M E A S U R E S O F C O M M I T M E N T
2 0 0 6 A N N U A L R E P O R T
Atrion Corporation designs and manufactures proprietary products primarily for sale to niche
medical device markets worldwide. Headquartered in Allen, Texas, Atrion has manufacturing facilities in
Alabama, Florida, and Texas.
2
6
2 9
3 5
3 6
L e t t e r t o S t o c k h o l d e r s
F i n a n c i a l S t a t e m e n t s
M a n a g e m e n t ’s D i s c u s s i o n
S e l e c t e d F i n a n c i a l D a t a
C o r p o r a t e I n f o r m a t i o n
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
FINANCIAL HIGHLIGHTS
FOR TH E Y EAR EN DED DECEM BER 31,
2006
2005
Revenu es
O perat ing In com e
Net
In co me
E ar n in g s P er Diluted Sha re
$ 81,020,000
$ 72, 089,000
14,338,0 00
1 2,6 98,000
10,7 6 5,000
8 , 958,0 0 0
$
5 .5 1
$
4. 6 6
We igh ted Av erage Dilu ted Shar es Out stan din g
1,95 3, 0 00
1 , 9 24, 0 00
AS OF DECEM B ER 3 1,
2006
2005
Total A ssets
Wo rkin g Ca p ita l
Long-Te r m De bt
Stockh old e rs’ Eq uit y
$ 95 ,772,00 0
$ 78,47 0 ,000
23,7 35,000
1 9,747 , 0 00
11, 399,000
2 ,52 9 ,000
$ 70,8 95,00 0
$ 61, 8 95,00 0
Ear ning s Per Dilu t ed Sh ar e
Re v e nues
in milli o n s
Op e ra ti ng I nc ome
in milli o ns
$6 .00
5. 00
4.00
3. 00
2. 00
1. 00
$90
80
70
60
50
40
30
20
10
$1 6
14
12
10
8
6
4
2
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
1
TO OUR STOCKHOLDERS Numbers are critical in measuring a company's performance.
We count profits and people, products and plant locations. We plot stock prices and sales, production
capacity and volumes, and a host of other metrics. Certainly, these numbers provide valuable information
about a company, but we believe they also measure something much more important — commitment.
At Atrion, we understand commitment. We commit ourselves daily to designing and manufacturing products
to the highest standards of quality. We work hard to build and maintain a reputation for superior customer
service. And, always, we remember that our commitment to people — our employees, our customers, our
communities, our stockholders — is vital to our success as a company.
COMMITTED TO FINANCIAL
strength and consistency of our cash flow. We anticipate
PERFORMANCE Financial performance is
paying down most of the remaining debt by the end
a direct reflection of commitment in action. When we
of 2007.
do our jobs well — committed to our goals and to our
mission — it shows up in the bottom line. In 2006,
COMMITTED TO OPERATIONAL
Atrion's results once again demonstrated the strength
EXCELLENCE Atrion is committed to maintaining
of our commitment to profitability and growth.
its position as a market and technology leader. To that
In 2006, our revenues increased across many of our
product lines. Our overall sales growth of 12 percent
helped increase our earnings per diluted share by
18 percent — from $4.66 in 2005 to $5.51 in 2006.
In September, we increased our quarterly cash dividend
end, we continue to make substantial investments in
areas that build operational strength, including facilities
and equipment. By doing so, we continue to excel in
delivering high-quality medical products for critical,
niche applications.
from 17 cents per share to 20 cents per share — the third
One of our most notable accomplishments during
increase since we began the dividend program in 2003.
2006 was the completion of, and relocation to, a
We are pleased with the 2006 results and, more
important, with our financial performance over time. For
the eighth straight year, we charted earnings-per-share
growth of 15 percent or higher. Over the last two years,
we have not only generated the working capital to support
a 23 percent growth in sales, but also invested more
than $31 million in new facilities and equipment—all
new manufacturing facility in St. Petersburg, Florida.
With more than twice the space of the former location,
this world-class facility greatly enhances our quality,
efficiency, and capacity. We now have approximately
400,000 square feet of manufacturing, research, and
development capacity through our three facilities in
Alabama, Florida, and Texas.
this while increasing our indebtedness by less than
We are committed to bringing additional technological
$9 million during this period. This is a testament to the
improvement to all our facilities. During 2006, we
2
2006 REVENUES BY PRODUCT LINE
CARDIOVASCULAR
29%
OTHER PRODUCTS
22%
OPHTHALMOLOGY
17%
FLUID DELIVERY
32%
invested millions to upgrade manufacturing technology
our innovative Myocardial Protection System®— are
and automate key processes at all three plants.
complex medical devices that move directly into
Through 2007 and 2008, we will implement additional
patient-care settings. From the smallest to the most
automation to maximize efficiency and quality control.
complex, we design each of our products for safety and
As a result of these continuing improvements, our three
dependability because we know they touch the lives
facilities are well positioned to respond to increasing
of millions.
customer demand for our superior products.
During 2006, our key product lines continued to meet
As an established leader in growing niche markets, Atrion
the demands of the markets we serve.
has built market share by harnessing technology to meet
the changing demands of end users, distributors, and
manufacturers. To ensure our ability to respond to new
opportunities, we make research and development a
continuing priority. In 2006, we devoted 16 percent of
our operating income before taxes and R&D expenditures
to this area. And our commitment shows: Today, Atrion
holds more than 200 patents for innovations in
product design.
Fluid delivery. Atrion manufactures a broad array of
clamps and valves, along with tubing sets and related
products that are essential to the healthcare market.
In 2006, we introduced a number of custom-designed
products, including new tubing configurations and
additional applications for our swabable valves. During
the year, fluid delivery revenues rose 26 percent.
Cardiovascular. Our cardiovascular products include
Each year, we manufacture hundreds of millions of
our innovative MPS ® Myocardial Protection System, a
components that are assembled into products that we
proprietary technology that delivers essential fluids and
ship to our customers. Some of these products — like
medications to the heart during open-heart surgery, plus
essential valves and clamps — serve as components in
a range of catheter inflation devices and other medical
equipment made by other manufacturers. Others — like
systems. The second generation of MPS ®, introduced in
3
2005 as MPS2®, generated a strong response from the
cost incurred to finance its construction. In addition, we
market during 2006. Cardiovascular revenues grew
will no longer receive contingent payments related to
21 percent in 2006 compared to the prior year.
assets that were sold in 1997 and reflected on our
Ophthalmic. Our LacriCATH® balloon catheter and
soft contact lens disinfection cases are the mainstays of
our ophthalmic product line. During the first three quarters
of 2006, some of our ophthalmic customers experienced
manufacturing issues unrelated to our products that had
to be resolved before they resumed purchasing from
us. In the fourth quarter, sales returned to anticipated
levels — bringing ophthalmic revenues in only 5 percent
below 2005 results.
Other products. Atrion’s product offerings also
profit and loss statement as income from “discontinued
operations.” We also expect that our tax rate will
increase from 25 percent last year to 31 percent in
2007. Despite all of these factors, we anticipate
strong performance for the year with earnings per
share continuing to show double-digit growth.
As always, we are grateful to our employees, customers,
and investors for their confidence and commitment. We
are especially pleased to welcome Ronald N. Spaulding,
President of International Operations for Abbott Vascular,
who joined our Board of Directors in March 2006. The
include marine and aviation inflation components, and
wealth of his knowledge and strength of his character
a variety of general medical products. During the year,
fortify our efforts to chart a path for continued growth.
revenues from these products rose 2 percent, reflecting
We are truly fortunate to count him as a member of the
previous overstocking by our inflation customers and
Atrion family.
unseasonable weather in Europe.
COMMITTED TO CONTINUING
STRENGTH We covered significant new ground
Emile A. Battat
in 2006, and we believe that our investment of time,
Chairman of the Board, President,
energy, and resources has positioned us for greater
and Chief Executive Officer
growth and service.
Our results in 2007 will reflect the higher operating
expenses at our new Florida facility and the interest
4
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
A trion's new state-of-the-art manufacturing facility in St. Petersburg, Florida,
opened in the third quarter of 2006 following two years of planning and construction.
Designed for maximum efficiency and productivity, the plant's innovative layout
keeps materials and processes moving smoothly — from the receipt of raw materials
to the shipping of finished products. Rail-guided overhead cranes handle multi-ton
molds and supplies with ease, and finished goods are stored in a spacious,
climate-controlled warehouse. The 178,000-square-foot plant includes ample
space for molding and assembly — in a clean, low-particulate environment that
meets the critical requirements for medical manufacturing.
A smooth move was accomplished through a carefully staged transition, enabling
us to complete each stage without affecting shipments or service to our customers.
5
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
CONSOLIDATED BALANCE SHEETS
Assets:
AS OF DECEMBER 31, 2006 AND 2005 (IN THOUSANDS)
2006
2005
Current Assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
of $149 and $65 in 2006 and 2005, respectively
Inventories
Prepaid expenses and other current assets
Deferred income taxes
Total Current Assets
Property, Plant and Equipment
Less accumulated depreciation and amortization
Other Assets and Deferred Charges:
Patents and licenses, net of accumulated amortization of $9,195 and
$8,877 in 2006 and 2005, respectively
Goodwill
Other
$
333
$
525
10,542
17,115
1,530
1,138
30,658
82,536
31,094
51,442
2,264
9,730
1,678
13,672
8,291
17,705
832
620
27,973
63,041
27,787
35,254
2,331
9,730
3,182
15,243
The accompanying notes are an integral part of these statements.
$
95,772
$
78,470
6
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
Liabilities and Stockholders’ Equity:
AS OF DECEMBER 31, 2006 AND 2005 (IN THOUSANDS)
2006
2005
Current Liabilities:
Accounts payable
Accrued liabilities
Accrued income and other taxes
Total Current Liabilities
Line of credit
Other Liabilities and Deferred Credits:
Deferred income taxes
Other
Total Liabilities
Commitments and Contingencies
Stockholders’ Equity:
Common stock, par value $.10 per share, authorized 10,000 shares, issued 3,420 shares
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Treasury shares, 1,546 shares in 2006 and 1,586 shares in 2005, at cost
$
3,387
2,654
882
6,923
11,399
5,074
1,481
6,555
$
4,501
2,627
1,098
8,226
2,529
4,344
1,476
5,820
24,877
16,575
342
14,140
(892)
91,708
(34,403)
70,895
342
12,508
—
82,318
(33,273)
61,895
$
95,772
$
78,470
7
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2006, 2005 AND 2004
(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
Net Income
Income Per Basic Share:
Continuing operations
Discontinued operations
Net Income Per Basic Share
Weighted Average Basic Shares Outstanding
Income Per Diluted Share:
Continuing operations
Discontinued operations
Net Income Per Diluted Share
Weighted Average Diluted Shares Outstanding
Dividends Per Common Share
The accompanying notes are an integral part of these statements.
2006
2005
2004
$ 81,020
$
72,089
$
66,081
48,572
32,448
6,067
9,249
2,794
18,110
14,338
91
(253)
(4)
14,172
(3,572)
10,600
165
$ 10,765
$
$
$
$
$
5.73
.09
5.82
1,851
5.43
.08
5.51
1,953
.74
43,119
28,970
5,637
8,239
2,396
16,272
12,698
37
(61)
10
12,684
(3,891)
8,793
165
8,958
4.90
.09
4.99
1,794
4.57
.09
4.66
1,924
.62
$
$
$
$
$
$
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
1,850
.52
$
$
$
$
$
$
8
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2006, 2005 AND 2004 (IN THOUSANDS)
2006
2005
2004
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of discontinued operations
Depreciation and amortization
Deferred income taxes
Tax benefit related to stock options
Stock-based compensation
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
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 (Note 3)
Cash Flows From Investing Activities:
Property, plant and equipment additions
Deposit on land purchase
Property, plant and equipment sales
Cash Flows From Financing Activities:
Line of credit advances
Line of credit repayments
Exercise of stock options
Purchase of treasury stock
Tax benefit related to stock options
Dividends paid
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash Paid For:
Interest (net of capitalization)
Income taxes
The accompanying notes are an integral part of these statements.
$ 10,765
$
8,958
$
6,470
(165)
5,005
693
—
116
10
(165)
5,389
500
1,168
—
10
(165)
4,830
487
90
—
20
16,424
15,860
11,732
(2,250)
590
(698)
(119)
(1,087)
(216)
4
12,648
165
12,813
(703)
(3,692)
196
(1,863)
(18)
(223)
337
9,894
165
10,059
(20,889)
(10,569)
—
3
—
21
(20,886)
(10,548)
38,186
(29,316)
1,228
(1,594)
752
(1,375)
7,881
(192)
525
333
199
3,272
$
$
25,599
(26,006)
2,285
—
—
(1,119)
759
270
255
525
62
2,508
$
$
(1,362)
(2,698)
866
542
1,109
670
165
11,024
165
11,189
(5,570)
(3,750)
—
(9,320)
22,834
(24,185)
414
(84)
—
(891)
(1,912)
(43)
298
255
96
716
9
$
$
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED
DECEMBER 31, 2006, 2005 AND 2004
SHARES
ADDITIONAL
OTHER
PAID-IN
COMPREHENSIVE
RETAINED
COMMON STOCK
TREASURY STOCK
ACCUMULATED
(IN THOUSANDS)
OUTSTANDING
AMOUNT
SHARES
AMOUNT
CAPITAL
LOSS
EARNINGS
TOTAL
Balance, January 1, 2004
1,700
$
342
1,720
$ (34,311)
$
9,673
— $ 68,900
$ 44,604
Net income
Tax benefit from
exercise of
stock options
Exercise of stock
options
Purchase of
treasury stock
Dividends
90
21
(2)
(21)
164
250
2
(84)
6,470
6,470
90
414
(84)
(891)
(891)
Balance, December 31, 2004
1,719
342
1,701
(34,231)
10,013
—
74,479
50,603
Net income
Tax benefit from
exercise of
stock options
Exercise of stock
options
Dividends
115
(115)
958
1,327
1,168
Balance, December 31, 2005
1,834
342
1,586
(33,273)
12,508
—
Net income
Tax benefit from
exercise of
stock options
Stock options and
restricted stock
66
(66)
597
Shares surrendered
in option exercises
(2)
2
(133)
Purchase of
treasury stock
(24)
24
(1,594)
Dividends
Adjustment for initial
application of
SFAS 158, net of
tax (Notes 1 and 11)
752
880
8,958
8,958
1,168
2,285
(1,119)
(1,119)
82,318
10,765
61,895
10,765
752
1,477
(133)
(1,594)
(1,375)
(1,375)
Balance, December 31, 2006
1,874 $ 342
1,546 $(34,403) $ 14,140
$ (892) $91,708 $70,895
The accompanying notes are an integral part of this statement.
10
(892)
(892)
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Summary of Significant Accounting Policies
Atrion Corporation (“Atrion”) and its subsidiaries (collectively, the “Company”) design, develop, manufacture, sell and
distribute products primarily for the medical and healthcare industry. The Company markets its products throughout the United
States and internationally. The Company’s customers include hospitals, distributors, and other manufacturers. The principal
subsidiaries of Atrion through which these operations are conducted are 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 and its subsidiaries. All 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.
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.
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 and determines when to grant credit to its customers 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 (including materials, direct labor and applicable overhead) or market. Cost is
determined by using the first-in, first-out method. The following table details the major components of inventory (in thousands):
Raw materials
Work in process
Finished goods
Total inventories
$
2006
7,194
4,084
5,837
DECEMBER 31,
$
2005
6,898
4,291
6,516
$
17,115
$
17,705
11
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 tax laws and rates applicable to the periods
in which the differences are expected to affect taxable income. In assessing the realizability of deferred income tax assets,
management considers whether it is more likely than not that the deferred income tax assets will be realized. A valuation
allowance is provided where the realization of the deferred tax asset is not likely.
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):
Land
Buildings
Machinery and equipment
Total property, plant and equipment
DECEMBER 31,
2006
2005
$
5,260
28,945
48,331
$ 82,536
$
$
5,260
14,006
43,775
63,041
USEFUL
LIVES
—
30–40 yrs
3–10 yrs
Depreciation expense of $4,685,000, $4,365,000 and $4,408,000 was recorded for the years ended December 31,
2006, 2005 and 2004, respectively.
Capitalized interest related to the construction of a new facility at Halkey-Roberts in the amount of $325,839 and $26,850
was recorded during 2006 and 2005, respectively.
Patents and Licenses
Cost for patents and licenses acquired is determined at acquisition date. Patents and licenses are amortized over the useful
lives of the individual patents and licenses, which are from 7 to 19 years. Patents and licenses 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 value of tangible and identifiable intangible net assets acquired. Annual
impairment testing for goodwill is done 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. The Company has identified
three reporting units where goodwill was recorded for purposes of testing goodwill impairment annually: (1) Atrion Medical
Products (2) Halkey-Roberts and (3) Quest Medical. The carrying amount for goodwill in each of the three years ended
December 31, 2006, 2005 and 2004 was $9,730,000.
12
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
Current Accrued Liabilities
The items comprising current accrued liabilities are as follows (in thousands):
Accrued payroll and related expenses
$
1,272
$
1,277
DECEMBER 31,
2006
2005
Accrued vacation
Accrued professional fees
Other accrued liabilities
Total accrued liabilities
Revenues
227
567
588
261
427
662
$
2,654
$
2,627
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. All risks and rewards of ownership pass to
the customer upon shipment. Net sales represent gross sales invoiced to customers, less certain related charges, including
discounts, returns and other allowances. Revenues are recorded exclusive of taxes. Returns, discounts and other allowances
have been insignificant historically.
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.
Advertising
Advertising production costs are expensed as incurred. Media for print placement costs are expensed in the period the
advertising appears. Total advertising expenses were approximately $198,000, $219,000 and $161,000 for the years
ended December 31, 2006, 2005 and 2004, respectively.
Stock-Based Compensation
At December 31, 2006, the Company had three stock-based employee compensation plans which are described more fully
in Note 8. Prior to January 1, 2006, the Company accounted for those plans under the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”), and
related interpretations. No stock-based employee compensation cost was reflected in net income prior to January 1, 2006,
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.
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment”
(“SFAS No. 123R”) using the modified-prospective transition method and the disclosures that follow are based on applying
SFAS No. 123R. Under this transition method, compensation expense recognized during 2006 included compensation
expense for all share-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”,
(“SFAS No. 123”).
13
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the modified-prospective transition method, results for the prior periods have not been restated. In 2006
the Company recorded compensation expense under its three plans in the amount of approximately $116,000 and
recognized tax benefits of approximately $35,000 related to such expense.
As a result of the adoption of SFAS No. 123R, the financial results of the Company were lower than the results would have
been under the previous accounting method for stock-based compensation by the following amounts:
(IN THOUSANDS , EXCEPT PER SHARE AMOUNTS)
Income from continuing operations before income taxes
Income from continuing operations and net income
Basic and diluted earnings per share
YEAR ENDED
DECEMBER 31, 2006
$
$
$
71
51
0.03
Prior to the adoption of SFAS No. 123R all tax benefits resulting from the exercise of stock options were reflected as operating
cash flows in the Consolidated Statements of Cash Flows. SFAS No. 123R requires that cash flows from the exercise of stock-
based compensation resulting from tax benefits in excess of recognized compensation cost (excess tax benefits) be classified as
financing cash flows. In 2006, $752,000 of such excess tax benefits was classified as financing cash flows. In 2005 and
2004, $1,168,000 and $90,000, respectively of such excess tax benefits were recorded as operating cash flows, as was
prescribed prior to the adoption of SFAS No. 123R.
Upon adoption of SFAS No. 123R, we have elected the “long form” method of calculating the tax effects of stock-based
compensation pursuant to SFAS No. 123R, paragraph 81. Under the “long form” method, we determine the beginning balance
of the additional paid-in capital pool related to the tax effects of the employee stock-based compensation “as if” we had
adopted the recognition provisions of SFAS No. 123 since its effective date of January 1, 1995.
Pension Plan
Pension plan benefits are expensed as applicable employees earn benefits. The recognition of expenses is significantly
impacted by estimates made by management such as discount rates used to value certain liabilities and expected return on
assets. The Company uses third-party specialists to assist management in appropriately measuring the expense associated
with pension plan benefits.
On December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). As is further
described in Note 11, the funded status of the Company’s pension is recorded as a noncurrent asset and all unrecognized
losses, net of tax, are recorded as accumulated other comprehensive loss within stockholders’ equity at December 31, 2006.
As required by SFAS 158, results for prior periods have not been restated.
The incremental effects of applying SFAS 158 on line items in the consolidated balance sheet at December 31, 2006 were
as follows (amounts in thousands):
Other Assets and Deferred Charges: Other
Deferred income tax liability
Accumulated other comprehensive loss
The adoption of SFAS 158 had no effect on net earnings or cash flows.
$
BEFORE
APPLICATION
3,051
5,555
—
ADJUSTMENTS
$
(1,373)
$
(481)
(892)
AFTER
APPLICATION
1,678
5,074
(892)
14
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in
income taxes recognized in financial statements. FIN 48 requires the impact of a tax position to be recognized in the
financial statements if that position is more likely than not of being sustained by the taxing authority. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently evaluating the requirements of FIN 48. Based
upon the Company’s computations, the FIN 48 adjustment to the Company’s retained earnings during the first quarter of
2007 is expected to be less than $100,000.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidance for
measuring the fair value of assets and liabilities, as well as requires expanded disclosures about fair value measurements.
SFAS 157 indicates that fair value should be determined based on the assumptions marketplace participants would use in
pricing the asset or liability, and provides additional guidelines to consider in determining the market-based measurement.
The Company will be required to adopt SFAS 157 on January 1, 2008. The Company is currently evaluating the impact of
adopting SFAS 157 on its consolidated financial statements.
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115“, (“SFAS 159”), which allows measurement at fair value of eligible
financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is
elected, unrealized gains and losses for that item shall be reported in current earnings at each subsequent reporting date.
SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different
measurement attributes the company elects for similar types of assets and liabilities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. Early adoption is permitted. The Company is currently assessing the impact of
SFAS 159 on its financial statements.
2
Patents and Licenses
Purchased patents and licenses paid for the use of other entities’ patents are amortized over the useful life of the patent or
license. Patents and licenses are as follows (dollars in thousands):
WEIGHTED AVERAGE
ORIGINAL LIFE (YEARS)
14.72
WEIGHTED AVERAGE
ORIGINAL LIFE (YEARS)
14.74
DECEMBER 31, 2006
GROSS
CARRYING
AMOUNT
$ 11,459
DECEMBER 31, 2005
GROSS
CARRYING
AMOUNT
$ 11,208
ACCUMULATED
AMORTIZATION
$ 9,195
ACCUMULATED
AMORTIZATION
$ 8,877
Aggregate amortization expense for patents and licenses was $318,000 for 2006, $1,024,000 for 2005 and $422,000 for
2004. Estimated future amortization expense for each of the years set forth below ending December 31, is as follows (in thousands):
2007
2008
2009
2010
2011
$ 312
$ 295
$ 276
$ 262
$ 262
15
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
Discontinued Operations
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 2006, 2005 and 2004. 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 2006, 2005 and 2004 which are reflected in each year as a gain from discontinued operations of $165,000, net of
tax. The eight-year period expired when the final payment was received in April 2006.
4
Line of Credit
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 (6.38 percent at December 31, 2006) and is payable monthly.
At December 31, 2006 and 2005, $11.4 million and $2.5 million, respectively, were outstanding under the line of credit.
The Credit Facility expires November 12, 2009 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, 2006, 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,
2006
$
2,705
$
230
2,935
607
30
637
2005
3,189
257
3,446
408
37
445
2004
$
1,807
91
1,898
380
11
391
Total income tax expense
$
3,572
$
3,891
$
2,289
16
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
Temporary differences and carryforwards which have given rise to deferred income tax assets and liabilities as of
December 31, 2006 and 2005 are as follows (in thousands):
Deferred tax assets:
Benefit plans
Inventories
Other
Total deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Pensions
Patents and goodwill
Total deferred tax liabilities
Net deferred tax liability
Balance Sheet classification:
Non-current deferred income tax liability
Current deferred income tax asset
Net deferred tax liability
2006
2005
$
$
$
$
$
$
$
629
446
194
1,269
4,259
143
803
5,205
3,936
5,074
1,138
3,936
$
$
$
$
$
$
$
471
448
63
982
3,930
488
288
4,706
3,724
4,344
620
3,724
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):
YEAR ENDED DECEMBER 31,
2006
2005
2004
Income tax expense at the statutory federal income tax rate
$
4,960
$
4,313
$
2,922
Increase (decrease) resulting from:
State income taxes
R&D credit
Foreign sales benefit
Other, net
Total income tax expense
210
(1,322)
(154)
(122)
210
(100)
(434)
(98)
67
(75)
(441)
(184)
$
3,572
$
3,891
$
2,289
The 2006 amount for R&D credit includes $1,022,000 representing the results of a review and documentation of the
Company’s R&D tax credits for 2005 and prior-year tax returns. This review indicated that the Company was entitled to
higher credits than had been claimed and amended returns were filed.
17
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
Stockholders’ Equity
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. In 2006, the Company
repurchased 24,000 shares at a price of $66.41 per share. The Company repurchased 1,900 shares at a price of $44.16 per
share in 2004. As of December 31, 2006, authorization for the repurchase of up to 68,100 additional shares remained.
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 share
starting in September of 2003. The quarterly dividend was increased to $.14 per share in September of 2004 and to $.17
per share in September of 2005 and to $.20 per share in September of 2006.
The Company has a 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. This plan,
which was adopted in August of 2006, expires in August of 2016.
7
Income Per Share
The following is the computation for basic and diluted income per share from continuing operations:
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2006
Income from continuing operations
Weighted average basic shares outstanding
Add: Effect of dilutive securities
Weighted average diluted shares outstanding
Income per share from continuing operations:
Basic
Diluted
$ 10,600
$
1,851
102
1,953
2005
8,793
1,794
130
1,924
$
$
5.73
5.43
$
$
4.90
4.57
2004
6,305
1,711
139
1,850
3.68
3.41
$
$
$
In 2006, 7,500 shares of restricted stock were excluded from the calculation of weighted average basic shares outstanding,
but incremental shares of restricted stock were included in the calculation of weighted average diluted shares outstanding. For
the year ended December 31, 2004, options to purchase approximately 26,000 shares of common stock 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) received automatic annual grants of
nonqualified stock options to purchase 2,000 shares of common stock. The 1997 Stock Incentive Plan was amended in 2005
to provide that no additional stock options may be granted to outside directors thereunder. 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.
18
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
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.
During 2006, the Company’s stockholders approved the adoption of the Company’s 2006 Equity Incentive Plan which provides
for the grant to key employees and consultants of incentive and nonqualified stock options, restricted stock, restricted stock units,
deferred stock units, stock appreciation rights and performance shares. Under the 2006 Equity Incentive Plan, 100,000 shares,
in the aggregate, of common stock were reserved for awards. The purchase price of shares issued on the exercise of options must
be at least equal to the fair market value of such shares on the date of grant. The purchase price for restricted and performance
shares is fixed by the Compensation Committee of the Board of Directors. The options granted become exercisable and expire as
determined by the Compensation Committee except that incentive options expire no later than 10 years after the date of grant.
Option transactions for the three years in the period ended December 31, 2006 are as follows:
Options outstanding at January 1, 2004
Granted in 2004
Exercised in 2004
Options outstanding at December 31, 2004
Granted in 2005
Expired in 2005
Exercised in 2005
Options outstanding at December 31, 2005
Granted in 2006
Exercised in 2006
Options outstanding at December 31, 2006
Exercisable options at December 31, 2004
Exercisable options at December 31, 2005
Exercisable options at December 31, 2006
WEIGHTED AVERAGE
SHARES
EXERCISE PRICE
287,600
62,000
(21,100)
328,500
12,500
(1,000)
(114,900)
225,100
25,000
(58,750)
191,350
287,250
206,350
166,350
$
$
$
$
$
$
$
$
$
$
$
$
$
$
17.38
44.39
19.63
22.33
46.05
31.39
19.88
24.86
71.86
23.16
31.52
22.32
24.26
25.45
During 2006, the Company made one award of restricted stock, the restrictions as to which lapse generally over a five-year
period. Under the 2006 Equity Incentive Plan, during the vesting period, holders of the restricted stock have voting rights and
earn dividends, but the shares may not be sold, assigned, transferred, pledged or otherwise encumbered. Nonvested shares are
forfeited on termination of employment. Changes in restricted stock for the year ended December 31, 2006 were as follows:
Nonvested shares at the beginning of the period
Awarded
Vested
Forfeited
Nonvested shares at the end of the period
WEIGHTED AVERAGE
SHARES
AWARD DATE FAIR VALUE
—
7,500
—
—
7,500
$
$
$
$
$
—
71.86
—
—
71.86
During 2006, $45,000 was charged to expense for the amortization of this restricted stock award over its vesting period.
19
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2006, there remained 68,534 shares for which options may be granted in the future under the 1997
Stock Incentive Plan and the 2006 Equity Incentive Plan. The following table summarizes information about stock options
outstanding at December 31, 2006:
OPTIONS OUTSTANDING
OPTIONS EXERCISABLE
RANGE OF EXERCISE PRICES
OUTSTANDING
CONTRACTUAL LIFE
NUMBER
WEIGHTED
AVERAGE
REMAINING
$6.875–$14.063
$14.875–$22.50
$26.13–$31.39
$43.75–$71.86
81,900
6,000
22,350
81,100
191,350
2.2 years
3.2 years
2.4 years
3.2 years
2.7 years
$
$
$
$
$
WEIGHTED
AVERAGE
EXERCISE
PRICE
11.47
19.96
30.07
53.01
31.52
NUMBER
EXERCISABLE
81,900
6,000
22,350
56,100
166,350
WEIGHTED
AVERAGE
EXERCISE
PRICE
11.47
19.96
30.07
44.62
25.45
$
$
$
$
$
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula and a single
option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the
awards, which is generally the vesting period. The expected life represents the period that the Company’s stock-based
awards are expected to be outstanding and was determined based on historical experience of similar awards, giving
consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee
behavior. Stock-based payments made prior to January 1, 2006 were accounted for using the intrinsic value method under
APB 25. The fair value of stock-based payments made subsequent to January 1, 2006 are valued using the Black-Scholes
valuation method with a volatility factor based on the Company’s historical stock trading history. The Company bases the risk-
free interest rate using the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury securities
with an equivalent term. The Company bases the dividend yield used in the Black-Scholes valuation method on the
Company’s stock dividend history.
The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions for 2006, 2005 and 2004:
Risk-free interest rate
Dividend yield
Volatility factor
Expected life
2006
4.9%
1.0%
25.0%
4 years
2005
3.4%
1.3%
31.3%
3 years
2004
2.1%
1.1%
47.7%
2.8 years
The weighted average fair values of the options granted in 2006, 2005 and 2004 were $18.02, $10.51 and $13.45,
respectively. The total fair values of shares vested during 2006, 2005 and 2004 were $243,000, $131,000 and
$1,077,000, respectively.
The total intrinsic values of options exercised during 2006, 2005 and 2004 were $2.8 million, $3.7 million and $.5 million,
respectively. The total intrinsic values of options outstanding and options currently exercisable at December 31, 2006, were
$8.8 million and $8.7 million, respectively. The total intrinsic value of restricted stock awards at December 31, 2006 was
$539,000. The weighted-average remaining contractual term for restricted stock awards at December 31, 2006 was 4.6 years.
As of December 31, 2006 there was $404,000 in unrecognized compensation cost related to nonvested stock options
granted under the plans and $494,000 in unrecognized compensation cost related to nonvested restricted stock awards.
The unrecognized compensation costs related to nonvested stock options will be recognized over a period of 3.6 years. The
unrecognized compensation cost related to nonvested stock awards will be recognized over a period of 4.6 years.
At December 31, 2006 there were 25,000 nonvested stock options and 7,500 shares of nonvested restricted stock.
20
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
The Company has a policy of utilizing existing treasury shares to satisfy stock option exercises and restricted stock awards.
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 the 2005 and 2004 periods (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,
2005
8,958
129
8,829
4.99
4.92
4.66
4.59
$
$
$
$
$
$
2004
6,470
658
5,812
3.78
3.40
3.50
3.14
$
$
$
$
$
$
9
Revenues From Major Customers
The Company did not have any customers which represented ten percent or more of its operating revenues in 2006.
The Company had one major customer which represented approximately $7.8 million (10.8 percent) and $9.6 million
(14.5 percent) of the Company’s operating revenues during the years 2005 and 2004, respectively.
10
Industry Segment and Geographic Information
The Company operates in one reportable industry segment: designing, developing, manufacturing, selling and distributing
products for the medical and healthcare industry and has no foreign operating subsidiaries. The Company has other product
lines which 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
$955,000 in each of the years of 2006, 2005 and 2004. Pipeline net assets totaled $2.3 and $2.4 million at December
31, 2006 and 2005, respectively. Company revenues from sales to parties outside the United States totaled approximately
30 percent, 27 percent and 30 percent of the Company’s total revenues in 2006, 2005 and 2004, respectively. No
Company assets are located outside the United States. A summary of revenues by geographic territory, based on shipping
destination, for the three years 2006, 2005 and 2004 is as follows (in thousands):
United States
Canada
United Kingdom
Japan
Germany
Other countries less than $1 million
Total
YEAR ENDED DECEMBER 31,
2006
2005
2004
$ 56,784
$
52,283
$
46,375
9,235
1,897
2,763
1,827
8,514
8,232
1,984
1,824
1,183
6,583
9,113
1,883
1,739
1,235
5,736
$ 81,020
$
72,089
$
66,081
21
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of revenues by product line for the three years 2006, 2005 and 2004 are as follows (in thousands):
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
2006
2005
2004
$ 25,809
23,290
13,744
18,177
$ 81,020
$
$
20,447
19,307
14,514
17,821
72,089
$
$
17,192
16,577
15,690
16,622
66,081
11
Employee Retirement and Benefit Plans
A noncontributory cash balance defined benefit retirement plan is maintained for all regular employees of the Company
except those of Quest Medical. This plan was amended effective May 1, 2005 to discontinue the addition of newly-hired
employees to the plan after that date. 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.
See Note1 regarding the adoption of SFAS 158 and its effect on presentation of pension balances on the consolidated balance sheet.
The following table summarizes amounts recognized in accumulated other comprehensive loss at December 31, 2006 (in thousands):
Unrecognized net actuarial loss
Unrecognized prior service cost
Total
Tax benefit recognized
Net amount
$
$
$
1,762
(389)
1,373
(481)
892
Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during
2007 are as follows (in thousands):
Net actuarial loss
Prior service cost
Total
$
$
81
(38)
43
The following is a reconciliation of the beginning and ending balances of the benefit obligation and the fair value of plan
assets as of year end (in thousands):
2006
2005
Actuarial Present Value of Benefit Obligation:
Accumulated Benefit Obligation
Projected Benefit Obligation
Change in Projected Benefit Obligation:
Projected benefit obligation, January 1
Service cost
Interest cost
Actuarial (gain)/loss
Benefits paid
Projected benefit obligation, December 31
Change in Plan Assets:
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 at Year End
22
$
$
$
$
$
$
5,806
5,905
5,655
278
334
12
(374)
5,905
5,676
761
250
(374)
6,313
408
$
$
$
$
$
$
5,571
5,655
5,539
267
322
(61)
(412)
5,655
5,661
227
200
(412)
5,676
21
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
The amount recognized as other assets in the Consolidated Balance Sheet at December 31, 2006 equals the funded status of the
Company’s pension plan of $408,000. For the year ended December 31, 2005, the following table shows the reconciliation of
the funded status of the Company’s pension plan with the amounts recorded in the consolidated balance sheets (in thousands):
Funded status of plan at year end
Unrecognized actuarial loss
Unrecognized prior service cost
Net prepaid pension cost
Other comprehensive loss
Net amount recognized as other assets
$
21
2,182
(427)
1,776
—
$
1,776
The components of net periodic pension cost for 2006, 2005 and 2004 were as follows (in thousands):
Components of Net Periodic Pension Cost:
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,
2006
2005
2004
$
$
278
334
(445)
(37)
116
—
246
$
$
267
322
(456)
(37)
107
(44)
159
$
$
241
311
(423)
(37)
103
(44)
151
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:
2006
2005
6.00%
5.00%
6.00%
5.00%
Discount rate
Expected long-term return on assets
Rate of compensation increase
YEAR ENDED DECEMBER 31,
2006
2005
2004
6.00%
8.00%
5.00%
6.00%
8.00%
5.00%
6.50%
8.00%
5.00%
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, 2006 and 2005 were invested in the following asset categories:
Asset Category:
Equity securities
Debt securities
Other
Total
2006
2005
77%
19%
4%
100%
70%
29%
1%
100%
23
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
It is the Company’s investment policy to maintain 66 percent to 79 percent of the plan’s assets in equity securities and 19
percent to 31 percent of the plan’s 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, 2006 represents the targeted asset allocation.
Based upon the plan’s current funded position, the Company expects to make $250,000 in contributions to its pension plan
in 2007, and the Company’s estimated future benefit payments under the plan are as follows (in thousands):
2007
2008
2009
2010
2011
2012-2016
$ 480
$ 270
$ 280
$ 280
$ 300
$ 1,690
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 $244,000, $223,000 and $214,000 in 2006, 2005 and 2004, respectively.
12
Commitments and Contingencies
From time to time and in the ordinary course of business, the Company may be subject to various claims, charges and
litigation. In some cases, the claimants may seek damages, as well as other relief, which, if granted, could require significant
expenditures. The Company accrues the estimated costs of settlement or damages when a loss is deemed probable and such
costs are estimable, and accrues for legal costs associated with a loss contingency when a loss is probable and such
amounts are estimable. Otherwise, these costs are expensed as incurred. If the estimate of a probable loss or defense costs is
a range and no amount within the range is more likely, the Company accrues the minimum amount of the range. As of
December 31, 2006, the Company had accrued $384,000 for legal fees and expenses that it expected to incur in
connection with the litigation or arbitration of two such matters.
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 2007 could result in payments aggregating $1.4 million excluding any excise tax that may be reimbursable
by the Company.
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 leased facility. In 2004, the Company made a $3.75 million deposit required in connection
with a proposed purchase of eleven acres of land to be used for the construction of this new facility. During 2005, this
property was acquired and construction of the new facility commenced. The Company completed the construction of this new
facility and moved the Halkey-Roberts operation into the new facility during the third quarter of 2006. The Company
terminated its lease for the Halkey-Roberts facility in St. Petersburg, Florida which was vacated in October of 2006. This lease
was being accounted for as an operating lease, and the rental expense for the years ended December 31, 2006, 2005 and
2004 was $363,000, $422,000 and $409,000, respectively. There is no future rental commitment under this lease.
24
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
13
Quarterly Financial Data (Unaudited)
The following table shows selected unaudited quarterly financial data for 2006 and 2005:
QUARTER
ENDED
03/31/06
06/30/06
09/30/06
12/31/06
03/31/05
06/30/05
09/30/05
12/31/05
$
$
OPERATING
REVENUE
19,503
20,849
19,290
21,379
18,645
18,102
18,338
17,003
OPERATING
INCOME
NET INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
$
$
3,052
4,125
3,186
3,974
3,418
3,131
3,111
3,037
$
$
2,106
2,985
2,696
2,979
2,294
2,272
2,241
2,149
$
$
INCOME
PER BASIC
SHARE
1.15
1.62
1.45
1.60
1.33
1.27
1.23
1.17
$
$
INCOME
PER DILUTED
SHARE
1.08
1.53
1.38
1.52
1.23
1.18
1.15
1.10
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.
25
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of Atrion Corporation
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over
Financial Reporting, that Atrion Corporation and subsidiaries maintained effective internal control over financial reporting as
of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). Atrion Corporation’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the
effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Atrion Corporation and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal
Control-Integrated Framework issued by COSO. Also in our opinion, Atrion Corporation and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established
in Internal Control-Integrated Framework issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Atrion Corporation and subsidiaries as of December 31, 2006 and 2005, 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, 2006, and our report dated March 9, 2007, expressed an unqualified opinion on those
financial statements.
Grant Thornton LLP
Dallas, Texas
March 9, 2007
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AT R I O N / 2 0 0 6 A N N U A L R E P O R T
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934, as amended. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. All internal control systems, no matter how well designed, have inherent limitations. A system of internal
control may become inadequate over time because of changes in conditions or deterioration in the degree of compliance with the
policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2006 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on this assessment, the Company’s management concluded that, as
of December 31, 2006, the Company’s internal control over financial reporting was effective.
The financial statements for each of the years covered in this Annual Report have been audited by an independent registered
public accounting firm, Grant Thornton LLP. Additionally, Grant Thornton LLP has provided an attestation report on management’s
assessment of the Company’s internal control over financial reporting as of December 31, 2006.
27
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of Atrion Corporation
We have audited the accompanying consolidated balance sheets of Atrion Corporation and subsidiaries as of December 31,
2006 and 2005, 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, 2006. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Atrion Corporation and subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006 the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” Also as
discussed in Note 1 to the consolidated financial statements, effective December 31, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and
other Postretirement Plans.”
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the effectiveness of Atrion Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 9, 2007, expressed an unqualified opinion on both
management’s assessment of Atrion Corporation’s internal control over financial reporting and on the effectiveness of Atrion
Corporation’s internal control over financial reporting.
Grant Thornton LLP
Dallas, Texas
March 9, 2007
28
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company designs, develops, manufactures, sells and distributes products and components, primarily for the medical and
healthcare industry. The Company markets components to other equipment manufacturers for incorporation in their products
and sells finished devices to physicians, hospitals, clinics and other treatment centers. The Company’s medical products
primarily serve the fluid delivery, cardiovascular, and ophthalmology markets. The Company’s other medical and non-medical
products include instrumentation and disposables used in dialysis, contract manufacturing and valves and inflation devices
used in marine and aviation safety products. In 2006 approximately 30 percent of the Company’s sales were outside the
United States.
The Company’s products are used in a wide variety of applications by numerous customers. 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.
The Company’s strategy is to provide a broad selection of products in the areas of its expertise. Research and development
efforts are focused 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. 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.
The Company’s strategic objective is to further enhance its position in its served markets by:
• Focusing on customer needs;
• Expanding existing product lines and developing new products;
• Maintaining a culture of controlling cost; and
• Preserving and fostering a collaborative, entrepreneurial management structure.
For the year ended December 31, 2006, the Company reported revenues of $81.0 million, income from continuing operations
of $10.6 million and net income of $10.8 million, up 12 percent, 21 percent and 20 percent, respectively, from 2005.
During the third quarter of 2006, the Company completed the construction of a new facility in St. Petersburg, Florida for a
subsidiary, Halkey-Roberts Corporation (“Halkey-Roberts”). The relocation of the Halkey-Roberts operations to its new facility
was completed in 2006.
Results of Operations
The Company’s net income was $10.8 million, or $5.82 per basic and $5.51 per diluted share, in 2006, compared to net
income of $9.0 million, or $4.99 per basic and $4.66 per diluted share, in 2005 and $6.5 million, or $3.78 per basic and
$3.50 per diluted share, in 2004. Revenues were $81.0 million in 2006, compared with $72.1 million in 2005 and $66.1
million in 2004. The 12 percent revenue increase in 2006 over the prior year was primarily attributable to a 26 percent
increase in the revenues from the Company’s fluid delivery products, a 21 percent increase from the Company’s
cardiovascular products, and a 2 percent increase from the Company’s other medical and non-medical products. These
revenue increases were generally attributable to higher sales volumes. These increases were partially offset by a 5 percent
decrease in revenues from the Company’s ophthalmic products. The 9 percent revenue increase in 2005 over the prior year
was primarily attributable to a 19 percent increase in the revenues from the Company’s fluid delivery products, a 16 percent
increase from the Company’s cardiovascular products, and a 7 percent increase from the Company’s other medical and non-
medical products. These revenue increases were generally attributable to higher sales volumes, but were partially offset by a
7 percent decrease in revenues from the Company’s ophthalmic products.
29
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Annual revenues by product lines were as follows (in thousands):
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
2006
2005
2004
$ 25,809
23,290
13,744
18,177
$ 81,020
$
$
20,447
19,307
14,514
17,821
72,089
$
$
17,192
16,577
15,690
16,622
66,081
The Company’s cost of goods sold was $48.6 million in 2006, compared with $43.1 million in 2005 and $40.8 million in
2004. The 13 percent increase in cost of goods sold for 2006 over 2005 was primarily related to the revenue increase
discussed above. The 6 percent increase in cost of goods sold for 2005 over 2004 was primarily related to the revenue
increase discussed above, an improved mix of product sales toward products with lower costs and favorable manufacturing
efficiencies brought on by increased volumes and continued manufacturing cost improvement projects.
Gross profit in 2006 increased $3.4 million to $32.4 million, compared with $29.0 million in 2005 and $25.3 million in
2004. The Company’s gross profit was 40 percent of revenues, in both 2006 and 2005 and 38 percent of revenues in
2004. The increase in gross profit percentage in 2005 from the prior year was primarily due to the favorable shift in product
mix mentioned above, productivity improvements and improved manufacturing efficiencies.
Operating expenses were $18.1 million in 2006, compared with $16.3 million in 2005 and $16.7 million in 2004. The
increase in operating expenses in 2006 from 2005 was primarily related to increased research and development (“R&D”),
selling (“Selling”) and general and administrative (“G&A”) expenses. R&D expenses consist primarily of salaries and other
related expenses of the research and development personnel as well as costs associated with regulatory expenses. R&D
expenses increased $398,000 in 2006, primarily due to increased legal, prototype supplies and compensation costs. Selling
expenses consist primarily of salaries, commissions and other related expenses for sales and marketing personnel, marketing,
advertising and promotional expenses. Selling expenses increased $430,000 in 2006, primarily as a result of increased
compensation costs, commissions, outside services, promotion and advertising. G&A expenses consist primarily of salaries
and other related expenses of administrative, executive and financial personnel and outside professional fees. In 2006, G&A
expenses increased $1.0 million, primarily due to outside services, taxes, compensation and benefits and costs associated
with the relocation to the new facility for Halkey-Roberts. The decrease in operating expenses in 2005 from 2004 was
primarily related to decreased G&A expenses. The decrease in G&A was primarily attributable to reduced legal costs
partially offset by increases in compensation and costs related to information technology enhancements.
The Company’s operating income for 2006 was $14.3 million, compared with $12.7 million in 2005 and $8.6 million in
2004. The previously mentioned increase in gross profit, partially offset by the previously mentioned increase in operating
expenses, was the major contributor to the operating income improvement in 2006. The previously mentioned increase in
gross profit along with cost containment and cost reduction activities were the major contributors to the operating income
improvements in 2005.
Interest expense was $253,000 in 2006 compared to $61,000 in 2005 and $93,000 in 2004. The increase in 2006 was
primarily related to higher average borrowings and increased interest rates.
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AT R I O N / 2 0 0 6 A N N U A L R E P O R T
Income tax expense in 2006 totaled $3.6 million, compared with $3.9 million in 2005 and $2.3 million in 2004. The
effective tax rates for 2006, 2005 and 2004 were 25.2 percent, 30.7 percent and 26.6 percent, respectively. Benefits from
tax incentives for exports and R&D expenditures totaled $1,476,000 in 2006, $534,000 in 2005 and $516,000 in 2004.
The lower effective tax rate in 2006 is primarily a result of a review and documentation of the Company’s R&D tax credits for
2005 and prior-year tax returns which indicated that the Company was entitled to higher credits than had been claimed. The
higher effective tax rate in 2005 is primarily a result of benefits from tax incentives for exports and R&D expenditures being a
lesser percentage of taxable income in 2005 than in 2004. The Company expects the effective tax rate for 2007 to return to
approximately 31.0 percent.
The Company believes that 2007 revenues will be higher than 2006 revenues and that the cost of goods sold, gross profit,
operating income and net income will each be higher in 2007 than in 2006. As a result of the relocation to the new
St. Petersburg facility, the Company expects annual operating expenses, primarily depreciation, property taxes and utility
costs, to increase by approximately $1.0 million compared to rent and operating costs at the prior facility. The growth
of net income in 2007 will also be impacted by an increase in the Company’s tax rate and the absence of income from
discontinued operations in future years. The Company further believes that in 2007, the Company will have continuing
volume growth in most of its product lines, complemented by the introduction of new products, and will achieve continued
growth in operating income.
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 $0.2 million in each of 2006, 2005 and 2004. These
gains represented $.09 per basic share in each of 2006 and 2005 and $.10 per basic share in 2004, and $.08 per
diluted share in 2006, and $.09 per diluted share in each of 2005 and 2004.
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 2006, 2005 and 2004 which are reflected in each year as a gain from discontinued operations of $165,000, net of
tax. No additional payments are due in future periods under the terms of the 1997 agreement pursuant to which the
Company sold its natural gas operations.
Liquidity and Capital Resources
The Company has a $25.0 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 one percent. At December 31, 2006, the
Company had $13.6 million available for borrowing under the Credit Facility.
At December 31, 2006, the Company had cash and cash equivalents of $333,000 compared with $525,000 at December
31, 2005. The Company had outstanding borrowings of $11.4 million under its Credit Facility at December 31, 2006 and
$2.5 million at December 31, 2005. The Credit Facility, which expires November 11, 2009, 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. At December 31, 2006, the Company was in compliance with all financial covenants.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash flows from continuing operations generated $12.6 million in 2006 as compared to $9.9 million in 2005. The primary
contributors to this were the improved operating results for the 2006 period and the absence of the cash-flow impact from
increased inventory in the 2005 period. Cash provided by operating activities consists primarily of net income adjusted for
certain non-cash items and changes in working capital items. Non-cash items include depreciation and amortization and
deferred income taxes. Working capital items consist primarily of accounts receivable, accounts payable, inventories and
other current assets and other current liabilities.
At December 31, 2006, the Company had working capital of $23.7 million, including $333,000 in cash and cash
equivalents. The $4.0 million increase in working capital during 2006 was primarily related to an increase in accounts
receivable, and a decrease in accounts payable partially offset by a decrease in inventories. The increase in accounts
receivable is primarily related to the increase in revenues for the fourth quarter of 2006 as compared to the fourth quarter of
2005. The decrease in accounts payable is related to one-time items associated with the construction of the Halkey-Roberts
facility that were included in the 2005 accounts payable balance. The decrease in inventories is related to increased sales in
the fourth quarter of 2006.
Capital expenditures for property, plant and equipment totaled $20.9 million in 2006, compared with $10.6 million in 2005
and $5.6 million in 2004. Of the $20.9 million expended for the addition of property, plant and equipment during 2006,
the Company expended $15.5 million toward the construction of its new St. Petersburg facility for its Halkey-Roberts operation.
Of the $10.6 million expended for the addition of property, plant and equipment during 2005, the Company expended
$4.5 million toward the construction of its new St. Petersburg facility for its Halkey-Roberts operation. In 2004, the Company
expended $3.8 million for the purchase of eleven acres of land being used for this construction. The Company completed the
construction of its new St. Petersburg facility and moved the Halkey-Roberts operation into the new facility during the third
quarter of 2006. The total cost of the new facility was $20.0 million and the cost of the land was $3.8 million.
During 2006, the Company increased its outstanding borrowings under the Credit Facility by $8.9 million. The Company
reduced its outstanding borrowings under the Credit Facility by $407,000 during 2005. During 2006, the Company
repurchased 24,000 shares of its common stock for approximately $1.6 million.
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 2006, the Company paid dividends totaling $1.4 million
to its stockholders and received $1.2 million from the exercise of stock options.
The table below summarizes debt, lease and other contractual obligations outstanding at December 31, 2006:
CONTRACTUAL OBLIGATIONS (IN THOUSANDS)
TOTAL
Credit Facility
Purchase Obligations
Total
$
$
11,399
8,816
20,215
$
$
2007
—
7,933
7,933
PAYMENTS DUE BY PERIOD
2008 – 2009
2010 – 2011
2012 AND THEREAFTER
$
$
67
883
950
$
$
11,332
—
11,332
$
$
—
—
—
The payment schedule for the Credit Facility assumes at maturity, November 2009, the Company will convert this outstanding
debt to a two-year term note as permitted by the terms of the agreement.
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.
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AT R I O N / 2 0 0 6 A N N U A L R E P O R T
Off Balance Sheet Arrangements
The Company has no off-balance sheet financing arrangements.
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
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in
income taxes recognized in financial statements. FIN 48 requires the impact of a tax position to be recognized in the
financial statements if that position is more likely than not of being sustained by the taxing authority. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently evaluating the requirements of FIN 48. Based on
the Company’s computations, the FIN 48 adjustment to the Company’s retained earnings during the first quarter of 2007 is
expected to be less than $100,000.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidance for
measuring the fair value of assets and liabilities, as well as requires expanded disclosures about fair value measurements.
SFAS 157 indicates that fair value should be determined based on the assumptions marketplace participants would use in
pricing the asset or liability, and provides additional guidelines to consider in determining the market-based measurement.
The Company will be required to adopt SFAS 157 on January 1, 2008. The Company is currently evaluating the impact of
adopting SFAS 157 on its consolidated financial statements.
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115“ (“SFAS 159”), which allows measurement at fair value of eligible
financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is
elected, unrealized gains and losses for that item shall be reported in current earnings at each subsequent reporting date.
SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different
measurement attributes the Company elects for similar types of assets and liabilities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. Early adoption is permitted. The Company is currently assessing the impact of
SFAS 159 on its financial statements.
Critical Accounting Policies
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 effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different
assumptions and conditions.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During 2006, the Company accrued for legal costs associated with certain litigation. The Company believes these accruals
are adequate to cover the legal fees and expenses associated with litigating these matters. However, the time and cost
required to litigate these matters as well as the outcomes of the proceedings may vary from what the Company has projected.
The Company assesses the impairment of its long-lived identifiable assets, excluding goodwill which is tested for impairment
pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets” (“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.
The Company assesses goodwill for impairment pursuant to SFAS No.142 which requires that 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 or future events 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, net income, cash flows from operations, growth in product lines,
availability of equity and debt financing, repayment of outstanding debt, increased operating expenses and tax rate, and
growth in earnings per share. 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; 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; intellectual property 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 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.
34
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
SELECTED FINANCIAL DATA
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
2006
2005
2004
2003
2002
Operating Results for the
Year ended December 31,
Revenues
Operating income
Income from continuing operations
Net income
Depreciation and amortization
Per Share Data:
Income from continuing
operations, per diluted share
Net income per diluted share
Cash dividends per common share
Average diluted shares outstanding
Financial Position at December 31,
Total assets
Long-term debt
$ 81,020
$
72,089
$
66,081
$
62,803
$
59,533
14,338
10,600
10,765
5,005
5.43
5.51
.74
1,953
95,772
11,399
12,698
8,793
8,958
5,389
4.57
4.66
.62
1,924
78,470
2,529
8,596
6,305
6,470
4,830
3.41
3.50
.52
1,850
67,408
2,936
6,923
4,892
5,057
4,783
2.66
2.75
(a)
.24
1,839
5,782
4,065
2,589
(b)
4,418
2.18
1.39
(b)
—
1,863
60,050
4,287
60,807
10,337
(a) Dividends on outstanding shares of common stock 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)
35
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
DIRECTORS AND OFFICERS
Board of Directors
Executive Officers
Emile A. Battat
Chairman of the Board, President,
and Chief Executive Officer
Hugh J. Morgan, Jr.
Private Investor, Former Chairman of the Board
National Bank of Commerce of Birmingham
Birmingham, Alabama
Emile A. Battat
Chairman of the Board, President,
and Chief Executive Officer
Jeffery Strickland
Vice President and Chief Financial
Officer, Secretary and Treasurer
Ronald N. Spaulding
President of International Operations
Abbott Vascular
Brussels, Belgium
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
36
AT R I O N / 2 0 0 6 A N N U A L R E P O R T
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 2006 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 February 20, 2007, there were
1,100 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 2005 and 2006.
2005 Quarter Ended
March 31
June 30
September 30
December 31
2006 Quarter Ended
March 31
June 30
September 30
December 31
High
$ 53.56
74.55
81.28
69.43
High
$ 78.99
80.96
77.50
79.52
Low
$ 45.27 $
47.52
64.33
61.02
Dividends
0.14
0.14
0.17
0.17
Low
$ 66.30 $
64.31
67.37
75.13
Dividends
0.17
0.17
0.20
0.20
In the third quarter of 2003, the Company began paying
quarterly cash dividends and presently plans to pay
quarterly cash dividends in the future.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN AMONG ATRION CORPORATION,
SURGICAL AND MEDICAL INSTRUMENTS INDEX AND S&P 500 COMPOSITE INDEX
$
ATRION
CORPORATION
SURGICAL AND MEDICAL
INSTRUMENTS INDEX
S&P 500
COMPOSITE INDEX
ATRION CORPORATION
SURGICAL AND MEDICAL
INSTRUMENTS INDEX
S&P 500 COMPOSITE INDEX
2001
100
100
100
2002
59.13
2003
120.10
2004
123.34
2005
187.49
2006
212.03
81.62
121.00
138.65
129.90
142.29
77.90
100.25
111.15
116.61
135.03
The graph set forth above compares the cumulative total return on investment (the change in year-end stock price plus reinvestment of dividends) for each of the last five fiscal years, assuming that $100
was invested on December 31, 2001, in each of (i) the Company, (ii) a group of stocks consisting of companies in the Hemscott Index of Surgical and Medical Instruments, and (iii) a group of stocks consisting
of all companies whose stocks are included in the S&P 500 Composite Index.
MPS, MPS2, and LacriCATH are registered trademarks of Atrion Corporation.
AT R I O N C O R P O R AT I O N • O N E A L L E N T O W N PA R K WAY • A L L E N , T E X A S 7 5 0 0 2
9 7 2 . 3 9 0 . 9 8 0 0 • W W W. AT R I O N C O R P C O M
.