared with $4.2
decrease in the Credit Facility balance in 2004 from 2003 was
million in 2003 and $3.3 million in 2002. The Company expects
primarily attributable to the Company’s use of cash flows from
capital expenditures in 2005 to increase above 2004 levels. In
operating activities to reduce its borrowing level offset by
2004, the Company made a $3.8 million deposit required in
borrowings to make a deposit required in connection with a
connection with a proposed land purchase. In early 2005, the
proposed purchase of a parcel of land and to purchase property
Company entered into an agreement to purchase that property.
and equipment. Cash provided by operating activities decreased
The Company anticipates spending an additional $12 million to
to $11.2 million in 2004, compared to $12.9 million in 2003 and
$14 million for the construction of a new facility for Halkey-
$10.0 million in 2002. Cash provided by operating activities
Roberts at this site. The Company is planning to complete the
consists primarily of net income adjusted for certain non-cash
construction of this new facility and move the Halkey-Roberts
items and changes in working capital items. Non-cash items
operation into the new facility during 2006 (See Note 12).
28
During 2004, the Company expended $840,000 for the purchase
The Company received net proceeds of $414,000 for the exercise
of the Company’s common stock. During 2003, the Company
of employee stock options during 2004.
expended $4.9 million for the purchase of the Company’s
common stock. Included in this amount was $4.1 million in April
2003 for the completion of a tender offer in which a total of
173,614 shares of common stock were repurchased at a price of
$23.00 per share.
In September 2003, the Company announced that its Board of
Directors had approved a policy for the payment of regular
quarterly cash dividends on the Company’s common stock. During
2004 the Company paid dividends totaling $891,000 to its
stockholders.
The table below summarizes debt, lease and other contractual obligations outstanding at December 31, 2004:
CONTRACTUAL OBLIGATIONS (IN THOUSANDS)
Credit Facility
Operating Leases
Purchase Obligations
Total
PAYMENTS DUE BY PERIOD
2005
2006 - 2007
2008 - 2009
THEREAFTER
2010 AND
— $
$
$
$
422
6,238
6,660
$
$
$
285
166
277
728
$
2,651
—
—
$
2,651
—
—
—
—
TOTAL
2,936
588
6,515
$
$
$
$ 10,039
29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The payment schedule for the Credit Facility assumes at maturity,
offset a portion of these increased costs by increasing the sales
November 2006, the Company will convert this outstanding debt
prices of its products. However, competitive pressures have not
to a two-year term note as permitted by the terms of the
allowed for full recovery of these cost increases.
agreement. The payment schedule for the operating lease
assumes the lease expires in May 2006 (See Note 12 of Notes to
Consolidated Financial Statements).
N E W A C C O U N T I N G P R O N O U N C E M E N T S
In December 2004, the Financial Accounting Standards Board
The Company adopted SFAS No. 142 effective January 1, 2002.
issued a revision of FASB Statement No. 123, “Accounting for
The required adoption of SFAS No. 142 is considered a change in
Stock-Based Compensation” (“SFAS No. 123R”). In addition to
accounting principle and the cumulative effect of adopting this
SFAS No. 123R the FASB issued SFAS No. 151, “Inventory Costs,”
standard resulted in a $1.6 million non-cash, after-tax charge in
which amends Accounting Research Bulletin 43, Chapter 4,
2002. This charge had no effect on the Company’s cash position
“Inventory Pricing.” The impact to the Company for these items
or the balance of its outstanding indebtedness, and it did not
is described in Note 1 of Notes to the Consolidated Financial
have any impact on earnings from continuing operations in 2002.
Statements.
The Company believes that its existing cash and cash equivalents,
cash flows from operations and borrowings available under the
C R I T I C A L A C C O U N T I N G P O L I C I E S
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.
Companies sometimes establish legal entities for a specific
business transaction or activity in the form of a Variable Interest
Entity (“VIE”). VIEs may be used to facilitate off-balance sheet
financing, acquire financial assets, raise cash from owned assets
and similar transactions. The Company has no VIEs, no off-
balance sheet financing arrangements and no derivative financial
instruments.
I M P A C T O F I N F L A T I O N
The discussion and analysis of the Company’s financial condition
and results of operations are based on the Company’s
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. In the preparation of these financial
statements, the Company makes estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and
liabilities. The Company believes the following discussion
addresses the Company's most critical accounting policies and
estimates, 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 Company experiences the effects of inflation primarily in the
the effect of matters that are inherently uncertain. Actual results
prices it pays for labor, materials and services. Over the last three
could differ significantly from those estimates under different
years, the Company has experienced the effects of moderate
assumptions and conditions.
inflation in these costs. At times, the Company has been able to
30
During 2004, the Company accrued for legal costs associated with
representation by the Company that the objectives or plans of the
certain litigation. The Company believes these accruals are
Company will be achieved. Such statements include, but are not
adequate to cover the legal fees and expenses associated with
limited to, the Company’s expectations regarding future revenues,
litigating these matters. However, the time and cost required to
cost of goods sold, gross profit, operating income, income from
litigate these matters as well as the outcomes of the proceedings
continuing operations, cash flows from operations, growth in
may vary from what the Company has projected (See Note 12).
product lines, and availability of equity and debt financing.
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.
Words such as “anticipates,” “believes,” “intends,” “expects,”
“should” 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 or future events 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;
The Company assesses goodwill for impairment pursuant to SFAS
implementation
of new manufacturing
processes
or
No. 142 which requires that goodwill be assessed whenever
implementation of new information systems; the Company’s
events or changes in circumstances indicate that the carrying
ability to protect its intellectual property; changes in the prices
value may not be recoverable, or, at a minimum, on an annual
of raw materials; changes in product mix; intellectual property
basis by applying a fair value test.
F O R W A R D - L O O K I N G S T A T E M E N T S
and 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
The statements in this Management’s Discussion and Analysis and
management decisions are subjective in many respects and thus
elsewhere in this Annual Report that are forward-looking are
susceptible to interpretations and periodic review which may
based upon current expectations, and actual results or future
cause the Company to alter its marketing, capital expenditures or
events may differ materially. Therefore, the inclusion of such
other budgets, which in turn may affect the Company’s results of
forward-looking information should not be regarded as a
operations and financial condition.
31
BOARD OF DIRECTORS
Emile A. Battat
Chairman of the Board and President
Atrion Corporation
Richard O. Jacobson
Chairman of the Board
Jacobson Companies
Des Moines, Iowa
Hugh J. Morgan, Jr.
Private Investor, Former Chairman of the Board
National Bank of Commerce of Birmingham
Birmingham, Alabama
Roger F. Stebbing
President and Chief Executive Officer
Stebbing and Associates, Inc.
Signal Mountain, Tennessee
John P. Stupp, Jr.
President
Stupp Bros., Inc.
St. Louis, Missouri
John Maley, distinguished member of
our board since 1996, passed away in
January 2005. He always brought
extraordinary wisdom and insight
to our efforts. His outstanding
contributions to our company will long
be remembered, and his presence
among us as a colleague and friend
will be greatly missed.
EXECUTIVE OFFICERS
Emile A. Battat
Chairman of the Board and President
Jeffery Strickland
Vice President and Chief Financial
Officer, Secretary and Treasurer
32
CORPORATE INFORMATION
Corporate Office
Atrion Corporation
One Allentown Parkway
Allen, Texas 75002
(972) 390-9800
www.atrioncorp.com
Registrar and Transfer Agent
American Stock Transfer and Trust Company
59 Maiden Lane
New York, New York 10007
Form 10-K
A copy of the Company’s 2004 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 7,
2005, there were approximately 1,300 stockholders, including beneficial owners holding shares in
nominee or “street” name. The table below sets forth the high and low closing prices on The Nasdaq
Stock Market and the quarterly dividends per share declared by the Company for each quarter
of 2003 and 2004.
2003 Quarter Ended
March 31
June 30
September 30
December 31
2004 Quarter Ended
March 31
June 30
September 30
December 31
$
$
$
$
High
22.85
30.80
45.20
50.00
High
46.82
50.82
48.77
48.20
$
Dividends
0.00
0.00
0.12
0.12
Low
17.95
22.75
26.80
40.00
Low
38.51 $
40.50
43.51
41.69
Dividends
0.12
0.12
0.14
0.14
In the third quarter of 2003 the Company began paying quarterly cash dividends and presently plans
to pay quarterly cash dividends in the future.
MPS is a registered trademark of Atrion Corporation.
Atrion Corporation / One Allentown Parkway / Allen, Texas 75002 / 972•390•9800 / www.atrioncorp.com