ATRION
CORPORATION
ANNUAL
REPORT
2016
2016
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 ............................................ 2
Financial Statements ...................................................4
Management’s Discussion ........................................22
Selected Financial Data ..............................................27
Corporate Information ................................................29
Financial Highlights
For the Year Ended
December 31
2016
2015
As of
December 31
2016
2015
Revenues
$
143,487,000
$ 145,733,000
Total Assets
$
182,593,000
$
164,336,000
Operating Income
39,126,000
42,510,000
Net Income
27,581,000
28,925,000
Cash and
Investments
54,047,000
38,256,000
Income per Diluted Share
$
14.85
$
15.47
Long-term Debt
—
—
Weighted Average Diluted
Shares Outstanding
1,857,000
1,870,000
Stockholders’
Equity
$
162,988,000
$
144,098,000
2012
2013
2014
2015
2016
$11.66
$13.18
2012
2013
$14.08
2014
$15.47
2015
$14.85
2016
$119
$132
$141
$146
$143
2012
2013
2014
2015
2016
$33.6
$37.9
$40.8
$42.5
$39.1
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
The graph set forth at left compares the total
cumulative return for the five-year period ended
December 31, 2016 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,
2011 in our common stock, the Russell 2000 Index
and the SIC Code Index and dividends were
reinvested
2011
2012
2013
2014
2015
2016
Company/Index
Atrion Corporation
Russell 2000 Index
SIC Code Index
2011
$100.00
$100.00
$100.00
2012
$86.56
$116.35
$118.75
2013
$132.20
$161.52
$166.81
2014
$153.07
$169.42
$192.53
2015
$173.12
$161.95
$206.24
2016
$232.44
$196.45
$239.63
ATRION 2016 ANNUAL REPORT
1
To our stockholders,
We finished 2016 with an after-tax return on equity of 18%, almost 50% higher
than the S&P 500. This return is even stronger if you consider that about 30% of
our equity was comprised of cash and investments that did not generate
significant income in this low-interest environment. If we exclude these assets and
the income they generated, our after-tax return on equity for the year jumps to
25%. Once again, Atrion provided double-digit increases in the dividend to our
stockholders—17% in 2016. We also finished the year debt-free and with $54
million in cash and investments—40% higher than at the end of 2015.
That we achieved these results despite the significant headwinds I described in last
year’s letter reveals some critical insights about Atrion.
We proudly own and operate our manufacturing facilities, all of which are in the
United States. We do this to ensure the highest levels of quality, as well as out of
mutual loyalty to our employees—many have more than 20 years with us, and
more than a few have given us an incredible 30 or more years of their expertise.
But, like other U.S.-based manufacturers that export a substantial portion of their
products, the strong dollar impacted our revenues and operating income. Even
though product volumes actually grew in 2016, we saw a 2% decline in revenues
and an 8% decline in operating income.
We nevertheless generated strong returns for our investors because we manage the
ups and downs of business cycles sensibly. This does not mean we happily accept,
let alone excuse, any sort of negative year-over-year comparisons—quite the
opposite, in fact. In 2016, we redoubled our efforts to expand our sales. We went
back and questioned our processes and production methods to further improve our
efficiencies. But we also remained focused on our commitment to long-term
growth for our stockholders, employees, and customers. This means that making
smart investments in people, manufacturing technologies, and future products
took precedence over adding a little more to the 2016 year-end numbers.
This is how we intend to continue to grow and remain highly profitable over the
next decade.
Well-prepared for what’s next
While 2016 brought us significant headwinds in the form of pricing pressure, we
are still proud that our products are increasing their share of the marketplace. Our
unwavering commitment to consistency, our laser focus on quality, our unfailing
dedication to customer service, and our careful attention to hiring and retaining
the right people: these are the factors that have long shored up our foundation,
and that we are confident we can rely on going forward.
2
ATRION 2016 ANNUAL REPORT
Since last year’s report, global volatility has only increased and it might
well continue in that direction. We don’t know what 2017 will bring in
terms of macroeconomic factors, but we do recognize that any changes
that come our way—for example, corporate tax reform, trade policies, and
regulatory requirements —could impact us in ways that might be positive
or negative.
In the face of this, it is critical that we remain prepared and able to
maintain a steady course. Guided by solid business planning, our
philosophy has long been to prepare for, and protect against, factors that
are beyond our control. Over the years, we have done this by focusing on
maintaining a solid financial condition, and on growth that is steady and
sustainable.
A solid financial foundation is what allows us to continue investing in what
matters. We have no plans to slow the pace of investment in our
manufacturing, technology, and people. Of particular focus has been
investing in research and development, an area where we hold a significant
competitive advantage. In 2017, we will maintain the pace of these
investments; they have served us well.
Atrion’s stability and growth are firmly rooted in the capabilities of our
facilities and equipment, the intellectual property we own, and the people
driving our advancements.
Our priority is ensuring Atrion’s long-term stability and growth, rather than
realizing the kind of short-term outcomes achieved when we react too
quickly to events or expectations. You can continue to count on us to focus
on the long term, just as you can count on my continued appreciation of
your belief in us. I am grateful to all of our investors, and to the many
people at Atrion responsible for our steady, strong performance.
Respectfully,
David A. Battat
President and CEO
2016
2016 REVENUES BY PRODUCT LINE
Fluid Delivery
$ 60,889,000
Cardiovascular
$ 47,064,000
Ophthalmology
$ 15,427,000
Other
$ 20,107,000
42%
33%
11%
14%
ATRION 2016 ANNUAL REPORT
3
CONSOLIDATED BALANCE SHEETS
As of December 31, 2016 and 2015
Assets:
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $71 and $50 in 2016 and 2015, 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 $11,911 and $11,647 in 2016 and 2015, respectively
Goodwill
Other
Total Assets
The accompanying notes are an integral part of these statements.
2016
2015
(in thousands)
$
20,022
$
28,346
24,080
17,166
29,015
3,181
651
94,115
9,945
160,413
95,148
65,265
1,929
9,730
1,609
13,268
44
16,620
29,771
2,934
580
78,295
9,866
150,807
87,493
63,314
2,193
9,730
938
12,861
$
182,593
$
164,336
4
ATRION 2016 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
Accumulated other comprehensive income (loss)
Retained earnings
Treasury shares, 1,596 shares in both 2016 and 2015, at cost
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these statements.
2016
2015
(in thousands)
$
4,028
$
4,635
410
9,073
—
9,404
1,128
10,532
19,605
3,926
5,061
329
9,316
—
9,989
933
10,922
20,238
342
342
37,448
(474)
239,946
(114,274)
162,988
35,945
283
219,516
(111,988)
144,098
$
182,593 $
164,336
ATRION 2016 ANNUAL REPORT
5
CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, 2016, 2015 and 2014
Revenues
Cost of Goods Sold
Gross Profit
Operating Expenses:
Selling
General and administrative
Research and development
Operating Income
Interest Income
Other Income (Expense), 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
2016
2015
2014
(in thousands, except per share amounts)
$
143,487
$
145,733
$
140,762
75,857
67,630
6,611
15,319
6,574
28,504
39,126
448
(308)
39,266
(11,685)
27,581
15.12
1,824
74,752
70,981
6,043
16,082
6,346
28,471
42,510
771
(2,411)
40,870
(11,945)
28,925
15.67
1,846
$
$
$
$
14.85
$
15.47
$
1,857
1,870
3.90 $
3.30 $
72,244
68,518
6,210
16,205
5,286
27,701
40,817
1,191
13
42,021
(14,213)
27,808
14.20
1,958
14.08
1,975
2.78
$
$
$
$
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended December 31, 2016, 2015 and 2014
Net Income
Other Comprehensive Income (Loss), net of tax: Unrealized Gain (Loss) on investments, net of tax
benefit of $408 in 2016, net of tax expense of $283 in 2015 and net of tax benefit of $131 in 2014
2016
2015
2014
(in thousands)
$
27,581 $
28,925
$
27,808
(757)
528
(245)
Comprehensive Income
$
26,824 $
29,453
$
27,563
The accompanying notes are an integral part of these statements.
6
ATRION 2016 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2016, 2015 and 2014
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
Impairment of investment
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 investments
Proceeds from sale of investments
Proceeds from maturities of investments
Cash Flows From Financing Activities:
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.
$
$
2016
2015
2014
(in thousands)
$
27,581
$
28,925
$
27,808
8,953
(247)
1,566
8,823
(1,431)
1,841
345
2,413
(37)
—
100
17
8,723
2
2,209
—
340
29
38,161
40,688
39,111
(546)
756
(247)
(673)
(324)
81
195
371
(1,749)
1,786
(103)
(492)
(128)
54
(2,798)
(1,756)
(3,117)
(22)
968
(396)
(767)
37,403
40,427
31,223
(10,639)
(30,799)
210
5,000
(36,228)
(1,112)
—
(1,276)
(7,111)
(9,499)
(8,324)
28,346
(9,323)
(168)
—
13,400
3,909
(154)
156
(30,698)
(6,069)
(36,765)
7,571
20,775
20,022
$
28,346
$
(12,671)
(33,115)
—
35,975
(9,811)
(376)
168
(23,556)
(5,432)
(29,196)
(7,784)
28,559
20,775
10,750
$
12,900
$
17,475
ATRION 2016 ANNUAL REPORT
7
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the year ended December 31, 2016, 2015 and 2014 (in thousands)
Common Stock
Treasury Stock
Shares
Outstanding
Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (loss)
Retained
Earnings
Total
Balances, January 1, 2014
1,985 $ 342
1,435 $ (57,302) $
31,592 $
— $ 174,362 $ 148,994
Net income
Other comprehensive income
Tax benefit from stock-based compensation
Stock-based compensation transactions
Shares surrendered in stock transactions
Purchase of treasury stock
Dividends
3
(1)
(74)
(3)
1
74
61
(376)
(23,556)
(245)
168
2,180
27,808
27,808
(245)
168
2,241
(376)
(23,556)
(5,464)
(5,464)
Balances, December 31, 2014
1,913
342
1,507
(81,173)
33,940
(245)
196,706
149,570
Net income
Other comprehensive income
Tax benefit from stock-based compensation
Stock-based compensation transactions
Shares surrendered in stock transactions
Purchase of treasury stock
Dividends
1
(1)
(89)
(1)
1
89
37
(154)
(30,698)
528
156
1,849
28,925
28,925
528
156
1,886
(154)
(30,698)
(6,115)
(6,115)
Balances, December 31, 2015
1,824
342
1,596
(111,988)
35,945
283
219,516
144,098
Net income
Other comprehensive income
Stock-based compensation transactions
Shares surrendered in stock transactions
Purchase of treasury stock
Dividends
7
(3)
(4)
(7)
3
4
102
(1,112)
(1,276)
(757)
1,503
27,581
27,581
(757)
1,605
(1,112)
(1,276)
(7,151)
(7,151)
Balances, December 31, 2016
1,824 $ 342
1,596 $ (114,274) $
37,448 $
(474) $ 239,946 $
162,988
The accompanying notes are an integral part of this statement.
8
ATRION 2016 ANNUAL REPORT
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the Company’s cash and cash equivalents
and our short and long-term investments as of December 31,
2016 and 2015 are as follows (in thousands):
Cash and Cash Equivalents:
Cash deposits
Money market funds
Total cash and cash equivalents
Short-term investments:
December 31,
2016
2015
$
$
10,724
$
16,015
9,298
12,331
20,022
$
28,346
Certificates of deposit (held-to-maturity)
$
24,000
Corporate bonds (held-to-maturity)
80
Total short-term investments
Long-term investments:
Corporate bonds (held-to-maturity)
Equity securities (available-for-sale)
Total long-term investments
Total cash, cash equivalents and
short and long-term investments
$
$
$
$
24,080
$
5,000
$
4,945
9,945
$
—
44
44
5,555
4,311
9,866
54,047
$
38,256
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, evalua-
tion of customers’ current and past financial condition, recent
payment history, current economic environment, and discus-
sions with appropriate Company personnel and with the
customers directly. Accounts are written off when we determine
the receivable will not be collected.
(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
physicians, 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 the consolidated 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 and Investments
Cash and cash equivalents include cash on hand and in the bank
as well as money market accounts and debt securities with
maturities at the time of purchase of 90 days or less.
Our investments consist of taxable corporate bonds, certificates
of deposit and equity securities. We classify our investment
securities in one of two categories: held-to-maturity or available-
for-sale. Securities that we have the positive intent and ability to
hold to maturity are reported at amortized cost and classified
as held-to-maturity securities. If we do not have the intent and
ability to hold a security to maturity, we report the investment
as available-for-sale securities. We report available-for-sale
securities at fair value, based on quoted market prices, with
unrealized gains and, to the extent deemed temporary,
unrealized losses recorded in stockholders’ equity as
accumulated other comprehensive income (loss). We consider
investments which will mature in the next 12 months as current
assets. The remaining investments are considered non-current
assets including our investment in equity securities which we
intend to hold longer than 12 months. We periodically evaluate
our investments for impairment.
Notes to Consolidated Financial Statements ATRION 2016 ANNUAL REPORT
9
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,
2016
2015
Raw materials
Work in process
Finished goods
Total inventories
$
$
12,984
$
6,230
9,801
29,015
$
12,775
6,557
10,439
29,771
Accounts Payable
We reflect disbursements as trade accounts payable until such
time as payments are presented to our bank for payment. At
December 31, 2016 and 2015, disbursements totaling
approximately $624,000 and $636,000, 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, or 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.
During the years ended December 31, 2016 and 2015, we
made quarterly payments in excess of federal income taxes due
of approximately $920,000 and $1.2 million, respectively. These
amounts are recorded in Prepaid expenses and other current
assets on our Consolidated Balance Sheets.
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,
2016
2015
Useful Lives
$
5,260
$
5,260
—
32,321
31,914
30-40 yrs
122,832
113,633
3-15 yrs
$
160,413
$
150,807
Land
Buildings
Machinery and
equipment
Total property, plant
and equipment
Depreciation expense of $8,689,000, $8,478,000 and
$8,454,000 was recorded for the years ended December 31,
2016, 2015 and 2014, 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 seven 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, 2016 and
2015 was $9,730,000. Our evaluation of goodwill during each
year resulted in no impairment losses.
10
ATRION 2016 ANNUAL REPORT Notes to Consolidated Financial Statements
Current Accrued Liabilities
The items comprising current accrued liabilities are as follows (in
thousands):
December 31,
2016
2015
Accrued payroll and related expenses
$
3,661
$
4,206
Accrued vacation
Other accrued liabilities
Total accrued liabilities
265
709
245
610
$
4,635
$
5,061
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
R&D 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, or ASC 718.
New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) 2016-09,
Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting (ASU 2016-09). This
amendment simplifies the accounting for some aspects of
share-based payment transactions, including the income tax
treatment of excess tax benefits and deficiencies, forfeitures,
classification of share-based awards as either equity or liabilities,
and classification in the statement of cash flows for certain
share-based transactions related to tax benefits and payments.
Under this guidance all excess tax benefits (“windfalls”) and
deficiencies (“shortfalls”) related to employee stock
compensation are recognized within income tax expense. Under
prior guidance windfalls were recognized in paid-in capital and
shortfalls were only recognized to the extent they exceeded the
pool of windfall tax benefits. ASU 2016-09 also requires
companies to classify cash flows resulting from excess tax
benefits and deficiencies from employee share-based payments
as cash flows from operating activities. These items were
previously included as cash flows from financing activities. ASU
2016-09 is effective for fiscal years beginning after December
15, 2016, including interim periods within those fiscal years.
Early adoption is permitted. The Company early adopted this
guidance in the second quarter of 2016 effective January 1,
2016. The Company elected to account for forfeitures as they
occur and to use a prospective transition method for the
presentation of excess tax benefits on the statement of cash
flows. As a result of the adoption, a tax benefit of $687,000 was
recorded in 2016 reflecting the excess tax benefits resulting
from the vesting of restricted stock and restricted stock units.
Prior to adoption, this amount would have been recorded as
additional paid-in capital. This change could create future
volatility in our effective tax rate depending upon the amount of
exercise or vesting activity from our stock based awards. This
adoption also impacted the computation of diluted shares
outstanding for all 2016 reporting periods as we excluded the
excess tax benefits from the assumed proceeds available to
repurchase shares in the computation of our diluted earnings
per share. The effect of this change on our diluted earnings per
share was not significant. The excess tax benefit recorded in
2016 was included in our consolidated statements of cash flows
as an operating activity rather than as a financing activity as
was done in prior years. There were no restatements of cash
flows from operating activities or cash flows from financing
activities for the years 2015 and 2014 because we elected to
adopt this change on a prospective basis. ASU 2016-09 also
requires the presentation of employee taxes paid by the
Company through the withholding of shares as a financing
activity on the statement of cash flows, which is how we had
previously reflected these items.
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The
main objective of this update is to enhance the reporting model
for financial instruments in order to provide users of financial
statements with more decision-useful information. The new
guidance addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial
instruments. This ASU is effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal
years. We are currently evaluating the new guidance to
determine the impact it may have on our consolidated financial
statements.
In November 2015, the FASB issued ASU 2015-17, Balance
Sheet Classification of Deferred Taxes (ASU 2015-17) which
requires that deferred tax liabilities and assets be classified as
noncurrent on the balance sheet. The current requirement that
deferred tax liabilities and assets of a tax-paying component of
an entity be offset and presented as a single amount is not
affected by this guidance. ASU 2015-17 is effective for annual
Notes to Consolidated Financial Statements ATRION 2016 ANNUAL REPORT 11
and interim periods beginning after December 15, 2016 but
early application is permitted and the guidance may be applied
either prospectively to all deferred tax liabilities and assets or
retrospectively to all periods presented. The Company does not
anticipate a material impact on its consolidated financial
statements at the time of adoption of this new standard.
In May 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers (ASU 2014-09). ASU 2014-09
requires an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods or
services to customers. ASU 2014-09 will replace most existing
revenue recognition guidance in United States Generally
Accepted Accounting Principles when it becomes effective. In
July 2015, the FASB voted to delay the effective date of ASU
2014-09 by one year, making it effective for fiscal years, and
interim periods within those years, beginning after December
15, 2017, with early adoption permitted as of the original
effective date. ASU 2014-09 permits the use of either the
retrospective or cumulative effect transition method. We plan
on adopting the ASU in the first quarter of the year ended
December 31, 2018. The Company has not yet selected a
transition method and is currently evaluating the effect that our
pending adoption for the guidance will have on our
consolidated financial statements and related disclosures. We
anticipate our assessment to be completed by December 31,
2017. Based on our existing evaluation process, we have not
identified any revenue stream that would be impacted.
From time to time, new accounting pronouncements applicable
to us are issued by the 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, 2016 and 2015, we held certain
investments in corporate and government debt securities,
certificates of deposit, and certain equity securities. These
investments are all considered Level 2 assets and the fair value
of our investments were estimated using recently executed
transactions and market price quotations (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 and cash
equivalents, certificates of deposit, investments and accounts
receivable.
Our cash and cash equivalents and certificates of deposit are
held in accounts with financial institutions that we believe are
creditworthy. Certain of these amounts at times may exceed
federally-insured limits. At December 31, 2016, approximately
89 percent of our cash and cash equivalents and all of our
certificates of deposit were uninsured. We have not experienced
any credit losses in such accounts and do not believe we are
exposed to any significant credit risk on these funds.
We have investments in corporate bonds. As a result, we are
exposed to potential loss from market risks that may occur as a
result of changes in interest rates, changes in credit quality of
the issuer and otherwise. These securities have a higher degree
of credit or default risk and a greater exposure to credit risk and
may be less liquid in times of economic weakness or market
disruptions.
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, 2016 and 2015, we had allowances
for doubtful accounts of approximately $71,000 and $50,000,
respectively. The carrying amount of the receivables
approximates their fair value. No customer exceeded 10 percent
of our accounts receivable as of December 31, 2016 or 2015.
(2) Investments
As of December 31, 2016 and 2015, 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 including interest receivable on long-term bonds. The
remaining investments are considered non-current assets
including our investment in equity securities which we intend to
hold longer than 12 months.
The amortized cost and fair value of our investments and the
related gross unrealized gains and losses, were as follows as of
the dates shown below (in thousands):
12
ATRION 2016 ANNUAL REPORT Notes to Consolidated Financial Statements
Gross Unrealized
(3) Patents and Licenses
Cost
Gains
Losses
As of December 31, 2016
Fair
Value
Short-term Investments:
Certificates of deposit
$ 24,000 $
9 $
— $ 24,009
Corporate bonds
$
80 $
— $
— $
80
Long-term Investments:
Corporate bonds
$ 5,000 $
Equity Investments
$ 5,675 $
—
—
($287)
$ 4,713
($730)
$ 4,945
As of December 31, 2015
Short-term Investments:
Corporate bonds
$
44 $
— $
— $
44
Long-term Investments:
Corporate and
government bonds
$ 5,555 $
—
($30)
$
5,525
Equity Investments
$ 3,876 $
435 $
— $
4,311
The above long-term corporate bonds represent an investment
in one issuer at December 31, 2016. The unrealized loss for this
investment relates to a rise in interest rates which resulted in a
lower market price for that security. This investment has not
been in a loss position for more than 12 months. In 2015, one
of our bonds experienced a significant decline in market value
over a 12-month period due to a changed outlook for the issuer
resulting from a major economic decline in its industry. In the
fourth quarter of 2015, we determined based upon disclosures
by the issuer, that more likely than not, we would be required to
sell or exchange the bond before recovery of its amortized cost.
Therefore, we recorded an impairment loss on this bond of $2.4
million in 2015, reducing the carrying value of the bond to its
market value at December 31, 2015. In 2016 after the issuer
declared bankruptcy, we sold this bond that was previously
intended to be held to maturity. We recorded an additional net
loss of $311,000 on this bond in 2016 prior to and including its
sale. These losses in 2015 and 2016 are reported as other
income (loss) on our Consolidated Statements of Income.
The carrying value of our investments is reviewed quarterly for
changes in circumstance or the occurrence of events that
suggest an investment may not be recoverable. At December
31, 2016, the length of time until maturity of the corporate
bond we currently own is 53.5 months and the length of time
until maturity of the certificates of deposit ranged from 1.5 to
9.7 months.
Our accumulated other comprehensive income (loss) is
comprised solely of unrealized losses on our above equity
investments, net of tax. These equity securities are treated as
available-for-sale securities.
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, 2016
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
15.67
$
13,840
$
11,911
December 31, 2015
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
15.67
$
13,840
$
11,647
Aggregate amortization expense for patents and licenses was
$264,000, $345,000 and $269,000 for 2016, 2015 and 2014,
respectively. Estimated future amortization expense for each of
the years set forth below ending December 31 is as follows (in
thousands):
2017
2018
2019
2020
2021
$
$
$
$
$
151
119
119
119
119
(4) Line of Credit
As of December 31, 2016 we had a $40.0 million revolving
credit facility with a money center bank pursuant to which the
lender was obligated to make advances until October 1, 2021.
The credit facility was secured by substantially all our
inventories, equipment and accounts receivable. Interest under
the credit facility was assessed at 30-day, 60-day or 90-day
LIBOR, as selected by us, plus one percent (1.76 percent at
December 31, 2016) and was payable monthly. We had no
outstanding borrowings under the credit facility at December
31, 2016 or 2015. Our ability to borrow funds under the credit
facility from time to time was contingent on meeting certain
covenants in the loan agreement, the most restrictive of which
was the ratio of total debt to earnings before interest, income
tax, depreciation and amortization. At December 31, 2016, we
were in compliance with all of those covenants.
On February 28, 2017 we replaced the revolving credit facility
with a new $75.0 million revolving credit facility with the same
bank. The new credit facility has similar operational, covenant
and collateral characteristics as the prior facility. Interest under
the new credit facility is assessed at one, two, three or six-month
LIBOR, as selected by us, plus .875 percent. The new credit
facility provides for advances until February 28, 2022.
Notes to Consolidated Financial Statements ATRION 2016 ANNUAL REPORT 13
(5) Income Taxes
The items comprising income tax expense are as follows (in
thousands):
Year ended December 31,
2016
2015
2014
Current — Federal
$ 10,706
$ 11,848
$ 12,626
— State
Deferred — Federal
— State
1,226
11,932
(92)
(155)
(247)
1,528
13,376
(1,364)
(67)
(1,431)
1,585
14,211
31
(29)
2
Provision for Income Taxes
$ 11,685
$ 11,945
$ 14,213
Temporary differences and carryforwards which have given rise
to deferred income tax assets and liabilities as of December 31,
2016 and 2015 are as follows (in thousands):
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
Current deferred income tax asset
Net deferred tax liability
$
$
$
$
$
$
2016
2015
$
1,819
$
1,958
519
1,292
473
733
3,630
$
3,164
9,550
$
2,833
—
12,383
8,753
$
$
9,585
2,897
91
12,573
9,409
9,404
$
9,989
651
580
8,753
$
9,409
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):
Income tax expense at the
statutory federal income tax rate
Increase (decrease) resulting
from:
State income taxes
Section 199 manufactur-
ing deduction
R&D tax credits
Excess tax benefit from
stock compensation
Other, net
Year ended December 31,
2016
2015
2014
$
13,743
$
14,304
$
14,707
730
882
934
(1,165)
(1,070)
(687)
134
(1,383)
(2,254)
—
396
(1,290)
(393)
—
255
An excess tax benefit is the realized tax benefit related to the
amount of deductible compensation cost reported on an
employer’s tax return for equity instruments in excess of the
compensation cost for those instruments recognized for financial
reporting purposes. The Company adopted ASU-2016-09 (see
Note 1) effective January 1, 2016 eliminating the requirement
for excess tax benefits to be recorded as additional paid-in
capital when realized. Excess tax benefits in the amount of
$156,000 and $168,000 were recognized as additional paid-in
capital during 2015 and 2014, respectively, resulting from the
vesting of restricted stock and restricted stock units. With the
adoption of ASU 2016-09, excess tax benefits of $687,000 were
recognized as a component of income tax expense in 2016 for
these types of transactions.
We recorded tax credits for our R&D expenditures totaling $2.3
million in 2015. This amount included an adjustment for
recalculation of our R&D tax credits from prior years resulting
from a new regulation issued by the Treasury Department which
favorably impacted the benefits provided to the Company under
these rules.
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, 2014
$
346
Increase in tax positions for prior years
Increase in tax positions for current year
Lapse in statutes of limitation
Gross unrecognized tax benefits at December 31, 2014
$
Increase in tax positions for prior years
Increase in tax positions for current year
Lapse in statutes of limitation
Gross unrecognized tax benefits at December 31, 2015
$
Decrease in tax positions for prior years
Increase in tax positions for current year
Lapse in statutes of limitation
Gross unrecognized tax benefits at December 31, 2016
$
6
0
(223)
129
122
0
(131)
120
(120)
0
0
0
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
2011. The audit of our federal income tax returns for 2011, 2012
and 2013 was completed in 2016 with no changes. All material
state and local income tax matters have been concluded for
years through 2012.
We recognize interest and penalties, if any, related to
unrecognized tax benefits in income tax expense. Tax expense
for the year ended December 31, 2016, 2015 and 2014 included
a net interest benefit of $0, $9,000 and $12,000, respectively.
Provision for Income Taxes
$
11,685 $
11,945
$
14,213
14
ATRION 2016 ANNUAL REPORT Notes to Consolidated Financial Statements
(6) Stockholders’ Equity
Our Board of Directors has at various times authorized
repurchases of our stock in open-market or privately-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 stock repurchase program
pursuant to which we repurchased 200,000 shares of our
common stock from time to time in open market or privately-
negotiated transactions, which was the maximum number of
shares that could be repurchased. On May 21, 2015 our Board
of Directors adopted a new stock repurchase program pursuant
to which we can repurchase up to 250,000 shares of our
common stock from time to time in open market or privately-
negotiated transactions. This program has no expiration date
but may be terminated by the Board of Directors at any time.
As of December 31, 2016, 231,765 shares remained available
for repurchase under this program. We repurchased 3,427,
89,452 and 73,379 shares during 2016, 2015 and 2014,
respectively.
We increased our quarterly cash dividend payments in
September of each of the past three years. The quarterly
dividend was increased to $.75 per share in September 2014, to
$.90 per share in September 2015 and to $1.05 per share in
September 2016. Holders of our stock units earned non-cash
dividend equivalents of $40,000 in 2016, $46,000 in 2015 and
$33,000 in 2014.
(7) Income Per Share
The following is the computation of basic and diluted income
per share:
Year ended December 31,
2016
2015
2014
(in thousands, except per share amounts)
Net Income
$
27,581
$
28,925
$
27,808
Weighted average basic
shares outstanding
Add: Effect of dilutive
securities
Weighted average
diluted shares
outstanding
Net Income Per Share
1,824
1,846
1,958
33
24
17
1,857
1,870
1,975
Basic
Diluted
$
$
15.12
14.85
$
$
15.67
15.47
$
$
14.20
14.08
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 eight shares of common stock for the
year ended December 31, 2014 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, 2016, 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
on applying ASC 718.
Our Amended and Restated 2006 Equity Incentive Plan, or 2006
Plan, provides for awards 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, 2016, there remained 52,248 shares reserved 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,
2016, there remained 1,559 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
Notes to Consolidated Financial Statements ATRION 2016 ANNUAL REPORT 15
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, 2016 is presented below:
Nonvested Shares
Shares
Weighted
Average Award
Date Fair Value
Per Share
Restricted stock at December 31, 2015
4,500 $
212.53
Granted in 2016
Vested in 2016
— $
—
(3,000) $
204.76
Restricted stock at December 31, 2016
1,500 $
228.08
All shares of nonvested restricted stock outstanding at December
31, 2016 are expected to vest. The total fair value of restricted
stock vested during 2016, 2015 and 2014 was $1,177,000,
$1,086,000 and $1,372,000, respectively.
During 2016 there were no restricted stock units awarded 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 2016, 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, 2016, 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
15,428
88
(6,128)
$
$
$
229.02
431.74
186.49
—
25 $
390.43
(25) $
390.43
9,388
$
258.69
—
Nonvested
Stock Units
Nonvested at
December
31, 2015
Granted
Vested
Nonvested at
December
31, 2016
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, 2016, there remained 1,126 shares reserved for
issuance under such plan.
A summary of stock option transactions for the year ended
December 31, 2016 is presented below:
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Outstanding at
December 31, 2015
Granted
Exercised
Outstanding at
December 31, 2016
Exercisable at
December 31, 2016
50,000
$
204.76
—
—
—
—
50,000
45,000
$
$
204.76
1.9 years
202.17
1.8 years
All nonvested options outstanding at December 31, 2016 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 2016, 2015 or 2014. There
were no options exercised in 2016 or 2015. The total intrinsic
values of options outstanding and options currently exercisable
at December 31, 2016, were $15.1 million and $13.7 million,
respectively.
During 2016, no shares of restricted stock were awarded 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
16
ATRION 2016 ANNUAL REPORT Notes to Consolidated Financial Statements
All nonvested restricted stock units at December 31, 2016 are
expected to vest. The total intrinsic value of all outstanding
stock units which were not convertible at December 31, 2016,
including 457 stock units held for the accounts of non-employee
directors, was $4,994,000. The total fair value of directors’ stock
units that vested was $10,000 during 2016, $5,000 during
2015 and $8,000 during 2014.
Stock awards that vested immediately were awarded under the
2006 Plan to non-employee directors totaling $240,000 in value
in each of 2016, 2015 and 2014. 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 award. 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, 2016, 2015 and 2014, we
recorded stock-based compensation expense as a G&A expense
in the amount of $1,566,000, $1,841,000 and $2,209,000,
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, 2016, 2015
and 2014, was $1,235,000, $644,000 and $773,000,
respectively. The 2016 tax benefit amount includes $687,000
of excess tax benefits within income tax expense as a result of
the adoption of ASU 2016-09. Excess tax benefits of $156,000
and $168,000 were recognized during 2015 and 2014,
respectively, as additional paid-in capital and are shown as a
financing activity in our consolidated statements of cash flows
for such years.
Unrecognized compensation cost information for our various
stock-based compensation types is shown below as of
December 31, 2016:
Unrecognized
Compensation Cost
Weighted Average
Remaining Years
in Amortization
Period
Stock options
Restricted stock
Restricted stock units
Total
$
$
76,000
128,000
622,000
826,000
0.4
0.4
2.5
We have a policy of utilizing treasury shares to satisfy stock option
exercises, stock unit conversions and restricted stock awards.
(9) 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 37,
35 and 42 percent of our net revenues in 2016, 2015 and 2014,
respectively. In 2015, we saw a shift in the percentage of our
international sales that was driven in large part by a customer’s
decision to build a new facility in the United States. We have no
assets located outside the United States.
A summary of revenues by geographic area, based on shipping
destination, for 2016, 2015 and 2014 is as follows (in
thousands):
Year ended December 31,
2016
2015
2014
United States
$
91,092
$
94,840 $
81,971
Canada
2,041
2,062
11,655
Other countries less
than 10% of revenues
50,354
48,830
47,136
Total
$
143,487
$
145,733 $
140,762
A summary of revenues by product line for 2016, 2015 and
2014 is as follows (in thousands):
2016
2015
2014
Fluid Delivery
$
60,889
$
60,630
$
57,905
Cardiovascular
Ophthalmology
Other
Total
47,064
15,427
20,107
46,463
18,253
20,387
43,001
19,329
20,527
$
143,487
$
145,733
$
140,762
(10) 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 $667,000,
$645,000 and $600,000 in 2016, 2015 and 2014, respectively.
Notes to Consolidated Financial Statements ATRION 2016 ANNUAL REPORT 17
(11) 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, 2016, the Company had no ongoing
litigation or arbitration for such matters.
(12) Quarterly Financial Data (Unaudited)
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 $4.0 million in potential future payments
under this settlement as of December 31, 2016 due to the
uncertainty of payment.
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,
2016 could have resulted in payments aggregating $6.0 million.
Quarter Ended
Operating Revenue
Operating Income
Net Income
(in thousands, except per share amounts)
Income Per
Basic Share
Income Per
Diluted Share
$
$
03/31/16
06/30/16
09/30/16
12/31/16
03/31/15
06/30/15
09/30/15
12/31/15
36,215 $
10,465 $
6,945 $
3.81 $
36,143
37,835
33,294
10,074
10,976
7,611
7,450
7,614
5,571
4.09
4.17
3.05
38,324 $
11,486 $
7,602 $
4.05 $
37,655
37,381
32,372
11,120
11,573
8,330
7,474
7,799
6,050
4.04
4.25
3.32
3.76
4.02
4.10
3.00
4.01
3.99
4.19
3.27
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 2016 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, 2016 and 2015, and the related
consolidated statements of income, comprehensive income,
changes in stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2016. 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, 2016 and 2015, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2016 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
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of
December 31, 2016, based on criteria established in the 2013
Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 14, 2017
expressed an unqualified opinion.
Grant Thornton LLP
Dallas, Texas
March 14, 2017
Report of Independent Registered Public Accounting Firm ATRION 2016 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, 2016 using
the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in the 2013
Internal Control–Integrated Framework. Based on this
assessment, our management concluded that, as of December
31, 2016, 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 2016 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, 2016, based on criteria established in the 2013
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, 2016, based on criteria established in the 2013
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, 2016, and our report
dated March 14, 2017, expressed an unqualified opinion on
those financial statements.
Grant Thornton LLP
Dallas, Texas
March 14, 2017
Report of Independent Registered Public Accounting Firm ATRION 2016 ANNUAL REPORT
21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the year ended December 31, 2016, we reported revenues
of $143.5 million, operating income of $39.1 million and net
income of $27.6 million.
Results of Operations
Our net income was $27.6 million, or $15.12 per basic and
$14.85 per diluted share, in 2016 compared to $28.9 million, or
$15.67 per basic and $15.47 per diluted share, in 2015 and net
income of $27.8 million, or $14.20 per basic and $14.08 per
diluted share, in 2014. Revenues were $143.5 million in 2016
compared with $145.7 million in 2015 and $140.8 million in
2014. Our 2016 revenues were negatively impacted by the
strong U. S. dollar in our international markets and lower sales
prices in certain markets. The four percent revenue increase in
2015 over 2014 was generally attributable to higher sales
volumes.
Annual revenues by product lines were as follows (in thousands):
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
2016
2015
2014
$
60,889
$
60,630
$
57,905
47,064
15,427
20,107
46,463
18,253
20,387
43,001
19,329
20,527
$ 143,487
$ 145,733
$ 140,762
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 2016, approximately 37 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. R&D 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
investments, 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 2016 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our cost of goods sold was $75.9 million in 2016, $74.8 million
in 2015 and $72.2 million in 2014. Increased compensation
costs, depreciation and repair costs partially offset by reduced
utilities and reduced supplies were the primary contributors to
the increase in cost of goods sold in 2016 over 2015. Higher
sales volume along with increased compensation costs, supplies
and utilities partially offset by improved manufacturing
efficiencies were the primary contributors to the increase in cost
of goods sold in 2015 over 2014.
Gross profit in 2016 was $67.6 million compared with $71.0
million in 2015 and $68.5 million in 2014. Our gross profit was
47 percent of revenues in 2016 and 49 percent of revenues in
both 2015 and 2014. The decrease in gross profit percentage in
2016 from 2015 was primarily related to reduced sales, lower
sales prices and increased manufacturing costs.
Operating expenses were $28.5 million in both 2016 and 2015
and $27.7 million in 2014. R&D expenses increased $228,000
in 2016 as compared to 2015 primarily as a result of increased
costs for supplies and travel partially offset by reduced outside
services. 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 2016, selling expenses
increased $568,000 as compared with 2015 primarily as a
result of increased travel, outside services, compensation and
trade shows. 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
decreased $763,000 in 2016 as compared to 2015 primarily as
a result of reduced compensation and benefits. G&A expenses
consist primarily of salaries and other related expenses of
administrative, executive and financial personnel and outside
professional fees.
R&D expenses increased $1.1 million in 2015 as compared to
2014 primarily as a result of increased costs for outside services
and supplies. In 2015, selling expenses decreased $167,000 as
compared with 2014 primarily as a result of decreased
promotional costs partially offset by increased commissions.
G&A expenses decreased $123,000 in 2015 as compared to
2014 primarily as a result of reduced outside services partially
offset by increased amortization.
Our operating income for 2016 was $39.1 million compared
with $42.5 million in 2015 and $40.8 million in 2014. Operating
income was 27 percent of revenues for 2016 and 29 percent of
revenues for both 2015 and 2014. Decreases in 2016 gross
profit was the major contributor to the decrease in operating
income for 2016 as compared to the previous year. Increases in
gross profit partially offset by increases in operating expenses
described above were the major contributors to the operating
income increase in 2015 as compared to the previous year. We
expect modest growth in our operating income during 2017 as
compared to 2016, reflecting the volatility of our ophthalmic
sales as well as the significant impact of the strong U. S. dollar
on sales to our international markets.
Interest income for 2016 was $448,000, compared with
$771,000 in 2015 and $1.2 million in 2014. Lower interest rates
were the primary reason for the reductions in 2016. Reduced
levels of investments and lower interest rates were the primary
reasons for the reductions in 2015.
Other income (expense) in 2015 is primarily related to an
impairment loss on one of our long-term corporate bonds which
experienced a significant decline in market value due to a
changed outlook for the issuer resulting from a major economic
decline in its industry. In the fourth quarter of 2015, we
determined, based upon disclosures by the issuer, that more
likely than not we would be required to sell or exchange the
bond before recovery of its amortized cost. Therefore, we
recorded an impairment loss on this bond of $2.4 million
reducing the carrying value of the bond to its market value at
December 31, 2015. In 2016 after the issuer declared
bankruptcy, we sold this bond that was previously intended to
be held to maturity. We recorded an additional net loss of
$311,000 on this bond in 2016 prior to and including its sale.
Income tax expense in 2016 totaled $11.7 million, compared
with $11.9 million in 2015 and $14.2 million in 2014. The
effective tax rates for 2016, 2015 and 2014 were 29.8 percent,
29.2 percent and 33.8 percent, respectively. The effective tax
rate for 2016 benefitted by $687,000 from the early adoption
of ASU 2016-09 regarding the accounting for employee
share-based compensation. The adoption was on a prospective
basis and therefore had no impact on prior years. The effective
tax rate for 2015 benefitted from tax credits totaling $2.3
million for our R&D expenditures. These credits reflected
amounts for the full year 2015 following the extension of the
R&D tax credit in December 2015. This amount also included an
adjustment for recalculation of these tax credits from prior years
resulting from a new regulation issued by the Treasury
Department which favorably impacted the benefits provided to
the Company under these rules. Benefits from R&D tax credits
totaled $1.1 million in 2016, $2.3 million in 2015 and $393,000
in 2014. Benefits from tax incentives for domestic production
totaled $1.2 million in 2016, $1.4 million in 2015 and $1.3
million in 2014. Benefits from changes in uncertain tax positions
totaled $120,000 in 2016, $9,000 in 2015 and $217,000 in
2014. We expect our effective tax rate for 2017 to be
approximately 33.0 percent. Accounting for stock based awards
could create volatility in our effective tax rate depending upon
the amount of exercise or vesting activity from these activities.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ATRION 2016 ANNUAL REPORT
23
Liquidity and Capital Resources
At December 31, 2016, we had a $40.0 million revolving credit
facility with a money center bank that could be utilized for the
funding of operations and for major capital projects or
acquisitions, subject to certain limitations and restrictions.
Interest under the credit facility was assessed at 30-day, 60-day
or 90-day LIBOR, as selected by us, plus one percent and was
payable monthly. We had no outstanding borrowings under our
credit facility at December 31, 2016 or 2015. The credit facility
contained various restrictive covenants, none of which was
expected to impact our liquidity or capital resources. At
December 31, 2016, we were in compliance with all financial
covenants.
On February 28, 2017 we replaced the revolving credit facility
with a new $75.0 million revolving credit facility with the same
bank. The new credit facility has similar operational, covenant
and collateral characteristics as the prior facility. Interest under
the new credit facility is assessed at one, two, three or six-month
LIBOR, as selected by us, plus .875 percent. The new credit
facility allows us to make advances until February 28, 2022. We
believe the bank providing the credit facility is highly-rated and
that the entire $75.0 million under the credit facility is currently
available to us.
At December 31, 2016, we had a total of $54.0 million in cash
and cash equivalents, short-term investments and long-term
investments, an increase of $15.8 million from December 31,
2015. The principal contributor to this increase was operational
results.
Cash flows provided by operations of $37.4 million in 2016 were
primarily comprised of net income plus the net effect of
non-cash expenses. At December 31, 2016, we had working
capital of $85.0 million, including $20.0 million in cash and cash
equivalents and $24.1 million in short-term investments. The
$16.1 million increase in working capital during 2016 was
primarily related to increases in short-term investments. This
increase was partially offset by decreases in cash and cash
equivalents. The increase in short-term investments was
primarily a result of operational results partially offset by
purchases of treasury stock under our stock repurchase program,
purchases of property, plant and equipment and payment of
dividends. 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
$10.6 million in 2016, compared with $9.3 million in 2015 and
$12.7 million in 2014. These expenditures were primarily for
machinery and equipment. We expect 2017 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 $7.1 million, $6.1 million and
$5.4 million during 2016, 2015 and 2014, respectively. We
expect to fund future dividend payments with cash flows from
operations. We purchased treasury stock totaling $1.3 million,
$30.7 million and $23.6 million during 2016, 2015 and 2014,
respectively
The table below summarizes debt, lease and other contractual
obligations outstanding at December 31, 2016:
Payments Due by Period
Contractual
Obligations
Total
2017
2018–
2019
2020 and
thereafter
(in thousands)
Purchase
Obligations
$ 11,863 $
11,643 $
Total
$ 11,863 $
11,643 $
220 $
220 $
—
—
We believe our cash, cash equivalents, short-term investments
and long-term investments, cash flows from operations and
available borrowings of up to $75.0 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 2017.
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
In March 2016, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) 2016-09,
Stock Compensation (Topic718): Improvements to Employee
Share-Based Payment Accounting (ASU 2016-09). This
amendment simplifies the accounting for some aspects of
share-based payment transactions, including the income tax
treatment of excess tax benefits and deficiencies, forfeitures,
classification of share-based awards as either equity or liabilities,
and classification in the statement of cash flows for certain
share-based transactions related to tax benefits and payments.
Under this guidance all excess tax benefits (“windfalls”) and
deficiencies (“shortfalls”) related to employee stock
compensation are recognized within income tax expense.
24
ATRION 2016 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations
Under prior guidance windfalls were recognized in paid-in
capital and shortfalls were only recognized to the extent they
exceeded the pool of windfall tax benefits. ASU 2016-09 also
requires companies to classify cash flows resulting from excess
tax benefits and deficiencies from employee share-based
payments as cash flows from operating activities. These items
were previously included as cash flows from financing activities.
ASU 2016-09 is effective for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal
years. Early adoption is permitted. The Company early adopted
this guidance in the second quarter of 2016 effective January 1,
2016. The Company elected to account for forfeitures as they
occur and to use a prospective transition method for the
presentation of excess tax benefits on the statement of cash
flows. As a result of the adoption, a tax benefit of $687,000 was
recorded in 2016 reflecting the excess tax benefits resulting
from the vesting of restricted stock and restricted stock units.
Prior to adoption, this amount would have been recorded as
additional paid-in capital. This change could create future
volatility in our effective tax rate depending upon the amount of
exercise or vesting activity from our stock based awards. This
adoption also impacted the computation of diluted shares
outstanding for all 2016 reporting periods as we excluded the
excess tax benefits from the assumed proceeds available to
repurchase shares in the computation of our diluted earnings
per share. The effect of this change on our diluted earnings per
share was not significant. The excess tax benefit recorded in
2016 was included in our consolidated statements of cash flows
as an operating activity rather than as a financing activity as
was done in prior years. There were no restatements of cash
flows from operating activities or cash flows from financing
activities for the years 2015 and 2014 because we elected to
adopt this change on a prospective basis. ASU 2016-09 also
requires the presentation of employee taxes paid by the
Company through the withholding of shares as a financing
activity on the statement of cash flows, which is how we had
previously reflected these items.
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The
main objective of this update is to enhance the reporting model
for financial instruments in order to provide users of financial
statements with more decision-useful information. The new
guidance addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial
instruments. This ASU is effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal
years. We are currently evaluating the new guidance to
determine the impact it may have on our consolidated financial
statements.
In November 2015, the FASB issued ASU 2015-17, Balance
Sheet Classification of Deferred Taxes (ASU 2015-17) which
requires that deferred tax liabilities and assets be classified as
noncurrent on the balance sheet. The current requirement that
deferred tax liabilities and assets of a tax-paying component of
an entity be offset and presented as a single amount is not
affected by this guidance. ASU 2015-17 is effective for annual
and interim periods beginning after December 15, 2016 but
early application is permitted and the guidance may be applied
either prospectively to all deferred tax liabilities and assets or
retrospectively to all periods presented. The Company does not
anticipate a material impact on its consolidated financial
statements at the time of adoption of this new standard.
In May 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers (ASU 2014-09). ASU 2014-09
requires an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods or
services to customers. ASU 2014-09 will replace most existing
revenue recognition guidance in United States Generally
Accepted Accounting Principles when it becomes effective. In
July 2015, the FASB voted to delay the effective date of ASU
2014-09 by one year, making it effective for fiscal years, and
interim periods within those years, beginning after December
15, 2017, with early adoption permitted as of the original
effective date. ASU 2014-09 permits the use of either the
retrospective or cumulative effect transition method. We plan
on adopting the ASU in the first quarter of the year ended
December 31, 2018. The Company has not yet selected a
transition method and is currently evaluating the effect that our
pending adoption of this guidance will have on our consolidated
financial statements and related disclosures. We anticipate our
assessment to be completed by December 31, 2017. Based on
our existing evaluation process, we have not identified any
revenue stream that would be materially impacted.
From time to time, new accounting standards updates
applicable to us are issued by the 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
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ATRION 2016 ANNUAL REPORT
25
about the effect of matters that are inherently uncertain. Actual
results could differ significantly from those estimates under
different assumptions and conditions.
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
significantly from what we have projected.
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
changes in our business plan could materially affect our
evaluations. No such changes are anticipated at this time.
We assess goodwill for impairment pursuant to Accounting
Standards Codification, or 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.
We assess the total carrying value for each of our investments
on a quarterly basis for changes in circumstance or the
occurrence of events that suggest our investment may not be
recoverable. If an investment is considered impaired, we must
determine whether the impairment is other than temporary. If it
is determined to be other than temporary, the impairment must
be recognized in our financial statements.
During 2016, 2015 and 2014, none of our critical accounting
policy estimates, with the exception of the previously
mentioned impairment loss on one of our long-term corporate
bonds, 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.
However, fluctuations in exchange rates may affect the prices
that our international customers are willing to pay and may put
us at a price disadvantage compared to other customers.
Increases in the value of the United States dollar relative to
foreign currencies could make our products less competitive or
less affordable and therefore adversely affect our sales in
international markets.
Market Risk and Credit Risk
The Company’s cash and cash equivalents are held in accounts
with financial institutions that we believe are creditworthy.
Certain of these accounts at times may exceed federally-insured
limits. We have not experienced any credit losses in such
accounts and do not believe we are exposed to any significant
credit risk on these funds.
We have investments in taxable corporate bonds, certificates of
deposit and equity securities. As a result, we are exposed to
potential loss from market risks that may occur as a result of
changes in interest rates, changes in credit quality of the issuer
and otherwise. These securities have a higher degree of credit or
default risk and a greater exposure to credit risk and may be less
liquid in times of economic weakness or market disruptions. We
have also invested a portion of our available funds in common
26
ATRION 2016 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations
stock. The value of these securities fluctuates due to changes in
the equity and credit markets along with other factors. In times
of economic weakness, the market value and liquidity of these
assets may decline and may negatively impact our financial
condition.
Forward-looking Statements
Statements in this Management’s Discussion and Analysis and
elsewhere in this Annual Report to Stockholders 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 growth in
operating income in 2017, our 2017 effective tax rate, the
impact of the restrictive covenants in our credit facility on our
liquidity and capital resources, our earnings in 2017, our 2017
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, the impact on our consolidated financial
statement of recently issued accounting standards when we
adopt those standards, the pace of investments in
manufacturing, technology, people, and R&D in 2017, and
increases in 2017 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.
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
2016
2015
2014
2013
2012
$
143,487 $
145,733 $
140,762 $
131,993 $
119,062
39,126
27,581
8,953
42,510
28,925
8,823
40,817
27,808
8,723
37,944
26,582
8,592
$
$
14.85 $
3.90 $
1,857
$
$
15.47
3.30
1,870
$
$
14.08
2.78
1,975
$
$
13.18
2.40
2,017
33,626
23,629
7,610
11.66
12.10
2,027
$
182,593 $
164,336
$
171,514
$
172,066
$
155,810
—
—
—
—
—
Selected Financial Data
ATRION 2016 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.
2016 net income A
Equity at December 31, 2015
Equity at December 31, 2016
Average equity B
Return on equity (A/B)
1) 2016 after tax interest income.
Adjustments
291 1
$
$
$
38,256 2
54,047 3
$
$
$
$
GAAP
27,581
144,098
162,988
153,543 4
18%
Non-GAAP
$
$
$
$
27,290
105,842
108,941
107,392 5
25%
2) Cash, cash equivalents and investments at December 31, 2015.
3) Cash, cash equivalents and investments at December 31, 2016.
4) GAAP equity at December 31, 2015 plus GAAP equity at December 31, 2016 divided by 2.
5) Adjusted equity at December 31, 2015 plus adjusted equity at December 31, 2016 divided by 2.
28
ATRION 2016 ANNUAL REPORT Non-GAAP Financial Measures Reconciliation
Leadership
Board of Directors
Emile A Battat
Chairman of the Board
Atrion Corporation
Preston G. Athey
Private Investor
Former Portfolio Manager
T. Rowe Price Small Cap Value Fund
T. Rowe Price Associates, Inc.
Baltimore, Maryland
Hugh J. Morgan, Jr.
Private Investor
Former Chairman of the Board
National Bank of Commerce
of Birmingham
Morganton, North Carolina
Ronald N. Spaulding
Private Investor
Former President of
Worldwide Commercial Operations
Abbott Vascular
Miami, Florida
Roger F. Stebbing
President and Chief Executive Officer
Stebbing and Associates, Inc.
Signal Mountain, Tennessee
John P. Stupp, Jr.
President and Chief Executive Officer
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
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 2016 Annual
Report on Form 10-K/A, 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 Global Select Market (Symbol: ATRI).
As of February 21, 2017, we had 262 record holders, and approximately 4,500 beneficial
owners, of our common stock. 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 2015 and 2016.
2015 Quarter Ended
High
Low
Dividends
March 31
June 30
September 30
December 31
2016 Quarter Ended
March 31
June 30
September 30
December 31
$
355.62
$
315.01
$
396.00
428.85
423.00
High
316.25
365.00
343.50
Low
$
415.00
$
350.00
$
442.50
490.45
522.05
385.00
393.96
418.00
0.75
0.75
0.90
0.90
Dividends
0.90
0.90
1.05
1.05
The Company presently plans to pay quarterly cash dividends in the future.
ATRION 2015 ANNUAL REPORT 29
ATRION CORPORATION
One Allentown Parkway
Allen, Texas 75002
972.390.9800
www.atrioncorp.com