ANNUAL REPORT
TO STOCKHOLDERS
2013 Atrion Corporation develops and manufactures products primarily for medical applications.
Our products advance the standard of care by increasing safety for patients and providers. We target
niche markets, with particular emphasis on fluid delivery, cardiovascular and ophthalmology applications.
Headquartered in Allen, Texas, Atrion has design and manufacturing facilities in Alabama, Florida and Texas.
Contents
Letter to Stockholders
Financial Statements
Management’s Discussion
Selected Financial Data
Corporate Information
2
4
22
27
29
2013 Financial Highlights
For the Year Ended
December 31
2013
2012
As of
December 31
2013
2012
Revenues
$ 131,993,000
$ 119,062,000
Total Assets
$
172,066,000
$ 155,810,000
Operating Income
37,944,000
33,626,000
Net Income
26,582,000
23,629,000
Cash and
Investments
56,979,000
44,614,000
Income per Diluted Share
$
13.18
$
11.66
Long-term Debt
—
—
Weighted Average Diluted
Shares Outstanding
2,017,000
2,027,000
Stockholders’
Equity
$
148,994,000
$ 134,828,000
2009
2010
2011
2012
2013
$8.36
$10.32
$12.82
$11.66
$13.18
2009
2010
2011
2012
2013
$101
$109
$118
$119
$132
2009
2010
2011
2012
2013
$25.0
$31.0
$38.2
$33.6
$37.9
INCOME PER DILUTED SHARE
REVENUES (IN MILLIONS)
OPERATING INCOME (IN MILLIONS)
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
Among Atrion Corporation, Russell 2000 Index and SIC Code Index
Atrion Corporation
Russell 2000 Index
SIC Code Index
400
300
s
r
a
l
l
o
D
200
100
0
2008
2009
2010
2011
2012
2013
The graph set forth at left compares the total
cumulative return for the five-year period ended
December 31, 2013 on the Company’s common
stock, the Russell 2000 Index and SIC Code
3841 Index-Surgical and Medical Instruments
(compiled by Zacks Investment Research, Inc.),
assuming $100 was invested on December 31,
2008 in our common stock, the Russell 2000
Index and the SIC Code Index and dividends
were reinvested.
Company/Index
Atrion Corporation
Russell 2000 Index
SIC Code Index
2008
$100.00
$100.00
$100.00
2009
$162.23
$127.09
$125.01
2010
$199.50
$161.17
$127.90
2011
$269.59
$154.44
$121.00
2012
$233.36
$179.75
$146.20
2013
$356.38
$249.53
$204.47
1
To our stockholders
I am pleased to report that 2013 was a year of strong results. All of our
major product categories achieved higher revenues compared to 2012,
resulting in an overall increase in revenues of 11%, with net income and
diluted earnings per share up 13%.
We constantly push ourselves to achieve this level of performance. For the
last 15 years, the current management team has relentlessly focused on a
dedication to developing innovative products, a commitment to—and
attainment of—the highest quality standards, and a continual process of
seeking and developing talent. The results speak for themselves: annual
compounded rates of growth of 8% in sales, 18% in net income—all of
which we achieved organically rather than through acquisitions.
The Power of Strategic Investments
One of our key strengths has been how we’ve chosen to invest in our future.
Whether utilizing our cash for technologies to continuously improve our
quality and efficiency, or for fortifying our intellectual capital, we’ve kept a
steady focus on what it takes to position ourselves for growth. Over the past
several years, the foundation we’ve built has consistently allowed us to
successfully stay ahead of economic and industry changes, and to deliver
impressive results for our stockholders.
The success of this capital allocation strategy speaks for itself. In 2013 the
after-tax return on equity was 18%, which was stifled by the substantial
low-yielding cash and marketable securities that we retain. Excluding these
financial assets and the after-tax income they generated, our after-tax return
on the equity supporting our business activities was 28%.
A Foundation of Our Own Design
We have outpaced the growth of the markets in which we participate by
cementing customer relationships through exceptional service, and
expanding our product offerings and customer base by committing to
innovation and quality. While we will remain fully committed to these
strategies that have driven our growth, we are also augmenting them to
pursue new opportunities.
The results speak for
themselves: annual
compounded rates of
growth of 8% in sales,
18% in net income—all
of which we achieved
organically rather than
through acquisitions.
2
ATRION 2013 ANNUAL REPORT For example, many of our largest OEM customers are moving away from
funding their own R&D in favor of paying a premium for products that other
companies have completed. Few companies are as well-positioned as we
are to take advantage of this trend. We have the financial and intellectual
resources to create innovative products, the ability to manufacture them
properly, and the established OEM relationships through which to sell them.
To leverage this opportunity, beginning in 2012 we substantially increased
our investments in R&D. Our R&D expenditures are 50% higher than they
were in 2011.
In addition to our internal projects, we acquired third-party patents, and
partnered with outside experts to accelerate our entry into niches we are
targeting. Growth through acquisition is also still possible, though our
approach to this remains highly disciplined. The valuation must be sensible,
and the technology and talent must complement and expand what we
have today.
Enthusiastic About the Road Ahead
Today’s rapid pace of change demands that we stay nimble in order to
remain competitive and grow. Our dedication to innovation is aimed at this.
In 2014, we will maintain our focus on product development.
We expect to continue to show growth in revenues and earnings this
year—despite increasing outlays for product development and the
uncertain economic outlook in the international markets that are
responsible for 42% of our sales.
Our success is built on the contributions of many. For their loyalty and effort,
I am grateful to our employees. For your continued interest, confidence, and
support, I’m deeply appreciative of our stockholders as well.
Respectfully,
David A. Battat
President and Chief Executive Officer
2013 REVENUES BY PRODUCT LINE
Fluid Delivery
$ 51,289,000
Cardiovascular
$ 40,182,000
Ophthalmology
$ 20,736,000
Other
$ 19,786,000
39%
30%
16%
15%
3
ATRION 2013 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
As of December 31, 2013 and 2012
Assets:
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $86 and $47 in 2013 and 2012, respectively
Inventories
Prepaid expenses and other current assets
Deferred income taxes
Total Current Assets
Long-term investments
Property, Plant and Equipment
Less accumulated depreciation and amortization
Other Assets and Deferred Charges:
Patents and licenses, net of accumulated amortization of $11,032 and $10,853 in 2013 and 2012, respectively
Goodwill
Other
Total Assets
The accompanying notes are an integral part of these statements.
2013
2012
(in thousands)
$
28,559 $
18,351
14,164
26,266
1,603
1,376
90,319
10,069
130,504
72,176
58,328
2,808
9,730
812
13,350
7,999
8,182
13,054
23,779
3,110
623
56,747
28,433
124,180
64,912
59,268
837
9,730
795
11,362
$
172,066 $
155,810
4
ATRION 2013 ANNUAL REPORT
Liabilities and Stockholders’ Equity:
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
Retained earnings
Treasury shares, 1,428 shares in 2013, 1,399 shares in 2012, at cost
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these statements.
2013
2012
(in thousands)
$
4,088 $
4,423
853
9,364
—
12,062
1,646
13,708
23,072
3,843
2,900
465
7,208
—
12,232
1,542
13,774
20,982
342
342
31,592
174,362
(57,302)
148,994
29,998
152,630
(48,142)
134,828
$
172,066 $
155,810
5
ATRION 2013 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, 2013, 2012 and 2011
Revenues
Cost of Goods Sold
Gross Profit
Operating Expenses:
Selling
General and administrative
Research and development
Operating Income
Interest Income
Other Income, net
Income before Provision for Income Taxes
Provision for Income Taxes
Net Income
Net Income Per Basic Share
Weighted Average Basic Shares Outstanding
Net Income Per Diluted Share
Weighted Average Diluted Shares Outstanding
Dividends Per Common Share
The accompanying notes are an integral part of these statements.
2013
2012
2011
(in thousands, except per share amounts)
$
131,993 $
119,062 $
117,704
68,931
63,062
6,218
14,612
4,288
25,118
37,944
1,313
8
62,922
56,140
5,694
13,054
3,766
22,514
33,626
1,447
2
57,697
60,007
5,325
13,646
2,868
21,839
38,168
1,295
12
39,265
(12,683)
35,075
(11,446)
39,475
(13,437)
26,582 $
23,629 $
26,038
13.22 $
11.72 $
2,010
2,016
13.18 $
11.66 $
2,017
2,027
2.40 $
12.10 $
12.90
2,019
12.82
2,031
1.82
$
$
$
$
6
ATRION 2013 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2013, 2012 and 2011
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Stock-based compensation
Net change in accrued interest, premiums, and discounts on investments
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
Cash Flows From Investing Activities:
Property, plant and equipment additions
Purchase of patents
Purchase of investments
Proceeds from maturities of investments
Cash Flows From Financing Activities:
Exercise of stock options
Shares tendered for employees’ withholding taxes on stock-based compensation
Tax benefit related to stock-based compensation
Purchase of treasury stock
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:
Income taxes
The accompanying notes are an integral part of these statements.
2013
2012
2011
(in thousands)
$
26,582
$
23,629
$
26,038
8,592
(923)
1,586
556
30
7,610
1,462
1,482
817
—
6,544
2,584
1,047
824
—
36,423
35,000
37,037
(1,110)
(2,487)
1,507
(17)
1,768
388
104
36,576
(7,503)
(2,150)
—
7,639
(2,014)
—
—
15
(9,196)
(4,821)
(14,002)
20,560
7,999
(1,831)
803
(797)
(77)
(2,465)
(370)
(894)
29,369
298
(7,182)
(1,263)
18
2,008
283
341
31,540
(10,347)
(11,999)
—
—
(26,566)
19,750
(17,163)
731
(1,136)
1,412
(5,344)
(24,460)
(28,797)
(16,591)
24,590
(14,723)
14,290
(12,432)
—
(78)
79
(1,513)
(3,676)
(5,188)
13,920
10,670
$
28,559
$
7,999
$
24,590
$
8,036
$
10,357
$
11,921
7
ATRION 2013 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the year ended December 31, 2013, 2012, and 2011 (in thousands)
Common Stock
Treasury Stock
Shares
Outstanding
Amount
Shares
Amount
Additional
Paid-in Capital
Retained
Earnings
Total
Balances, January 1, 2011
2,016 $
342
1,404 $
(39,342)
$
24,331 $
131,286 $
116,617
26,038
26,038
Net income
Tax benefit from stock-based compensation
Stock-based compensation transactions
Shares surrendered in stock transactions
Purchase of treasury stock
Dividends
8
(8)
(8)
8
35
(78)
(1,513)
79
1,042
(3,706)
Balances, December 31, 2011
2,016
342
1,404
(40,898)
25,452
153,618
Net income
Tax benefit from stock-based compensation
Stock-based compensation transactions
Shares surrendered in stock transactions
Purchase of treasury stock
Dividends
41
(9)
(27)
(41)
9
27
368
(2,268)
(5,344)
1,412
3,134
23,629
(24,617)
Balances, December 31, 2012
2,021
342
1,399
(48,142)
29,998
152,630
Net income
Tax benefit from stock-based compensation
Stock-based compensation transactions
Purchase of treasury stock
Dividends
1
(30)
(1)
30
36
(9,196)
15
1,579
26,582
(4,850)
79
1,077
(78)
(1,513)
(3,706)
138,514
23,629
1,412
3,502
(2,268)
(5,344)
(24,617)
134,828
26,582
15
1,615
(9,196)
(4,850)
Balances, December 31, 2013
1,992 $ 342
1,428 $
(57,302) $
31,592 $
174,362 $
148,994
The accompanying notes are an integral part of these statements.
8
ATRION 2013 ANNUAL REPORT
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Atrion Corporation and its subsidiaries (“we,” “our,” “us,” “Atrion”
or the “Company”) develop and manufacture products primarily
for medical applications. We market our products throughout
the United States and internationally. Our customers include
hospitals, distributors, and other manufacturers. Atrion
Corporation’s principal subsidiaries through which these
operations are conducted are Atrion Medical Products, Inc.,
Halkey-Roberts Corporation and Quest Medical, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of
Atrion Corporation and its subsidiaries. All intercompany
transactions and balances have been eliminated in
consolidation.
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 include cash on hand and in the bank as well
as money market accounts and debt securities with original
maturities of 90 days or less.
Trade Receivables
Trade accounts receivable are recorded at the original sales
price to the customer. We maintain an allowance for doubtful
accounts to reflect estimated losses resulting from the failure of
customers to make required payments. On an ongoing basis,
the collectability of accounts receivable is assessed based upon
historical collection trends, current economic factors and the
assessment of the collectability of specific accounts. We
evaluate the collectability of specific accounts and determine
when to grant credit to our 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 we determine
the receivable will not be collected.
Investments
Our investments consist of taxable corporate bonds. Our
investment policy is to seek to preserve principal and maintain
adequate liquidity while at the same time maximizing yields
without significantly increasing risk. We are required to classify
our investments as trading, available-for-sale or held-to-
maturity. Our investments are accounted for as held-to-maturity
since we have the positive intent and ability to hold these
investments to maturity. These investments are reported at
cost, adjusted for premiums and discounts that are recognized
in interest income, using a method that approximates the
effective interest method, over the period to maturity and
unrealized gains and losses are excluded from earnings. We
consider as current assets those investments which will mature
in the next 12 months. The remaining investments are
considered non-current assets.
9
Notes to Consolidated Financial Statements ATRION 2013 ANNUAL REPORT 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):
December 31,
2013
2012
Raw materials
Work in process
Finished goods
Total inventories
$
$
10,744 $
6,246
9,276
26,266 $
10,017
5,268
8,494
23,779
Accounts Payable
We reflect disbursements as trade accounts payable until such
time as payments are presented to our bank for payment. At
December 31, 2013 and 2012, disbursements totaling
approximately $443,000 and $495,000, respectively, had not
been presented for payment to our bank.
Income Taxes
We account for income taxes utilizing Accounting Standards
Codification (ASC) 740, Income Taxes (“ASC 740”). ASC 740
requires the asset and liability method for the recording of
deferred income taxes, whereby deferred tax assets and
liabilities are recognized based on the tax effects of temporary
differences between the financial statement and the tax bases
of assets and liabilities, as measured at current enacted tax
rates. When appropriate, we evaluate the need for a valuation
allowance to reduce deferred tax assets.
ASC 740 also requires the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements and
prescribes a recognition threshold and measurement attributes
of income tax positions taken or expected to be taken on a tax
return. Under ASC 740, the impact of an uncertain tax position
taken or expected to be taken on an income tax return must be
recognized in the financial statements at the largest amount
that is more-likely-than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will
not be recognized in the financial statements unless it is
more-likely-than-not of being sustained.
Our uncertain tax positions are recorded as “Other non-current
liabilities.” We classify interest expense on underpayments of
income taxes and accrued penalties related to unrecognized tax
benefits in the income tax provision.
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. Additions and improvements are capitalized,
including all material, labor and engineering costs to design,
install or improve the asset. Expenditures for repairs and
maintenance are charged to expense as incurred. The following
table represents a summary of property, plant and equipment
at original cost (in thousands):
December 31,
2013
2012
Useful Lives
$
5,260 $
31,314
5,260
30,664
—
30-40 yrs
93,930
88,256
3-15 yrs
$
130,504 $
124,180
Land
Buildings
Machinery and
equipment
Total property, plant
and equipment
Depreciation expense of $8,413,000, $7,448,000 and
$6,272,000 was recorded for the years ended December 31,
2013, 2012 and 2011, respectively. Depreciation expense is
recorded in either cost of goods sold or operating expenses
based on the associated assets’ usage.
Patents and Licenses
Costs for patents and licenses acquired are determined at
acquisition date. Patents and licenses are amortized over the
useful lives of the individual patents and licenses, which are
from 7 to 20 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 qualitative
assessment on goodwill impairment to determine whether it is
necessary to perform the two-step goodwill impairment test.
Goodwill is also reviewed whenever events or changes in
circumstances indicate a change in value may have occurred.
We have identified three reporting units where goodwill was
recorded for purposes of testing goodwill impairment annually:
(1) Atrion Medical Products, Inc., (2) Halkey-Roberts Corporation
and (3) Quest Medical, Inc. The total carrying amount of
goodwill in each of the years ended December 31, 2013, 2012
and 2011 was $9,730,000. Our evaluation of goodwill during
the year resulted in no impairment losses.
10
ATRION 2013 ANNUAL REPORT Notes to Consolidated Financial Statements Current Accrued Liabilities
The items comprising current accrued liabilities are as follows
(in thousands):
December 31,
2013
2012
Accrued payroll and related expenses
$
3,711 $
2,276
Accrued vacation
Other accrued liabilities
Total accrued liabilities
229
483
210
414
$
4,423 $
2,900
Revenues
We recognize revenue when our products are shipped to our
customers, provided an arrangement exists, the fee is fixed and
determinable and collectability 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 sales and similar
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.
Stock-Based Compensation
We have stock-based compensation plans covering certain of
our officers, directors and key employees. As explained in detail
in Note 8, we account for stock-based compensation utilizing
the fair value recognition provisions of ASC 718, Compensation-
Stock Compensation, (“ASC 718”).
New Accounting Pronouncements
From time to time, new accounting pronouncements applicable
to us are issued by the Financial Accounting Standards Board
(“FASB”) or other standards setting bodies, which we will adopt
as of the specified effective date. Unless otherwise discussed, we
believe the impact of recently issued standards that are not yet
effective will not have a material impact on our consolidated
financial statements upon adoption.
Fair Value Measurements
Accounting standards use a three-tier fair value hierarchy which
prioritizes the inputs used in measuring fair value. These tiers
are: Level 1, defined as observable inputs such as quoted prices
in active markets; Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in which
little or no market data exists therefore requiring an entity to
develop its own assumptions.
As of December 31, 2013 and 2012, we held certain
investments that were required to be measured for disclosure
purposes at fair value on a recurring basis. These investments
are considered Level 2 assets. The fair value of our investments
is estimated using recently executed transactions and market
price quotations. At December 31, 2013 and 2012, the fair
value of our investments approximated or exceeded the
carrying value of the investments (see Note 2).
The carrying values of our other financial instruments including
cash and cash equivalents, money market accounts, accounts
receivable, accounts payable, accrued liabilities, and accrued
income and other taxes approximated fair value due to their
liquid and short-term nature.
Concentration of Credit Risk
Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash, cash
equivalents, investments and accounts receivable.
Our cash is held in high credit quality financial institutions. As
of December 31, 2013, we had $28.6 million in cash and cash
equivalents invested as follows: $2.6 million invested in money
market mutual funds and $26.0 million held in depository
accounts. From time to time, deposits held with financial
institutions exceed the amount of Federal Deposit Insurance
Corporation, or FDIC, insurance provided on such deposits.
Generally, these deposits may be redeemed upon demand and,
therefore, bear minimal risk. At December 31, 2013, our
uninsured cash and cash equivalents totaled approximately
$27.0 million.
For accounts receivable, we perform ongoing credit evaluations
of our customers’ financial condition and generally do not
require collateral. We maintain reserves for possible credit
losses. As of December 31, 2013 and 2012, we had allowances
for doubtful accounts of approximately $86,000 and $47,000,
respectively. The carrying amount of the receivables
approximates their fair value. Our customer that generates our
largest revenues accounted for 8.2%, 16.3% and 6.7% of
accounts receivable as of December 31, 2013, 2012 and 2011,
respectively. No other customer exceeded 10% of our accounts
receivable as of December 31, 2013, 2012 or 2011.
11
Notes to Consolidated Financial Statements ATRION 2013 ANNUAL REPORT (2) Investments
As of December 31, 2013 and 2012, we held certain
investments that were required to be measured for disclosure
purposes at fair value on a recurring basis. These investments
were considered Level 2 investments. We consider as current
assets those investments which will mature in the next 12
months. The remaining investments are considered non-current
assets. The amortized cost and fair value of our investments
that are being accounted for as held-to- maturity securities, and
the related gross unrealized gains and losses, were as follows as
of the dates shown below (in thousands):
(3) 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. The following tables provide information regarding
patents and licenses (dollars in thousands):
December 31, 2013
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
18.55
$
13,840
$
11,032
Gross Unrealized
Cost
Gains
Losses
As of December 31, 2013
December 31, 2012
Fair
Value
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
14.88
$
11,690
$
10,853
Short-term Investments:
Corporate bonds
$ 18,351 $
234 $ — $ 18,585
Long-term Investments:
Corporate bonds
$ 10,069 $
285 $ — $ 10,354
Aggregate amortization expense for patents and licenses was
$179,000 for 2013, $162,000 for 2012 and $272,000 for 2011.
Estimated future amortization expense for each of the years set
forth below ending December 31, is as follows (in thousands):
As of December 31, 2012
Short-term Investments:
Corporate bonds
$ 8,182 $
78 $
— $ 8,260
Long-term Investments:
Corporate bonds
$ 28,433 $
652 $
29 $ 29,056
At December 31, 2013, the length of time until maturity of
these securities ranged from five to 16 months.
2014
2015
2016
2017
2018
$
$
$
$
$
269
269
269
173
141
(4) Line of Credit
We have a revolving credit facility with a money center bank
which is secured by substantially all our inventories, equipment
and accounts receivable. Effective October 1, 2011, our credit
facility was amended to increase the maximum principal
amount of our revolving line of credit from $25.0 million to
$40.0 million. Interest under the credit facility is assessed at
30-day, 60-day or 90-day LIBOR, as selected by us, plus one
percent (1.17 percent at December 31, 2013) and is payable
monthly. We had no outstanding borrowings under the credit
facility at December 31, 2013 or 2012. The credit facility
amendment also extended the date on which the lender is
obligated to make advances under the revolving line of credit to
October 1, 2016. At any time during the term, we may convert
any or all outstanding amounts under the credit facility to a
term loan with a maturity of two years. Our 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, 2013, we were in compliance with all of those
covenants.
12
ATRION 2013 ANNUAL REPORT Notes to Consolidated Financial Statements (5) Income Taxes
The items comprising income tax expense are as follows
(in thousands):
Total income tax expense 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,
2013
2012
2011
Current — Federal
$
12,541
$
8,934 $
9,973
Current — State
Deferred — Federal
Deferred — State
1,065
13,606
(1,063)
140
(923)
1,050
9,984
1,363
99
1,462
880
10,853
2,372
212
2,584
Total income tax expense
$
12,683 $
11,446 $
13,437
Temporary differences and carryforwards which have given rise
to deferred income tax assets and liabilities as of December 31,
2013 and 2012 are as follows (in thousands):
2013
2012
$
1,590 $
1,099
525
37
536
38
2,152 $
1,673
9,716 $
10,299
2,956
166
2,972
11
12,838 $
13,282
10,686 $
11,609
$
$
$
$
Deferred tax assets:
Benefit plans
Inventories
Other
Total deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Patents and goodwill
Other
Total deferred tax liabilities
Net deferred tax liability
Balance Sheet classification:
Non-current deferred income tax
liability
Year ended December 31,
2013
2012
2011
$
13,743 $
12,276 $
13,816
Income tax expense at
the statutory federal
income tax rate
Increase (decrease)
resulting from:
State income taxes
770
747
710
Section 199
manufacturing
deduction
Other, net
Total income tax
expense
(1,307)
(523)
(949)
(628)
(996)
(93)
$
12,683 $
11,446 $
13,437
A reconciliation of the beginning and ending balances of the
total amounts of gross unrecognized tax benefits as required by
ASC 740 is as follows (in thousands):
Gross unrecognized tax benefits at January 1, 2011
$
1,420
Decreases in tax positions for prior years
Increases in tax positions for current year
Lapse in statutes of limitation
(77)
134
(216)
Gross unrecognized tax benefits at December 31, 2011
$
1,261
Increase in tax positions for prior years
Increase in tax positions for current year
Decrease due to settlement with taxing authorities
Lapse in statutes of limitation
Gross unrecognized tax benefits at December 31, 2012
$
Increase in tax positions for prior years
Current deferred income tax asset
1,376
623
Lapse in statutes of limitation
Net deferred tax liability
$
10,686 $
11,609
Gross unrecognized tax benefits at December 31, 2013
$
$
12,062 $
12,232
Increase in tax positions for current year
19
0
(641)
(98)
541
11
0
(206)
346
13
Notes to Consolidated Financial Statements ATRION 2013 ANNUAL REPORT
As of December 31, 2013 all of the unrecognized tax benefits,
which were comprised of uncertain tax positions, would impact
the effective tax rate if recognized. Unrecognized tax benefits
that are affected by statutes of limitation that expire within the
next 12 months are immaterial.
We are subject to United States federal income tax as well as to
income tax of multiple state jurisdictions. We have concluded all
United States federal income tax matters for years through
2009. In January 2009, the Internal Revenue Service (“IRS”)
began examining certain of our United States federal income tax
returns for 2006, 2007 and 2008. This audit was favorably
concluded in the third quarter of 2012 when the IRS appeals
group allowed 100% of the tax credits claimed for our research
and development during those years. Our unrecognized tax
benefits were reduced at that time on the basis of this favorable
settlement in the amount of approximately $641,000. All
material state and local income tax matters have been
concluded for years through 2009.
We recognize interest and penalties, if any, related to
unrecognized tax benefits in income tax expense. The liability for
unrecognized tax benefits included accrued interest of $21,000,
$26,000 and $77,000 at December 31, 2013, 2012 and 2011,
respectively. Tax expense for the year ended December 31, 2013,
2012 and 2011 included a net interest benefit of $5,400,
$51,000 and $7,000, respectively.
(6) Stockholders’ Equity
Our Board of Directors has at various times authorized
repurchases of our stock in open-market or negotiated
transactions at such times and at such prices as management
may from time to time determine. On August 16, 2011, our
Board of Directors adopted a new stock repurchase program
pursuant to which we can repurchase up to 200,000 shares of
our common stock from time to time in open market or privately-
negotiated transactions. This stock repurchase program has no
expiration date but may be terminated by the Board of Directors
at any time. As of December 31, 2012, 165,438 shares remained
available for repurchase under this program. In 2013, we
repurchased 36,666 shares under this program, including 6,704
shares from executive officers in transactions during an open
window period for trading, and that were pre-cleared, under our
Insider Trading Policy. In 2012 and 2011, we repurchased
26,562 and 8,000 shares, respectively, and as of December 31,
2013 there remained 128,772 shares available for repurchase
under the program.
We have increased our quarterly cash dividend payments in
September of each of the past three years. The quarterly
dividend was increased to $.49 per share in September 2011, to
$.56 per share in September 2012 and to $.64 in September
2013. On December 10, 2012 we also paid a special cash
14
dividend to stockholders of $10.00 per share. Holders of stock
units earned non-cash dividends of $29,000 in 2013, $157,000
in 2012 and $30,000 in 2011.
We have 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 our
stockholders to purchase at a substantial discount, upon the
occurrence of certain events, shares of our common stock or of
an acquiring company involved in a business combination with
us. This plan, which was adopted in August 2006, expires in
August 2016.
(7) Income Per Share
The following is the computation of basic and diluted income per
share:
Year ended December 31,
2013
2012
2011
(in thousands, except per share amounts)
Net Income
$
26,582
$
23,629 $
26,038
Weighted average basic
shares
outstanding
Add: Effect of dilutive
securities
Weighted average
diluted shares
outstanding
Net Income Per Share
2,010
2,016
2,019
7
11
12
2,017
2,027
2,031
Basic
Diluted
$
$
13.22
13.18
$
$
11.72 $
11.66 $
12.90
12.82
As required by ASC 260, Earnings per Share, unvested share-
based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents are considered participating
securities and, therefore, are included in the computation of
basic income per share pursuant to the two-class method.
Incremental shares from stock options and restricted stock units
were included in the calculation of weighted average diluted
shares outstanding using the treasury stock method. Dilutive
securities representing 4,344 shares of common stock for the
year ended December 31, 2013 were excluded from the
computation of weighted average diluted shares outstanding
because their effect would have been anti-dilutive.
(8) Stock Plans
At December 31, 2013, we had three stock-based compensation
plans which are described more fully below. We account for our
plans under ASC 718, and the disclosures that follow are based
ATRION 2013 ANNUAL REPORT Notes to Consolidated Financial Statements on applying ASC 718. ASC 718 requires that cash flows from the
use of stock-based compensation resulting from tax benefits in
excess of recognized compensation cost (excess tax benefits) be
classified as financing cash flows. We recorded $15,000,
$1,412,000 and $79,000 of such excess tax benefits as financing
cash flows in 2013, 2012 and 2011, respectively.
Our Amended and Restated 2006 Equity Incentive Plan (the
“2006 Plan”) provides for the grant to key employees, non-
employee directors and consultants of incentive and
nonqualified stock options, restricted stock, restricted stock units,
deferred stock units, stock appreciation rights, performance
shares and other stock-based awards. Under the 2006 Plan,
200,000 shares, in the aggregate, of common stock have been
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 options granted
become exercisable and expire as determined by the
Compensation Committee. As of December 31, 2013, there
remained 58,242 shares for future stock-based awards under the
2006 Plan.
In May 2007, we adopted our Deferred Compensation Plan for
Non-Employee Directors (as amended, the “Deferred
Compensation Plan”), and 2,500 shares of our common stock
were initially reserved for issuance thereunder. This plan allows
our non-employee directors to elect to receive stock units in lieu
of all or part of the cash fees they are receiving for their services
as directors. On the first business day of each calendar year,
each participating non-employee director is credited with a
number of stock units determined on the basis of the foregone
cash fees and the closing price of our common stock on the next
preceding date on which shares of our stock were traded. The
stock units are converted to shares of our common stock on a
one-for-one basis at a future date as elected in advance by the
director, but no later than the January following the year in
which the director ceases to serve on the Board of Directors, and
the shares are delivered to the director. As of December 31,
2013, there remained 1,626 shares of common stock reserved
for issuance upon the conversion of stock units which may be
credited in the future to non-employee directors.
In May 2007, we also adopted our Non-Employee Director Stock
Purchase Plan, (as amended, the “Director Stock Purchase Plan”),
and 2,500 shares of our common stock were initially reserved for
issuance thereunder. Under this plan, our non-employee directors
may elect to receive on the first business day of the calendar
year fully-vested stock and restricted stock in lieu of some or all
of their fees payable to them during such year. The foregone
fees are converted into shares of fully-vested stock and restricted
stock on the first business day of such calendar year based on
the closing price of our common stock on the next preceding
date on which shares of our stock were traded. The restricted
stock vests in equal amounts on the first day of the next three
succeeding calendar quarters provided the non-employee
director is then serving on our Board of Directors. As of
December 31, 2013, there remained 1,126 shares reserved for
issuance under such plan.
A summary of stock option transactions for the year ended
December 31, 2013 is presented below:
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Outstanding at
December 31, 2012
Granted
Exercised
Outstanding at
December 31, 2013
Exercisable at
December 31, 2013
50,000
$
204.76
—
—
—
—
50,000
$
204.76
4.9 years
15,000
$
196.99
4.7 years
All nonvested options outstanding at December 31, 2013 are
expected to vest. We estimate the fair value of stock options
granted using the Black-Scholes option-pricing formula and a
single option award approach. None of our grants includes
performance-based or market-based vesting conditions. The
expected life represents the period that our 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. The
fair value of stock-based payments, funded with options, is
valued using the Black-Scholes valuation method with a volatility
factor based on our historical stock trading history. We base 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. We base the dividend yield used in the
Black-Scholes valuation method on our dividend history.
There were no options granted in 2013. The fair value for the
options granted in 2012 and 2011 was estimated at the date of
grant using a Black-Scholes option pricing model with the
following weighted average assumptions:
Risk-free interest rate
Dividend yield
Volatility factor
Expected life
2013
2012
2011
—
—
—
—
0.5%
1.0%
25.0%
5 years
1.7%
1.0%
25.0%
5 years
15
Notes to Consolidated Financial Statements ATRION 2013 ANNUAL REPORT
The weighted average grant date fair value of the options
granted in 2012 and 2011 was $40.38 and $40.64, respectively.
The total intrinsic value of options exercised during 2012 was
$3.1 million. There were no options exercised in 2013 and 2011.
The total intrinsic values of options outstanding and options
currently exercisable at December 31, 2013, were $4.6 million
and $1.5 million, respectively.
During 2013, we made no awards of restricted stock under the
2006 Plan. Under the terms of our restricted stock awards, the
restrictions usually lapse over a five-year period. During the
vesting period, holders of restricted stock have voting rights and
earn dividends, but the shares may not be sold, assigned,
transferred, pledged or otherwise encumbered. Nonvested shares
are generally forfeited on termination of employment unless
otherwise provided in the participant’s employment agreement
or the termination is in connection with a change in control. A
summary of changes in nonvested restricted stock for the year
ended December 31, 2013 is presented below:
Nonvested Shares
Shares
Weighted
Average Award
Date Fair Value
Per Share
Restricted stock at December 31, 2012
13,500 $
207.35
Granted in 2013
Vested in 2013
— $
(3,000) $
Restricted stock at December 31, 2013
10,500 $
—
211.06
208.09
All shares of nonvested restricted stock outstanding at December
31, 2013 are expected to vest. The total fair value of restricted
stock vested during 2013, 2012 and 2011 was $633,000,
$559,000 and $481,000, respectively.
During 2013, restricted stock units were awarded to certain
employees under the 2006 Plan. All of our restricted stock units
are convertible to shares of stock on a one-for-one basis when
the restrictions lapse, which is generally after a five-year period.
Nonvested stock units are generally forfeited on termination of
employment unless the termination is in connection with a
change in control. During the vesting period, holders of all
restricted stock units earn dividends in the form of additional
units. During 2013, one non-employee director elected to
receive stock units in lieu of a portion of his cash fees for his
services as a member of the Board of Directors.
A summary of changes in stock units for the year ended
December 31, 2013, is presented below:
Weighted
Average
Award Date
Fair Value
Per Unit
Restricted
Stock
Units
Director’s
Stock Units
Weighted
Average
Award Date
Fair Value
Per Unit
11,996
908
—
$
$
194.95
214.76
—
41 $
199.78
—
(41) $
199.78
12,904
$
196.35
—
Nonvested
Stock Units
Nonvested at
December
31, 2012
Granted
Vested
Nonvested at
December
31, 2013
All nonvested restricted stock units at December 31, 2013 are
expected to vest. The total intrinsic value of all outstanding stock
units which were not convertible at December 31, 2013,
including 389 stock units held for the accounts of non-employee
directors, was $3,938,000. There were no vested restricted stock
units during 2013. The total fair value of directors’ stock units
vested during 2013, 2012 and 2011 was $8,000, $22,000 and
$8,000, respectively.
Stock awards that vest immediately were awarded under the
2006 Plan to non-employee directors in 2013, 2012 and 2011
totaling $120,000 in value in each year. Compensation related
to stock awards, restricted stock and stock units is based on the
fair market value of the stock on the date of the grant. These fair
values are then amortized on a straight-line basis over the
requisite service periods of the entire awards, which is generally
the vesting period. Compensation related to stock options is
based on the fair value of stock options granted using the
Black-Scholes option-pricing formula and a single option award
approach. For the years ended December 31, 2013, 2012 and
2011, we recorded stock-based compensation expense as a
“General and Administrative expense” in the amount of
$1,586,000, $1,482,000 and $1,047,000, respectively, for all of
the above mentioned stock-based compensation arrangements.
The total tax benefit recognized in the income statement from
stock-based compensation arrangements for the years ended
December 31, 2013, 2012 and 2011, was $555,000, $516,000
and $359,000, respectively.
16
ATRION 2013 ANNUAL REPORT Notes to Consolidated Financial Statements Unrecognized compensation cost information for our various
stock-based compensation types is shown below as of
December 31, 2013:
A summary of revenues by product line for 2013, 2012 and
2011 is as follows (in thousands):
Unrecognized
Compensation Cost
$
1,172,000
1,812,000
1,355,000
Weighted Average
Remaining Years
in Amortization
Period
3.0
3.0
3.3
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
Stock options
Restricted stock
Restricted stock units
2013
2012
2011
$
51,289 $
49,060 $
45,274
40,182
20,736
19,786
36,021
15,717
18,264
34,072
19,581
18,777
$ 131,993 $
119,062 $ 117,704
Total
$
4,339,000
We have a policy of utilizing treasury shares to satisfy stock
option exercises, stock unit conversions and restricted stock
awards.
(9) Revenues From Major Customers
We had one major customer which represented approximately
$13.5 million (10.2 percent) and $15.1 million (12.9 percent) of
our net revenues during 2013 and 2011, respectively.
(10) Industry Segment and Geographic Information
We operate in one reportable industry segment: developing and
manufacturing products primarily for medical applications and
have no foreign operating subsidiaries. We have 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 our medical products segment. Our revenues from sales to
customers outside the United States totaled approximately 42
percent of our net revenues in 2013, 2012 and 2011. We have
no assets located outside the United States.
A summary of revenues by geographic territory, based on
shipping destination, for 2013, 2012 and 2011 is as follows (in
thousands):
Year ended December 31,
2013
2012
2011
(11) Employee Retirement and Benefit Plans
We sponsor a defined contribution 401(k) plan for all
employees. Each participant may contribute certain amounts of
eligible compensation. We make a matching contribution to the
plan. Our contributions under this plan were $561,000,
$533,000 and $487,000 in 2013, 2012 and 2011, respectively.
(12) Commitments and Contingencies
From time to time and in the ordinary course of business, we
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.
We accrue the estimated costs of settlement or damages when
a loss is deemed probable and such costs are estimable, and
accrue 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, we accrue the minimum amount of the
range. As of December 31, 2013, the Company had no ongoing
litigation or arbitration for such matters.
We had a dispute which was favorably settled in the third
quarter of 2007. This settlement was amended in December
2008. The amended settlement agreement provides that we
may receive annual payments from 2009 through 2024. We
have not recorded $5.5 million in potential future payments
under this settlement as of December 31, 2013 due to the
uncertainty of payment.
United States
$
75,997 $
69,388 $
68,156
Canada
15,114
13,352
17,524
Other countries less
than 10% of revenues
40,882
36,322
32,024
Total
$
131,993 $
119,062 $
117,704
We have arrangements with three of our executive officers
pursuant to which the termination of their employment under
certain circumstances would result in lump sum payments to
them. Termination under such circumstances at December 31,
2013 could have resulted in payments aggregating $4.3 million.
17
Notes to Consolidated Financial Statements ATRION 2013 ANNUAL REPORT (13) Quarterly Financial Data (Unaudited)
Quarter Ended
Operating Revenue
Operating Income
Net Income
(in thousands, except per share amounts)
Income Per
Basic Share
Income Per
Diluted Share
03/31/13
06/30/13
09/30/13
12/31/13
03/31/12
06/30/12
09/30/12
12/31/12
$
33,493 $
9,400 $
6,635 $
3.28 $
32,605
34,044
31,851
9,495
10,713
8,336
6,506
7,673
5,768
3.23
3.82
2.88
$
29,239 $
7,943 $
5,377 $
2.67 $
30,689
30,637
28,497
8,967
9,677
7,039
6,099
7,259
4,894
3.03
3.60
2.42
3.28
3.22
3.81
2.87
2.65
3.02
3.59
2.42
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.
18
ATRION 2013 ANNUAL REPORT Notes to Consolidated Financial Statements REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Atrion Corporation
We have audited the accompanying consolidated balance
sheets of Atrion Corporation and subsidiaries (the “Company”)
as of December 31, 2013 and 2012, 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, 2013. Our audits of the basic consolidated
financial statements included the financial statement schedule
(not presented separately herein) listed in the index appearing
under Item 15. Exhibits and Financial Statement Schedules.
These financial statements and financial statement schedule are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule 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 financial
position of Atrion Corporation and subsidiaries as of December
31, 2013 and 2012, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2013 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
aspects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Atrion Corporation and subsidiaries’ internal control over
financial reporting as of December 31, 2013, based on criteria
established in the 1992 Internal Control—Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our
report dated March 14, 2014 expressed an unqualified opinion.
Grant Thornton LLP
Dallas, Texas
March 14, 2014
Report of Independent Registered Public Accounting Firm ATRION 2013 ANNUAL REPORT
19
MANAGEMENT’S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2013 using
the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in the 1992
Internal Control—Integrated Framework. Based on this
assessment, our management concluded that, as of December
31, 2013, our internal control over financial reporting was
effective.
Our management, including our 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. Our 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.
20
ATRION 2013 ANNUAL REPORT Management’s Report on Internal Control Over Financial Reporting
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Atrion Corporation
We have audited the internal control over financial reporting of
Atrion Corporation and subsidiaries (the “Company”) as of
December 31, 2013, based on criteria established in the 1992
Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’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, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on 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,
assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our
opinion.
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, the Company maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2013, based on criteria established in the 1992
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 financial statements of the Company as of
and for the year ended December 31, 2013, and our report
dated March 14, 2014, expressed an unqualified opinion on
those financial statements.
Grant Thornton LLP
Dallas, Texas
March 14, 2014
Report of Independent Registered Public Accounting Firm ATRION 2013 ANNUAL REPORT
21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the year ended December 31, 2013, we reported revenues
of $132.0 million, operating income of $37.9 million and net
income of $26.6 million.
Results of Operations
Our net income was $26.6 million, or $13.22 per basic and
$13.18 per diluted share, in 2013, compared to net income of
$23.6 million, or $11.72 per basic and $11.66 per diluted share,
in 2012 and net income of $26.0 million, or $12.90 per basic
and $12.82 per diluted share, in 2011. Revenues were $132.0
million in 2013, compared with $119.1 million in 2012 and
$117.7 million in 2011. The 11 percent revenue increase in
2013 over 2012 and 1 percent revenue increase in 2012 over
2011 were generally attributable to higher sales volumes.
Increases in revenues in 2012 in our fluid delivery and
cardiovascular product lines were largely offset by reduced
ophthalmology sales to a large customer with which we have a
long-term contract that had accumulated too large of an
inventory of one of our products in 2011.
Annual revenues by product lines were as follows (in thousands):
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
2013
2012
2011
$ 51,289 $
49,060 $
45,274
40,182
20,736
19,786
36,021
15,717
18,264
34,072
19,581
18,777
$ 131,993 $ 119,062 $ 117,704
Overview
We develop and manufacture products primarily for medical
applications. We market components to other equipment
manufacturers for incorporation in their products and sell
finished devices to physicians, hospitals, clinics and other
treatment centers. Our medical products primarily serve the
fluid delivery, cardiovascular, and ophthalmology markets. Our
other medical and non-medical products include valves and
inflation devices used in marine and aviation safety products.
In 2013, approximately 42 percent of our sales were outside
the United States.
Our products are used in a wide variety of applications by
numerous customers. We encounter competition in all of our
markets and compete primarily on the basis of product quality,
price, engineering, customer service and delivery time.
Our strategy is to provide a broad selection of products in the
areas of our expertise. Research and development efforts are
focused on improving current products and developing
highly-engineered products that meet customer needs and
serve niche markets with meaningful sales potential. 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. We also focus on controlling costs by investing in
modern manufacturing technologies and controlling
purchasing processes. We have been successful in consistently
generating cash from operations and have used that cash to
reduce or eliminate indebtedness, to fund capital expenditures,
to make investment purchases, to repurchase stock and to pay
dividends.
Our strategic objective is to further enhance our position in our
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.
22
ATRION 2013 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our cost of goods sold was $68.9 million in 2013, $62.9 million
in 2012 and $57.7 million in 2011. Higher sales volume was the
primary contributor to the increase in cost of goods sold in 2013
over 2012. Product mix, higher depreciation expense and lower
manufacturing efficiencies offset by the impact of continued
cost improvement initiatives were the primary contributors to
the 10 percent increase in cost of goods sold for 2012 over
2011.
Gross profit in 2013 was $63.1 million compared with $56.1
million in 2012 and $60.0 million in 2011. Our gross profit was
48 percent of revenues in 2013, 47 percent of revenues in 2012
and 51 percent of revenues in 2011. The increase in gross profit
percentage in 2013 over 2012 was primarily related to a
product mix that was more favorable than 2012’s product mix,
improvements in manufacturing efficiencies and the impact of
cost-savings projects partially offset by the new 2.3 percent
excise tax on the sale of certain medical devices in the United
States. The decrease in gross profit percentage in 2012 from the
prior year was primarily due to a less favorable product mix and
reduced manufacturing capacity utilization.
Operating expenses were $25.1 million in 2013 compared with
$22.5 million in 2012 and $21.8 million in 2011. Research and
development, or R&D, expenses increased $522,000 in 2013 as
compared to 2012 primarily related to increased costs for
supplies, outside services and compensation, partially offset by
decreased travel costs. R&D expenses consist primarily of
salaries and other related expenses of our R&D personnel as well
as costs associated with regulatory matters. In 2013, selling
expenses increased $524,000 primarily related to increased
outside services, compensation, commissions and promotional
expenses. Selling expenses consist primarily of salaries,
commissions and other related expenses for sales and
marketing personnel, marketing, advertising and promotional
expenses. General and administrative, or G&A, expenses
increased $1.6 million in 2013 as compared to 2012 primarily
related to increased compensation and outside services. G&A
expenses consist primarily of salaries and other related expenses
of administrative, executive and financial personnel and outside
professional fees.
In 2012 increases in selling expenses and increases in R&D
expenses were partially offset by decreases in G&A expenses.
R&D expenses increased $898,000 in 2012 as compared to
2011 primarily related to increased costs for compensation,
supplies, travel and outside services. In 2012, selling expenses
increased $369,000 primarily related to increased
compensation, commissions and promotional expenses. G&A
expenses decreased $592,000 in 2012 as compared to 2011
primarily related to decreased outside services.
Our operating income for 2013 was $37.9 million, compared
with $33.6 million in 2012 and $38.2 million in 2011. Operating
income was 29 percent of revenues for 2013, 28 percent of
revenues for 2012 and 32 percent of revenues for 2011. The
increase in gross profit partially offset by the increase in
operating expenses described above was the major contributor
to the operating income increase in 2013 compared to the
previous year. The decrease in gross profit and the increase in
operating expenses described above were the primary
contributors to the operating income decrease in 2012
compared to the previous year. Although we anticipate
increases in R&D expenses and depreciation charges in 2014,
we expect growth in our operating income during 2014 as
compared to 2013.
Income tax expense in 2013 totaled $12.7 million, compared
with $11.4 million in 2012 and $13.4 million in 2011. The
effective tax rates for 2013, 2012 and 2011 were 32.3 percent,
32.6 percent and 34.0 percent, respectively. The effective tax
rate for 2013 benefitted from the extension of the federal
research tax credit provisions included in the American Taxpayer
Relief Act of 2012. The decrease in our effective tax rate for
2012 was primarily related to a favorable adjustment to an
uncertain tax position related to income tax credits claimed for
research and development following the conclusion of an
Internal Revenue Service examination of our United States
federal income tax returns for 2006, 2007 and 2008. Benefits
from tax incentives for domestic production totaled $1.3 million
in 2013, $949,000 in 2012 and $996,000 in 2011. Benefits
from changes in uncertain tax positions totaled $195,000 in
2013, $720,000 in 2012 and $159,000 in 2011. We expect our
effective tax rate for 2014 to be approximately 34.0 percent
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2013 ANNUAL REPORT
23
Liquidity and Capital Resources
Effective October 1, 2011, our revolving credit facility with a
money center bank was amended to increase the maximum
principal amount of our revolving line of credit from $25.0
million to $40.0 million and to extend the date on which the
lender is obligated to make advances under the revolving line of
credit to October 1, 2016. The credit facility is to be utilized for
the funding of operations and for major capital projects or
acquisitions, subject to certain limitations and restrictions.
Borrowings under the credit facility bear interest that is payable
monthly at 30-day, 60-day or 90-day LIBOR, as selected by us,
plus one percent. From time to time prior to October 1, 2016
and assuming an event of default is not then existing, we can
convert outstanding advances under the revolving line of credit
to term loans with a term of up to two years. We had no
outstanding borrowings under our credit facility at December
31, 2013 or 2012. The credit facility contains various restrictive
covenants, none of which is expected to impact our liquidity or
capital resources. At December 31, 2013, we were in compliance
with all financial covenants. We believe the bank providing the
credit facility is highly-rated and that the entire $40.0 million
under the credit facility is currently available to us. If that bank
were unable to provide such funds, we believe such inability
would not impact our ability to fund operations.
At December 31, 2013, we had a total of $57.0 million in cash
and cash equivalents, short-term investments and long-term
investments, an increase of $12.4 million from December 31,
2012. The principal contributor to this increase was the cash
generated by operating activities.
Cash flows provided by operations of $36.6 million in 2013 were
primarily comprised of net income plus the net effect of
non-cash expenses. At December 31, 2013, we had working
capital of $81.0 million, including $28.6 million in cash and cash
equivalents and $18.4 million in short-term investments. The
$31.4 million increase in working capital during 2013 was
primarily related to increases in cash and cash equivalents,
short-term investments and inventories partially offset by
increases in accounts payable and accrued liabilities. The net
increase in cash and cash equivalents was primarily related to
the maturities of short-term investments. The increase in
short-term investments was primarily related to the
reclassification of long-term investments as their maturities
became less than one year. Increased inventories are primarily
related to higher safety stock levels necessary to support
increased revenues. Increased accounts payable and accrued
liabilities were primarily related to increased accrued
compensation. Working capital items consisted primarily of
cash, accounts receivable, short-term investments, inventories
and other current assets minus accounts payable and other
current liabilities.
Capital expenditures for property, plant and equipment totaled
$7.5 million in 2013, compared with $10.3 million in 2012 and
$12.0 million in 2011. These expenditures were primarily for
machinery and equipment. We expect 2014 capital
expenditures, primarily machinery and equipment, to be greater
than the average of the levels expended during each of the past
three years.
We paid cash dividends totaling $4.8 million, $24.5 million and
$3.7 million during 2013, 2012 and 2011, respectively. In
November 2012, our Board of Directors declared a special cash
dividend of $10.00 per share on our outstanding common
stock. This dividend which totaled $20.2 million was paid on
December 10, 2012. We expect to fund future dividend
payments with cash flows from operations. We purchased
treasury stock totaling $9.2 million, $5.3 million and $1.5 million
during 2013, 2012 and 2011, respectively.
The table below summarizes debt, lease and other contractual
obligations outstanding at December 31, 2013:
Payments Due by Period
Contractual
Obligations
Total
2014
2015–
2016
2017 and
thereafter
(in thousands)
Purchase
Obligations
$ 13,460 $
13,387 $
Total
$ 13,460 $
13,387 $
64 $
64 $
9
9
24
ATRION 2013 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations
We believe our cash, cash equivalents, short-term investments
and long-term investments, cash flows from operations and
available borrowings of up to $40.0 million under our credit
facility will be sufficient to fund our cash requirements for at
least the foreseeable future. We believe our strong financial
position would allow us to access equity or debt financing
should that be necessary. Additionally, we expect our cash and
cash equivalents and investments, as a whole, will continue to
increase in 2014.
From time to time, we accrue legal costs associated with certain
litigation. In making determinations of likely outcomes of
litigation matters, we consider the evaluation of legal counsel
knowledgeable about each matter, case law and other case-
specific issues. We believe 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 we have projected.
Off-Balance Sheet Arrangements
We have no off-balance sheet financing arrangements.
Impact of Inflation
We experience the effects of inflation primarily in the prices we
pay for labor, materials and services. Over the last three years,
we have experienced the effects of moderate inflation in these
costs. At times, we have been able to offset a portion of these
increased costs by increasing the sales prices of our products.
However, competitive pressures have not allowed for full
recovery of these cost increases.
New Accounting Pronouncements
From time to time, new accounting standards updates
applicable to us are issued by the Financial Accounting
Standards Board (“FASB”), which we will adopt as of the
specified effective date. Unless otherwise discussed, we believe
the impact of recently issued standards updates that are not yet
effective will not have a material impact on our consolidated
financial statements upon adoption.
Critical Accounting Policies
The discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. In
the preparation of these financial statements, we make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. We believe the following
discussion addresses our most critical accounting policies and
estimates, which are those that are most important to the
portrayal of our 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.
We maintain an allowance for doubtful accounts to reflect
estimated losses resulting from the failure of customers to make
required payments. On an ongoing basis, the collectability of
accounts receivable is assessed based upon historical collection
trends, current economic factors and the assessment of the
collectability of specific accounts. We evaluate the collectability
of specific accounts and determine when to grant credit to our
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 our personnel and
with the customers directly. Accounts are written off when it is
determined the receivable will not be collected. If circumstances
change, our estimates of the collectability of amounts could be
changed by a material amount.
We are required to estimate our provision for income taxes and
uncertain tax positions in each of the jurisdictions in which we
operate. This process involves estimating our actual current tax
exposure, including assessing the risks associated with tax
audits, together with assessing temporary differences resulting
from the different treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included within the balance sheet. We
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and, to the extent we
believe that recovery is more likely than not, do not establish a
valuation allowance. In the event that actual results differ from
these estimates, the provision for income taxes could be
materially impacted.
We assess the impairment of our long-lived identifiable assets,
excluding goodwill which is tested for impairment 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.
Although we believe that our estimates of future cash flows are
reasonable, different assumptions regarding such cash flows or
future changes in our business plan could materially affect our
evaluations. No such changes are anticipated at this time.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2013 ANNUAL REPORT
25
We assess goodwill for impairment pursuant to ASC 350,
Intangibles—Goodwill and Other, 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 qualitative
assessment on goodwill impairment to determine whether it is
necessary to perform the two-step goodwill impairment test.
During 2013, 2012 and 2011, none of our critical accounting
policy estimates required significant adjustments. We did not
note any material events or changes in circumstances indicating
that the carrying value of long-lived assets were not recoverable.
Quantitative and Qualitative Disclosures About
Market Risks
Foreign Exchange Risk
We are not exposed to material fluctuations in currency
exchange rates because the payments from our international
customers are received primarily in United States dollars.
Principal and Interest Rate Risk
Our cash equivalents and short-term and long-term investments
consist of money-market accounts and taxable corporate bonds.
Our investment policy is to seek to manage these assets to
achieve the goal of preserving principal, maintaining adequate
liquidity at all times, and maximizing returns subject to
established investment guidelines. In general, the primary
exposure to market risk is interest rate sensitivity. This means
that a change in prevailing interest rates may cause the value of
and the return on the investment to fluctuate.
Forward-looking Statements
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 us that our objectives or plans will be
achieved. Such statements include, but are not limited to, our
expectations regarding our research and development
expenditures in 2014, our depreciation charges in 2014, our
2014 effective tax rate, our focus on product development in
2014, the impact of the restrictive covenants in our credit
facility on our liquidity and capital resources, our revenues and
earnings in 2014, our growth in operating income in 2014, our
2014 capital expenditures, funding future dividend payments
with cash flows from operations, availability of equity and debt
financing, our ability to meet our cash requirements for the
foreseeable future, our ability to fund operations if the bank
providing our credit facility were unable to lend funds to us, the
impact on our consolidated financial statement of recently
issued accounting standards when we adopt those standards,
payment of cash dividends in the future and increases in 2014
in cash, cash equivalents and investments. Words such as
“expects,” “believes,” “anticipates,” “intends,” “should,” “plans,”
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; our ability to
protect our 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 us to
alter our marketing, capital expenditures or other budgets,
which in turn may affect our results of operations and financial
condition.
26
ATRION 2013 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
Operating Results for the Year ended December 31,
Revenues
Operating income
Net income
Depreciation and amortization
Per Share Data:
Net income per diluted share
Cash dividends per common share
Average diluted shares outstanding
Financial Position at December 31,
Total assets
Long-term debt
2013
2012
2011
2010
2009
$
131,993 $
119,062 $
117,704 $
108,569
$
100,643
37,944
26,582
8,592
13.18
2.40
2,017
33,626
23,629
7,610
11.66
12.10
2,027
38,168
26,038
6,544
12.82
1.82
2,031
30,977
20,952
7,041
10.32
10.56
2,030
25,004a
16,843a
7,163
8.36a
1.32
2,015
172,066
155,810
161,895
134,652
132,749
—
—
—
—
—
a) Included a non-cash charge for the settlement of a pension plan termination that subtracted $1.0 million from operating income, $643,000 from net income and $0.32 from
net income per diluted share.
Selected Financial Data ATRION 2013 ANNUAL REPORT
27
NON-GAAP FINANCIAL MEASURES RECONCILIATION
(Dollars in thousands)
Included in our Annual Report is a non-GAAP financial measure that is calculated by excluding certain income and assets that are
included in financial measures determined in accordance with GAAP. We have provided this non-GAAP measure as an additional tool
for investors to evaluate the Company’s performance. This measure should be considered in addition to, rather than as a substitute
for, GAAP measures of the Company’s performance. The table below provides a reconciliation of this non-GAAP financial measure
with the most directly comparable GAAP financial measure.
2013 net income A
Equity at December 31, 2012
Equity at December 31, 2013
Average equity B
Return on equity (A/B)
1) 2013 after tax interest income.
Adjustments
853 1
$
$
$
44,614 2
56,979 3
$
$
$
$
GAAP
26,582
134,828
148,994
141,911 4
19%
Non-GAAP
$
$
$
$
25,729
90,214
92,015
91,115 5
28%
2) Cash, cash equivalents and investments at December 31, 2012.
3) Cash, cash equivalents and investments at December 31, 2013.
4) GAAP equity at December 31, 2012 plus GAAP equity at December 31, 2013 divided by 2.
5) Adjusted equity at December 31, 2012 plus adjusted equity at December 31, 2013 divided by 2.
28
ATRION 2013 ANNUAL REPORT Non-GAAP Financial Measures Reconciliation
Leadership
Board of Directors
Emile A Battat
Chairman of the Board
Atrion Corporation
Hugh J. Morgan, Jr.
Private Investor
Former Chairman of the Board
National Bank of Commerce
of Birmingham
Birmingham, Alabama
Ronald N. Spaulding
Private Investor
Former President of
Worldwide Commercial Operations
Abbott Vascular
Miami, Florida
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, LLC
Attn: Shareholder Services
6201 15th Avenue
Brooklyn, NY 11219
Form 10-K
A copy of the Company’s 2013 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
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
Executive Officers
Emile A Battat
Chairman of the Board
David A. Battat
President and Chief Executive Officer
Jeffery Strickland
Vice President and Chief Financial
Officer, Secretary and Treasurer
Stock Information
The Company’s common stock is traded on the NASDAQ Global Select Market (Symbol: ATRI).
As of February 25, 2014, there were approximately 3,300 stockholders, including beneficial
owners holding shares in nominee or “street” name. The table below sets forth the high and
low sales prices as reported by NASDAQ and the quarterly dividends per share declared by the
Company for each quarter of 2012 and 2013.
2012 Quarter Ended
High
Low
Dividends
March 31
June 30
September 30
December 31
2013 Quarter Ended
March 31
June 30
September 30
December 31
$
261.98
$
197.11
$
0.49
235.70
226.99
223.00
High
195.78
202.01
185.16
Low
0.49
0.56
10.56 a
Dividends
$
210.99
$
186.00
$
0.56
222.74
261.00
299.00
186.37
217.00
252.50
0.56
0.64
0.64
The Company presently plans to pay quarterly cash dividends in the future.
a) This amount includes a special cash dividend of $10.00 per share declared in the fourth quarter of 2012.
29
ATRION CORPORATION One Allentown Parkway, Allen, Texas 75002
972.390.9800 | www.atrioncorp.com