ANNUAL
REPORT2017
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.
2017
Contents
Letter to Stockholders ............................................ 2
Financial Statements ...................................................4
Management’s Discussion ........................................22
Selected Financial Data ..............................................28
Corporate Information ................................................29
Financial Highlights
For the Year Ended
December 31
2017
2016
As of
December 31
2017
2016
Revenues
$
146,595,000
$ 143,487,000
Total Assets
$
203,780,000
$ 181,942,000
Operating Income
41,274,000
39,126,000
Net Income
36,593,000
27,581,000
Cash and
Investments
74,740,000
54,047,000
Income per Diluted Share
$
19.71
$
14.85
Long-term Debt
—
—
Weighted Average Diluted
Shares Outstanding
1,857,000
1,857,000
Stockholders’
Equity
$
184,388,000
$ 162,988,000
2013
2014
2015
2016
2017
$13.18
$14.08
$15.47
$14.85
2013
2014
2015
2016
$19.71
2017
$132
$141
$146
$143
2013
2014
2015
2016
$147
2017
$37.9
$40.8
$42.5
$39.1
$41.3
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, 2017 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,
2012 in our common stock, the Russell 2000 Index
and the SIC Code Index and dividends were
reinvested.
2012
2013
2014
2015
2016
2017
Company/Index
Atrion Corporation
Russell 2000 Index
SIC Code Index
2012
$100.00
$100.00
$100.00
2013
$152.72
$138.82
$140.92
2014
$176.83
$145.62
$166.14
2015
$200.00
$139.19
$176.77
2016
$268.53
$168.85
$205.60
2017
$336.43
$193.58
$257.98
1
ATRION 2017 ANNUAL REPORT To our stockholders,
We finished 2017 with increases across the board in all key areas over the
prior year: operating income was up 5%, our dividend increased by 15%,
and cash and short- and long-term investments were up 38% over the
prior year to $75 million. Return on equity remained high at 21%, and
GAAP net income and earnings per share both increased by 33%.
For some companies, those net income and EPS numbers would be the
headline. At Atrion, it’s always been our practice to tell the full story
behind the numbers. Our effective tax rate in 2017 was 14% compared to
30% in 2016. This was due to a combination of one-time unusual tax
benefits and the impact of the enactment in late 2017 of the Tax Cuts
and Jobs Act, which significantly reduced future liabilities for accelerated
depreciation in 2017 and prior years. This is why the 5% increase in
operating income is the more insightful comparison to the prior year.
Coupled with a 2% increase in revenues, I would characterize 2017 as
something of a steady state after a decade that saw several years of
double-digit growth in operating income.
We expect to work through this relatively flat period by the end of 2018,
with 2019 and beyond showing steady improvements in revenues and
pre-tax results as investments in research and development over the last
five years begin to make it through the lengthy processes of regulatory
approvals and customer validation and adoption.
2
ATRION 2017 ANNUAL REPORT The results for any calendar year don’t tell the full story of a
company’s outlook. This is particularly true when the focus, as it is at
Atrion, is on ensuring the company’s growth over the long term. Our
company is a solid organization delivering steady results. This
consistency is the result of our willingness to be entrepreneurial and
a commitment across all roles to design and produce products that
protect patients and clinicians. This is what drives our engineers to
reimagine our products for ever greater levels of patient and
clinician protection. Every year, our factories look different than they
did the year before, in a process of constant change to improve and
expand our capabilities. The dedication of these teams impresses,
excites, and humbles me. And not least, it inspires my gratitude.
To the Atrion teams that work so hard, and to you, our partners in
these endeavors, I say thank you for your belief in our work and your
investment in our future progress.
This year once again, you have my word that we will stay focused on
maintaining a solid financial position and dedicated to the steady
and sustainable growth you are accustomed to seeing from Atrion.
2017 REVENUES BY PRODUCT LINE
Fluid Delivery
65,053,000
$
Cardiovascular
48,073,000
$
Other
$
19,932,000
Ophthalmology
13,537,000
$
44%
33%
14%
9%
Respectfully,
David A. Battat
President and CEO
3
ATRION 2017 ANNUAL REPORT
ATRION CORPORATION CONSOLIDATED BALANCE SHEETS
As of December 31, 2017 and 2016
Assets:
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $28 and $71 in 2017 and 2016, respectively
Inventories
Prepaid expenses and other current assets
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 $12,062 and $11,911 in 2017 and 2016, respectively
Goodwill
Other
Total Assets
The accompanying notes are an integral part of these statements.
2017
2016
(in thousands)
$
30,136 $
20,022
35,468
17,076
29,354
3,199
115,233
9,136
167,080
100,711
66,369
1,778
9,730
1,534
13,042
24,080
17,166
29,015
3,181
93,464
9,945
160,413
95,148
65,265
1,929
9,730
1,609
13,268
$
203,780
$
181,942
4
ATRION 2017 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 loss
Retained earnings
Treasury shares, 1,584 shares in 2017 and 1,596 shares in 2016, at cost
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these statements.
2017
2016
(in thousands)
$
3,929 $
4,947
746
9,622
—
7,312
2,458
9,770
19,392
342
48,730
(1,215)
268,194
(131,663)
184,388
4,028
4,635
410
9,073
—
8,753
1,128
9,881
18,954
342
37,448
(474)
239,946
(114,274)
162,988
$
203,780 $
181,942
5
ATRION 2017 ANNUAL REPORT
ATRION CORPORATION CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, 2017, 2016 and 2015
Revenues
Cost of Goods Sold
Gross Profit
Operating Expenses:
Selling
General and administrative
Research and development
Operating Income
Investment 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
2017
2016
2015
(in thousands, except per share amounts)
$
146,595 $
143,487
$
145,733
75,841
70,754
7,251
16,430
5,799
29,480
41,274
1,065
1
42,340
(5,747)
75,857
67,630
6,611
15,319
6,574
28,504
39,126
448
(308)
39,266
(11,685)
$
$
$
$
36,593 $
27,581
$
19.82 $
1,846
15.12
1,824
19.71 $
14.85
$
1,857
1,857
4.50 $
3.90
$
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
15.47
1,870
3.30
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended December 31, 2017, 2016 and 2015
Net Income
Other Comprehensive (Loss) Income, net of tax: Unrealized (Loss) Gain on investments, net of tax
benefits of $68 and $408 in 2017 and 2016, respectively, and net of tax expense of $283 in 2015
2017
2016
2015
(in thousands)
$
36,593 $
27,581
$
28,925
(741)
(757)
528
Comprehensive Income
$
35,852 $
26,824
$
29,453
The accompanying notes are an integral part of these statements.
6
ATRION 2017 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2017, 2016 and 2015
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, net of refunds
Non-cash financing activities:
2017
2016
2015
(in thousands)
$
36,593
$
27,581
$
28,925
8,677
(1,374)
1,602
—
(195)
49
8,953
(247)
1,566
345
(37)
—
8,823
(1,431)
1,841
2,413
100
17
45,352
38,161
40,688
88
(339)
(18)
75
213
336
1,330
47,037
(9,677)
(69,193)
—
58,000
(20,870)
(7,735)
—
—
(8,318)
(16,053)
10,114
20,022
(546)
756
(247)
(673)
(324)
81
195
371
(1,749)
1,786
(103)
(492)
(128)
54
37,403
40,427
(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
$
$
30,136
$
20,022
$
28,346
4,959
$
10,750
$
12,900
Non-cash effect of stock option exercises
$
10,237
$
—
$
—
The accompanying notes are an integral part of these statements.
7
ATRION 2017 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the year ended December 31, 2017, 2016 and 2015 (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, 2015
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 loss
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
Net income
Other comprehensive loss
Stock-based compensation transactions
Shares surrendered in stock transactions
46
(34)
(46)
34
583
11,282
(17,972)
Dividends
36,593
(741)
(8,345)
36,593
(741)
11,865
(17,972)
(8,345)
Balances, December 31, 2017
1,836 $
342
1,584 $ (131,663) $
48,730 $
(1,215) $ 268,194 $
184,388
The accompanying notes are an integral part of this statement.
8
ATRION 2017 ANNUAL REPORT
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Atrion Corporation and its subsidiaries (“we,” “our,” “us,” “Atrion”
or the “Company”) develop and manufacture products primarily
for medical applications. We market our products throughout
the United States and internationally. Our customers include
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 and
commercial paper, mutual funds, certificates of deposit and
equity securities. We classify our investment securities in one of
three categories: held-to-maturity, available-for-sale, or trading.
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. 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 report
trading securities at fair value with unrealized gains and losses
recorded in investment income in the Consolidated Statement
of Income. We consider as current assets our mutual fund
investments and 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. We periodically evaluate our
investments for impairment.
The components of the Company’s cash and cash equivalents
and our short and long-term investments as of December 31,
2017 and 2016 are as follows (in thousands):
Cash and Cash Equivalents:
Cash deposits
Money market funds
December 31,
2017
2016
$
12,730
$
10,724
17,406
9,298
Total cash and cash equivalents
$
30,136
$
20,022
Short-term investments:
Mutual funds (trading)
$
222
Commercial paper (held-to-maturity)
31,220
—
—
Certificates of deposit (held-to-maturity)
4,020
$
24,000
Corporate bonds (held-to-maturity)
6
80
Total short-term investments
$
35,468
$
24,080
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
$
$
$
5,000 $
4,136
9,136
$
5,000
4,945
9,945
74,740
$
54,047
Account Receivables
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 collect-
ability of accounts receivable is assessed based upon historical
collection trends, current economic factors and the assessment
of the collectability of specific accounts. We evaluate the
collectability of specific accounts and determine when to grant
credit to our customers using a combination of factors, including
the age of the outstanding balances, evaluation of customers’
current and past financial condition, recent payment history,
current economic environment, and discussions with appropriate
Company personnel and with the customers directly. Accounts
are written off when we determine the receivable will not be
collected.
9
Notes to Consolidated Financial Statements ATRION 2017 ANNUAL REPORT
Inventories
Inventories are stated at the lower of cost (including materials,
direct labor and applicable overhead) or net realizable value.
Cost is determined by using the first-in, first-out method. The
following table details the major components of inventory (in
thousands):
December 31,
2017
2016
Raw materials
Work in process
Finished goods
Total inventories
$
$
13,545 $
6,647
9,162
29,354 $
12,984
6,230
9,801
29,015
Accounts Payable
We reflect disbursements as trade accounts payable until such
time as payments are presented to our bank for payment. At
December 31, 2017 and 2016, disbursements totaling
approximately $411,000 and $624,000, 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 year ended December 31, 2016, we made quarterly
payments in excess of federal income taxes due of
approximately $920,000. This amount is recorded in Prepaid
expenses and other current assets on our Consolidated Balance
Sheets.
10
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,
2017
2016
Useful Lives
$
5,511 $
5,260
—
32,461
32,321
30-40 yrs
129,108
122,832
3 -15 yrs
$
167,080 $
160,413
Land
Buildings
Machinery and
equipment
Total property, plant
and equipment
Depreciation expense of $8,526,000, $8,689,000 and
$8,478,000 was recorded for the years ended December 31,
2017, 2016 and 2015, 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 performed in the fourth
quarter using a qualitative assessment on goodwill impairment
to determine whether it is more likely than not that the carrying
value of our reporting units exceeds their fair value. If
necessary, a two-step goodwill impairment analysis is
performed. 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, 2017 and 2016 was $9,730,000. Our evaluation
of goodwill during each year resulted in no impairment losses.
ATRION 2017 ANNUAL REPORT Notes to Consolidated Financial Statements Current Accrued Liabilities
The items comprising current accrued liabilities are as follows
(in thousands):
December 31,
2017
2016
Accrued payroll and related expenses
$
3,943 $
3,661
Accrued vacation
Other accrued liabilities
Total accrued liabilities
273
731
265
709
$
4,947 $
4,635
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 was effective
for fiscal years beginning after December 15, 2016. Under this
guidance all excess tax benefits (“windfalls”) and deficiencies
(“shortfalls”) related to employee stock compensation are
recognized within income tax expense. The Company early
adopted this guidance using the prospective transition method
in the second quarter of 2016 effective January 1, 2016. As a
result of our adoption of this guidance, an excess tax benefit of
$687,000 was recorded in 2016 resulting from the vesting of
restricted stock and restricted stock units. In 2017 we recorded
an excess tax benefit of $5,782,000 resulting from the exercise
of employee stock options and the vesting of restricted stock
and restricted stock units. The excess tax benefits recorded in
2017 and 2016 were included in our consolidated statements
of cash flows under operating activity rather than under
financing activity as was done in prior years. There were no
restatements to 2015. This guidance could create future
volatility in our effective tax rate depending upon the extent of
exercise or vesting activity in our stock based awards.
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 was effective for
annual and interim periods beginning after December 15, 2016.
We adopted this ASU in the first quarter of 2017 on a
retrospective basis. As of December 31, 2016, “Deferred Income
Taxes” of $651,000 were reclassified from Current Assets to
“Other Liabilities and Deferred Credits” in the accompanying
Consolidated Balance Sheets.
In May 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers, also known as ASC 606. This new
standard 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 replaced most
existing revenue recognition guidance in United States
Generally Accepted Accounting Principles when it became
effective for fiscal years beginning after December 15, 2017.
ASU 2014-09 permits the use of either the retrospective or
cumulative effect transition method. We conducted and
completed a comprehensive review of contracts and their
associated business terms and conditions and performed
detailed analysis on the impact of this standard to our current
contracts. Based on our evaluation, we adopted the new
standard on January 1, 2018, using the full retrospective
method and expect no material change to our financial
statements and our internal controls over financial reporting as
a result. Because accounting for revenue under contracts will not
materially change for us under the new standard, prior period
financial statements will not require adjustment.
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. Changes
to the current guidance primarily affect the accounting for equity
investments, financial liabilities under the fair value option, and the
presentation and disclosure requirements for financial instruments.
The primary impact of this change relates to our available-for-sale
equity investment and will result in unrecognized gains and losses
from this investment being reflected in our income statement
starting in 2018. We adopted ASU 2016-01 as of January 1, 2018,
applying the update by means of a cumulative-effect adjustment
to the balance sheet by reclassifying Accumulated Other
Comprehensive Loss in the shareholders’ equity section of the
balance sheet to Retained Earnings. We do not anticipate that the
11
Notes to Consolidated Financial Statements ATRION 2017 ANNUAL REPORT adoption of ASU 2016-01 will have a material impact on our
financial statements.
On February 25, 2016 the FASB issued ASU 2016-02, Leases
(ASC 842). The main objective of this new standard is to
recognize lease assets and lease liabilities on the balance sheet
and disclose key information about leasing arrangements. The
new leasing standard requires lessees to recognize a right of use
asset and lease liability on the balance sheet. Lessor accounting
is updated to align with certain changes in the lessee model and
the new revenue recognition standard (ASC 606). Atrion
elected to early adopt this new standard as of January 1, 2018,
using the modified retrospective approach as required. We have
concluded that the adoption of this new standard will not have
a material impact on our financial statements.
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, 2017 and 2016, we held certain investments in
corporate bonds and commercial paper, mutual funds, certificates
of deposit, and certain equity securities. These investments, with
the exception of mutual funds, 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).
Our investments in mutual funds are considered Level 1 assets and
the reported fair value of these investments is based on observable
quoted prices from active markets.
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, investments and accounts receivable.
these amounts at times may exceed federally-insured limits. At
December 31, 2017, approximately 98 percent of our cash and
cash equivalents 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 and commercial paper
and in certificates of deposit. 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, and a
greater exposure to, credit or default 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, 2017 and 2016, we had allowances
for doubtful accounts of approximately $28,000 and $71,000,
respectively. The carrying amount of the receivables
approximates their fair value. One customer accounted for
15.5% of accounts receivable as of December 31, 2017. This
was the only customer that exceeded 10% of our accounts
receivable at December 31, 2017 and no customer exceeded
10% of our accounts receivable as of December 31, 2016.
(2) Investments
As of December 31, 2017 and 2016, 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
1 or Level 2 investments as detailed in the table below.
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):
Gross Unrealized
Level
Cost
Gains
Losses
Fair Value
As of December 31, 2017
Short-term Investments:
Certificates of deposit
Commercial paper
Corporate bonds
Mutual funds
Long-term Investments:
Corporate bonds
Equity Investments
2
2
2
1
2
2
$ 4,020
$ 31,220
$
$
— $
(3)
$
4,017
26
$
(38)
$ 31,208
$
$
6
$ — $ — $
6
219
$
3
$
— $
222
$ 5,000
$ — $
(75)
$ 5,675
$ — $ (1,539)
$
$
4,925
4,136
As of December 31, 2016
Short-term Investments:
Certificates of deposit
Corporate bonds
Long-term Investments:
2
2
2
2
$ 24,000
$
80
$ 5,000
$
5,675
$
$
$
$
9
$
— $ 24,009
— $
— $
80
— $
(287)
— $
(730)
$
$
4,713
4,945
Our cash and cash equivalents are held in accounts with
financial institutions that we believe are creditworthy. Certain of
Corporate bonds
Equity Investments
12
ATRION 2017 ANNUAL REPORT Notes to Consolidated Financial Statements
The above certificates of deposit and commercial paper
represent investments in multiple issuers at December 31, 2017,
and are classified as held-to-maturity securities. The above
equity investment represents an investment in one company at
December 31, 2017 and is classified as available for sale. The
above long-term corporate bond represents an investment in
one issuer at December 31, 2017. The carrying value of our
investments is reviewed quarterly for changes in circumstances
or the occurrence of events that suggest an investment may not
be recoverable. The unrealized loss for the long-term corporate
bond is attributable to a rise in interest rates which resulted in a
lower market price for that security. This investment has been in
a loss position for more than 12 months due to the rise in
interest rates. As of December 31, 2017 there were no changes
in circumstances or events that would suggest our investments
may not be recoverable. As a result, we recorded no impairment
expense related to our investments during 2017. 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) in the accompanying Consolidated Statements
of Income.
At December 31, 2017, the length of time until maturity of the
corporate bond we currently own was 41.5 months and the length
of time until maturity of the certificates of deposit and commercial
paper ranged from less than a month to 11.2 months.
Our accumulated other comprehensive loss is comprised solely
of unrealized losses on our above equity investments, net of tax.
(3) Patents and Licenses
Purchased patents and licenses paid for the use of other
entities’ patents are amortized over the useful life of the patent
or license. The following tables provide information regarding
patents and licenses (dollars in thousands):
December 31, 2017
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
15.67
$
13,840
$
12,062
December 31, 2016
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
15.67
$
13,840
$
11,911
Aggregate amortization expense for patents and licenses was
$151,000, $264,000 and $345,000 for 2017, 2016 and 2015,
respectively. Estimated future amortization expense for each of
the years set forth below ending December 31 is as follows (in
thousands):
2018
2019
2020
2021
2022
$119
$119
$119
$119
$117
(4) Line of Credit
As of December 31, 2017 we had a $75.0 million revolving
credit facility with a money center bank pursuant to which the
lender is obligated to make advances until February 28, 2022.
This credit facility, entered into on February 28, 2017, replaced a
$40.0 million revolving credit facility with the same bank which
was in place for several years prior to that date. The credit
facility is secured by substantially all our inventories, equipment
and accounts receivable. Interest under the credit facility is
assessed at 30-day, 60-day or 90-day LIBOR, as selected by us,
plus .875 percent (2.35 percent at December 31, 2017) and is
payable monthly. We had no outstanding borrowings under the
credit facility at December 31, 2017 or the prior credit facility at
December 31, 2016. Our ability to borrow funds under the
credit facility from time to time is contingent on meeting certain
covenants in the loan agreement, the most restrictive of which
is the ratio of total debt to earnings before interest, income tax,
depreciation and amortization. At December 31, 2017, we were
in compliance with all of the covenants.
(5) Income Taxes
The items comprising Provision for Income Taxes are as follows
(in thousands):
Year ended December 31,
2017
2016
2015
Current — Federal
$ 6,244
$ 10,706
$ 11,848
— State
Deferred — Federal
— State
877
7,121
(1,542)
168
(1,374)
1,226
11,932
(92)
(155)
(247)
1,528
13,376
(1,364)
(67)
(1,431)
Provision for Income Taxes
$ 5,747
$ 11,685
$ 11,945
13
Notes to Consolidated Financial Statements ATRION 2017 ANNUAL REPORT
Temporary differences and carryforwards which have given rise
to deferred tax liabilities as of December 31, 2017 and 2016 are
as follows (in thousands):
2017
2016
Deferred tax liabilities (assets):
Property, plant and equipment
$
6,787 $
Patents and goodwill
Benefit plans
Inventories
Capital loss carryover
Other
Plus: Valuation allowance
1,740
(854)
(282)
(572)
(116)
6,703
609
9,550
2,833
(1,819)
(519)
(954)
(338)
8,753
—
Total deferred tax liabilities
$
7,312 $
8,753
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
manufacturing deduction
R&D tax credits
Excess tax benefit from
stock compensation
Impact from tax law
rate change
Change in valuation
allowance
Uncertain tax positions
Other, net
Year ended December 31,
2017
2016
2015
$
14,819 $
13,743
$
14,304
662
(630)
(983)
730
882
(1,165)
(1,070)
(1,383)
(2,254)
(5,782)
(687)
(4,053)
609
865
240
—
—
(120)
254
—
—
—
(9)
The Tax Cuts and Jobs Act, enacted in December 2017, reduced
the corporate federal income tax rate in the United States from
35% to 21% effective on January 1, 2018. This rate reduction
reduced our net deferred tax liability, including adjustments to
our net state deferred tax liabilities, by $4.1 million as of
December 31, 2017. Based upon this tax law enactment, we
recorded a corresponding benefit in our income tax provision of
$4.1 million for the three months and year ended December 31,
2017. Also, in the fourth quarter of 2017 we recorded a deferred
tax valuation allowance of $609,000 primarily related to
deferred tax assets for a $2.7 million capital loss carryover
deduction which may not be realized by its expiration date in
2021. This charge partially offset the benefit recorded in our
income tax provision as a result of the Tax Cuts and Jobs Act.
14
We will continue to evaluate the tax reform impacts noting that
the ultimate impact of tax reform may differ from the amounts
recorded due to changes in our interpretations and assumptions,
as well as additional regulatory guidance that may be issued.
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. An excess tax benefit in the amount of
$156,000 was recognized as additional paid-in capital during
2015, resulting from the vesting of restricted stock and restricted
stock units. With the adoption of ASU 2016-09, excess tax
benefits of $5,782,000 and $687,000 were recognized as a
component of income tax expense in 2017 and 2016,
respectively.
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 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, 2015
$
Increase in tax positions for prior years
Increase in tax positions for current year
Lapse in statutes of limitation
129
122
0
(131)
Gross unrecognized tax benefits at December 31, 2015
$
120
(120)
0
0
0
865
0
0
Gross unrecognized tax benefits at December 31, 2016
$
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, 2017
$
865
As of December 31, 2017 all of the unrecognized tax benefits,
which were comprised of uncertain tax positions, would impact
the effective tax rate if recognized. Unrecognized tax benefits
that are affected by statutes of limitation that expire within the
next 12 months are immaterial.
Provision for Income Taxes
$
5,747
$
11,685
$
11,945
Lapse in statutes of limitation
Decrease in tax positions for prior years
405
Increase in tax positions for current year
ATRION 2017 ANNUAL REPORT Notes to Consolidated Financial Statements
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
2013. An 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 2013.
We recognize interest and penalties, if any, related to
unrecognized tax benefits in income tax expense. The liability for
unrecognized tax benefits included accrued interest of $1,000 at
December 31, 2017. Tax expense for the year ended December
31, 2017, included a net interest charge of $1,000. There were
no tax expenses or tax benefits for interest and penalties in 2016.
A net interest benefit of $9,000 was included in 2015.
(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
authorizing the repurchase of up to 250,000 shares of our
common stock 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, 2017, there remained 231,765 shares available
for repurchase under this program. There were no stock
repurchases during 2017. We repurchased 3,427 and 89,452
shares during 2016 and 2015, respectively.
We increased our quarterly cash dividend payments in
September of each of the past three years. The quarterly
dividend was increased to $.90 per share in September 2015, to
$1.05 per share in September 2016 and to $1.20 per share in
September 2017. Holders of our stock units earned non-cash
dividend equivalents of $27,000 in 2017, $40,000 in 2016 and
$46,000 in 2015.
(7) Income Per Share
The following is the computation of basic and diluted income
per share:
Year ended December 31,
2017
2016
2015
(in thousands, except per share amounts)
Net Income
$
36,593
$
27,581
$
28,925
Weighted average basic
shares outstanding
Add: Effect of dilutive
securities
Weighted average
diluted shares
outstanding
Net Income Per Share
1,846
1,824
1,846
11
33
24
1,857
1,857
1,870
Basic
Diluted
$
$
19.82
19.71
$
$
15.12
14.85
$
$
15.67
15.47
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. Securities
representing 148 shares of common stock for the year ended
December 31, 2017, were excluded from the computation of
weighted average diluted shares outstanding because their
effect would have been anti-dilutive. There were no anti-dilutive
shares excluded from the computation of weighted average
diluted shares outstanding in 2016 and 2015.
(8) Stock Plans
At December 31, 2017, 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, 2017, there remained 24,373 shares reserved for
future stock-based awards under the 2006 Plan.
15
Notes to Consolidated Financial Statements ATRION 2017 ANNUAL REPORT 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,
2017, there remained 1,548 shares of common stock reserved
for issuance upon the conversion of stock units which may be
credited in the future to non-employee directors.
In May 2007, we also adopted our Non-Employee Director Stock
Purchase Plan (as amended, the “Director Stock Purchase Plan”),
and 2,500 shares of our common stock were initially reserved for
issuance thereunder. Under this plan, our non-employee directors
may elect to receive on the first business day of the calendar
year fully-vested stock and restricted stock in lieu of some or all
of their fees payable to them during such year. The foregone
fees are converted into shares of fully-vested stock and restricted
stock on the first business day of such calendar year based on
the closing price of our common stock on the next preceding
date on which shares of our stock were traded. The restricted
stock vests in equal amounts on the first day of the next three
succeeding calendar quarters provided the non-employee
director is then serving on our Board of Directors. As of
December 31, 2017, there remained 1,126 shares reserved
for issuance under such plan.
A summary of stock option transactions for the year ended
December 31, 2017, is presented below:
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Outstanding at
December 31, 2016
Granted
Exercised
Outstanding at
December 31, 2017
Exercisable at
December 31, 2017
50,000
20,000
(50,000)
$
$
$
204.76
501.03
204.76
20,000
$
501.03
5.3 years
—
—
—
All nonvested options outstanding at December 31, 2017 are
expected to vest. None of our grants includes performance-
based or market-based vesting conditions. We estimate the fair
value of stock options granted using the Black-Scholes option-
pricing formula and a single option award approach. Our
Black-Scholes valuation uses a volatility factor based on our
historical stock trading history, a risk-free interest rate based on
the implied yield currently available on U.S. Treasury securities
with an equivalent term, and a dividend yield based on our
dividend history. Our expected life assumption 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.
There were no options granted in 2016 and 2015. The fair value
for the options granted in 2017 was estimated at the date of
grant using a Black-Scholes option pricing model with the
following weighted average assumptions:
Risk-free interest rate
Dividend yield
Volatility factor
Expected life
2017
2016
2015
2.13%
0.85%
25.45%
5 years
—
—
—
—
—
—
—
—
The weighted average grant date fair value of the options
granted in 2017 was $130.35. The total intrinsic value of options
exercised during 2017 was $16.5 million. The total intrinsic value
of options outstanding at December 31, 2017, was $2.6 million.
There were no exercisable options at December 31, 2017.
During 2017, we granted two awards of restricted stock under
the 2006 Plan. Under the terms of our restricted stock awards,
the restrictions usually lapse over a five-year period. Both awards
include restrictions on transfer for a two-year period following
vesting. During the vesting period, holders of restricted stock
have voting rights and earn dividends, but the shares may not be
sold, assigned, transferred, pledged or otherwise encumbered.
Nonvested shares are generally forfeited on termination of
employment unless otherwise provided in the participant’s
employment agreement or the termination is in connection with
a change in control. We calculated the weighted average fair
value per share of the restricted stock awarded in 2017 using the
market value of our common stock on the date of the grant with
a discount for post-vesting restrictions of 11.2%. We estimated
this discount using the Chaffe protective put method. A
summary of changes in nonvested restricted stock for the year
ended December 31, 2017, is presented below:
16
ATRION 2017 ANNUAL REPORT Notes to Consolidated Financial Statements
Nonvested Shares
Shares
Weighted
Average Award
Date Fair Value
Per Share
Restricted stock at December 31, 2016
1,500 $
Granted in 2017
Vested in 2017
5,900 $
(1,500) $
Restricted stock at December 31, 2017
5,900 $
228.08
445.47
228.08
445.47
All shares of nonvested restricted stock outstanding at
December 31, 2017 are expected to vest. The total fair value of
restricted stock vested during 2017, 2016 and 2015 was
$803,000, $1,177,000 and $1,086,000, respectively.
During 2017, restricted stock units were awarded to certain
employees under the 2006 Plan. All of our restricted stock units
are convertible to shares of stock on a one-for-one basis when
the restrictions lapse, which is generally after a five-year period.
Nonvested stock units are generally forfeited on termination of
employment unless the termination is in connection with a
change in control. During the vesting period, holders of all
restricted stock units earn dividends in the form of additional
units. During 2017, 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, 2017, 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
9,388
1,420
(4,608)
$
$
$
258.69
616.41
230.90
—
11
$
535.07
(11) $
535.07
6,200
$
361.28
—
Nonvested
Stock Units
Nonvested at
December
31, 2016
Granted
Vested
Nonvested at
December
31, 2017
All nonvested restricted stock units at December 31, 2017 are
expected to vest. The total intrinsic value of all outstanding
stock units which were not convertible at December 31, 2017,
including 468 stock units held for the accounts of non-employee
directors, was $4,205,000. The total fair value of directors’ stock
units that vested during 2017, 2016, and 2015 was $6,000,
$10,000 and $5,000, respectively.
Stock awards that vested immediately were awarded under the
2006 Plan to non-employee directors totaling $312,000 in value
in 2017 and $240,000 in value in each of 2016 and 2015.
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, 2017, 2016 and 2015, we
recorded stock-based compensation expense as a G&A expense
in the amount of $1,602,000, $1,566,000 and $1,841,000,
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, 2017, 2016
and 2015, was $6,342,000, $1,235,000 and $644,000,
respectively. The 2017 and 2016 tax benefit amounts include
$5,782,000 and $687,000, respectively, of excess tax benefits
within income tax expense as a result of the adoption of ASU
2016-09. Excess tax benefits of $156,000 were recognized
during 2015 as additional paid-in capital and is shown as a
financing activity in our consolidated statements of cash flows
for such year.
Unrecognized compensation cost information for our various
stock-based compensation types is shown below as of
December 31, 2017:
Weighted Average
Remaining Years
in Amortization
Period
4.3
4.3
3.8
Unrecognized
Compensation Cost
$
$
2,246,000
2,264,000
1,114,000
5,624,000
Stock options
Restricted stock
Restricted stock units
Total
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
percent of our net revenues in 2017 and 2016, and 35 percent
in 2015. We have no assets located outside the United States.
17
Notes to Consolidated Financial Statements ATRION 2017 ANNUAL REPORT A summary of revenues by geographic area, based on shipping
destination, for 2017, 2016 and 2015 is as follows (in thousands):
Year ended December 31,
2017
2016
2015
these deemed investments. Our deferred compensation obligation
under the plan at December 31, 2017 was $426,000 and is reflected
in “Other Liabilities and Deferred Credits” in the accompanying
Consolidated Balance Sheets.
United States
$
93,082 $
91,092 $
94,840
(11) Commitments and Contingencies
Germany
8,172
6,396
7,156
Other countries less
than 5% of revenues
45,341
45,999
43,737
Total
$
146,595 $
143,487 $
145,733
A summary of revenues by product line for 2017, 2016 and
2015 is as follows (in thousands):
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
2017
2016
2015
$
65,053 $
60,889
$
60,630
48,073
13,537
19,932
47,064
15,427
20,107
46,463
18,253
20,387
$ 146,595 $
43,487
$
145,733
(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 $720,000,
$667,000 and $645,000 in 2017, 2016 and 2015, respectively.
The Company adopted a Nonqualified Deferred Compensation
Plan effective September 1, 2017, for certain key management
or highly-compensated employees. The plan allows for the
deferral of salary and bonus compensation until retirement or
other specified payment events occur. Employees’ deferred
compensation amounts are deemed to be invested in certain
investment funds, indexes or vehicles selected by our Compensation
Committee and designated by each participant and their deferral
balances are adjusted for earnings based upon the performance of
(12) Quarterly Financial Data (Unaudited)
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, 2017, the
Company had no ongoing litigation or arbitration for such matters.
We had a dispute which was favorably settled in the third quarter of
2007. This settlement was amended in December 2008. The
amended settlement agreement provides that we may receive
annual payments from 2009 through 2024. We have not recorded
$3.5 million in potential future payments under this settlement as
of December 31, 2017, 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, 2017
could have resulted in payments aggregating $5.1 million.
At December 31, 2017, the Company had purchase obligations
with certain suppliers for the purchase of inventory for 2018. These
contracts were commitments to purchase inventory used in the
production of the Company’s products totaling $1.5 million.
Quarter Ended
Operating Revenue
Operating Income
Net Income
(in thousands, except per share amounts)
Income Per
Basic Share
Income Per
Diluted Share
$
$
03/31/17
06/30/17
09/30/17
12/31/17
03/31/16
06/30/16
09/30/16
12/31/16
38,504 $
11,327 $
9,950 $
5.42 $
36,164
37,903
34,024
10,175
11,479
8,293
10,026
7,971
8,646
5.44
4.30
4.67
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
5.36
5.40
4.29
4.66
3.76
4.02
4.10
3.00
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 2017 ANNUAL REPORT Notes to Consolidated Financial Statements REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Atrion Corporation
Opinion on the consolidated financial statements
We have audited the accompanying consolidated balance
sheets of Atrion Corporation (a Delaware corporation) and
subsidiaries (the “Company”) as of December 31, 2017 and
2016, 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, 2017, and the related notes and the schedule
(not presented separately herein) (collectively referred to as the
“financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 2017, in conformity
with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting
as of December 31, 2017, 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 February 27, 2018 expressed an
unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of
the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures
to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and
significant estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our
opinion.
Grant Thornton LLP
We have served as the Company’s auditor since 2002
Dallas, Texas
February 27, 2018
Report of Independent Registered Public Accounting Firm ATRION 2017 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, 2017
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, 2017, 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 2017 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
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of
Atrion Corporation (a Delaware corporation) and subsidiaries
(the “Company”) as of December 31, 2017, based on criteria
established in the 2013 Internal Control—Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). In our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2017, based on criteria established in the 2013
Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated financial statements and schedule
(not presented separately herein), of the Company as of and for
the year ended December 31, 2017, and our report dated
February 27, 2018 expressed an unqualified opinion on those
financial statements and schedule.
Basis for opinion
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 are a public
accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. 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.
Definition and limitations of internal control over financial
reporting
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.
Grant Thornton LLP
Dallas, Texas
February 27, 2018
Report of Independent Registered Public Accounting Firm ATRION 2017 ANNUAL REPORT
21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 2017, 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.
For the year ended December 31, 2017, we reported revenues
of $146.6 million, operating income of $41.3 million and net
income of $36.6 million.
Results of Operations
Our net income was $36.6 million, or $19.82 per basic and
$19.71 per diluted share, in 2017 compared to $27.6 million, or
$15.12 per basic and $14.85 per diluted share, in 2016 and net
income of $28.9 million, or $15.67 per basic and $15.47 per
diluted share, in 2015. Revenues were $146.6 million in 2017
compared with $143.5 million in 2016 and $145.7 million in
2015. The two percent revenue increase in 2017 over 2016 was
generally attributable to higher sales volumes. Our 2016
revenues were negatively impacted by the strong U.S. dollar in
our international markets and lower sales prices in certain
markets as compared to 2015 revenues.
Annual revenues by product lines were as follows (in thousands):
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
2017
2016
2015
$ 65,053 $
60,889
$
60,630
48,073
13,537
19,932
47,064
15,427
20,107
46,463
18,253
20,387
$ 146,595 $ 143,487
$ 145,733
Our cost of goods sold was $75.8 million in 2017, $75.9 million
in 2016 and $74.8 million in 2015. A favorable product sales
mix, improved manufacturing efficiencies and the impact of
continued cost improvement projects were the primary
contributors to the decrease in cost of goods sold in 2017
compared to 2016. 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.
Gross profit in 2017 was $70.8 million compared with $67.6
million in 2016 and $71.0 million in 2015. Our gross profit was
48 percent of revenues in 2017, 47 percent of revenues in 2016
and 49 percent of revenues in 2015. The increase in gross profit
percentage in 2017 from 2016 was primarily related to
increased revenues and a favorable product sales mix. 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 $29.5 million in 2017 and $28.5
million in both 2016 and 2015. R&D expenses decreased
$775,000 in 2017 as compared with 2016 primarily as a result
of decreased costs for outside services and supplies. R&D
22
ATRION 2017 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations
expenses consist primarily of salaries and other related expenses
of our R&D personnel as well as costs associated with regulatory
matters. In 2017, selling expenses increased $640,000 as
compared with 2016 primarily as a result of increased
commissions, outside services, compensation and travel costs.
Selling expenses consist primarily of salaries, commissions and
other related expenses for sales and marketing personnel,
marketing, advertising and promotional expenses. General and
Administrative, or G&A, expenses increased $1.1 million in 2017
as compared to 2016 primarily as a result of increased
compensation and compensation related costs and increased
outside services partially offset by reduced depreciation,
amortization and travel costs. 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 $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. In 2016,
selling expenses increased $568,000 as compared with 2015
primarily as a result of increased travel, outside services,
compensation and trade shows. G&A expenses decreased
$763,000 in 2016 as compared to 2015 primarily as a result of
reduced compensation and benefits.
Our operating income for 2017 was $41.3 million compared
with $39.1 million in 2016 and $42.5 million in 2015. Operating
income was 28 percent of revenues in 2017, 27 percent of
revenues for 2016 and 29 percent of revenues for 2015. An
increase in 2017 gross profit partially offset by increased
operating expenses was the major contributor to the increase in
operating income for 2017 as compared to the previous year.
The decrease in 2016 gross profit was the major contributor to
the decrease in operating income for 2016 as compared to the
previous year.
Investment income for 2017 was $1.1 million, compared with
$448,000 in 2016 and $771,000 in 2015. Increased levels of
investments, increased interest rates and increased dividends on
our equity investments were the primary reason for the increase
in 2017. Lower interest rates were the primary reason for the
reductions in 2016.
Other income (expense) in 2015 is primarily related to a $2.4
million impairment loss on one of our long-term corporate
bonds which experienced a significant decline in market value in
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 to other income
(expense) on this bond in 2016 prior to and including its sale.
Income tax expense in 2017 totaled $5.7 million, compared
with $11.7 million in 2016 and $11.9 million in 2015. The
effective tax rates for 2017, 2016 and 2015 were 13.6 percent,
29.8 percent and 29.2 percent, respectively. The Tax Cuts and
Jobs Act reduced the corporate federal income tax rate in the
United States from 35% to 21% effective for us on January 1,
2018. This rate reduction reduced our net deferred tax liability,
including adjustments to our net state deferred tax liabilities, by
$4.1 million as of December 31, 2017. Based upon this tax law
enactment, we recorded a corresponding benefit in our income
tax provision of $4.1 million for the fourth quarter and the full
year of 2017. Also, in the fourth quarter of 2017 we recorded a
valuation allowance of $609,000 to reduce our deferred tax
assets which partially offset the benefit recorded in our income
tax provision from the tax law change in 2017. During 2016 we
adopted ASU 2016-09, Stock Compensation (Topic 718)
Improvements to Employee Share Based Payment Accounting
and recorded excess tax benefits related to employee stock
compensation of $5.8 million and $687,000 for the years ended
December 31, 2017 and 2016, respectively. The adoption was
on a prospective basis and therefore had no impact on years
prior to 2016. The effective tax rate for 2015 benefitted from
tax credits totaling $2.3 million for our R&D expenditures. This
amount included an adjustment for recalculation of our R&D
tax credits from prior years resulting from a 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 $1.0 million in 2017, $1.1 million in 2016 and
$2.3 million in 2015. Benefits from tax incentives for domestic
production totaled $600,000 in 2017, $1.2 million in 2016 and
$1.4 million in 2015. Charges from changes in uncertain tax
positions totaled $865,000 in 2017. Benefits from changes in
uncertain tax positions totaled $120,000 in 2016. We expect
our effective tax rate for 2018 to be approximately 21.0
percent. Accounting for stock based awards could create
volatility in our effective tax rate depending upon the extent of
exercise or vesting activity.
Liquidity and Capital Resources
As of December 31, 2017, we had a $75.0 million revolving
credit facility with a money center bank pursuant to which the
lender is obligated to make advances until February 28, 2022.
This credit facility, entered into on February 28, 2017, replaced a
$40.0 million revolving credit facility with the same bank which
was in place for several years prior to that date. The credit
facility is secured by substantially all our inventories, equipment
and accounts receivable. Interest under the credit facility is
assessed at 30-day, 60-day or 90-day LIBOR, as selected by us,
plus .875 percent (2.35 percent at December 31, 2017) and is
payable monthly. We had no outstanding borrowings under the
credit facility at December 31, 2017, or the prior credit facility at
December 31, 2016. Our ability to borrow funds under the
credit facility from time to time is contingent on meeting certain
covenants in the loan agreement, the most restrictive of which
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2017 ANNUAL REPORT
23
is the ratio of total debt to earnings before interest, income tax,
depreciation and amortization. At December 31, 2017, we were
in compliance with all of the covenants.
At December 31, 2017, we had a total of $74.7 million in cash
and cash equivalents, short-term investments and long-term
investments, an increase of $20.7 million from December 31,
2016. The principal contributor to this increase was positive
cash flows resulting from operations.
Cash flows provided by operations of $47.0 million in 2017 were
primarily comprised of net income plus the net effect of
non-cash expenses. At December 31, 2017, we had working
capital of $105.6 million, including $30.1 million in cash and
cash equivalents and $35.5 million in short-term investments.
The $20.6 million increase in working capital during 2017 was
primarily related to increases in cash and short-term
investments. The increase in cash and short-term investments
was primarily a result of operational results partially offset by
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
$9.6 million in 2017, compared with $10.6 million in 2016 and
$9.3 million in 2015. These expenditures were primarily for
machinery and equipment. We expect 2018 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 $8.3 million, $7.1 million and
$6.1 million during 2017, 2016 and 2015, respectively. We
expect to fund future dividend payments with cash flows from
operations. We purchased treasury stock totaling $1.3 million
and $30.7 million during 2016 and 2015, respectively. No
treasury stock was purchased in 2017.
The table below summarizes debt, lease and other contractual
obligations outstanding at December 31, 2017:
Payments Due by Period
Contractual
Obligations
Total
2018
2019–
2020
2021 and
thereafter
(in thousands)
Purchase
Obligations
Total
$
$
1,474 $
1,474 $
1,474 $
1,474 $
— $
— $
—
—
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 2018.
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 (Topic 718): Improvements to Employee
Share-Based Payment Accounting. ASU 2016-09 was effective
for fiscal years beginning after December 15, 2016. Under this
guidance all excess tax benefits (“windfalls”) and deficiencies
(“shortfalls”) related to employee stock compensation are
recognized within income tax expense. The Company early
adopted this guidance using the prospective transition method
in the second quarter of 2016 effective January 1, 2016. As a
result of our adoption of this guidance, an excess tax benefit of
$687,000 was recorded in 2016 resulting from the vesting of
restricted stock and restricted stock units. In 2017 we recorded
an excess tax benefit of $5,782,000 resulting from the exercise
of employee stock options and the vesting of restricted stock
and restricted stock units. The excess tax benefits recorded in
2017 and 2016 were included in our consolidated statements
of cash flows under operating activity rather than under
financing activity as was done in prior years. There were no
restatements to 2015. This guidance could create future
volatility in our effective tax rate depending upon the extent of
exercise or vesting activity in our stock based awards.
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 was effective for
annual and interim periods beginning after December 15, 2016.
We adopted this ASU in the first quarter of 2017 on a
retrospective basis. As of December 31, 2016, “Deferred Income
24
ATRION 2017 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations
Taxes” of $651,000 were reclassified from an asset account in
Current Assets to a liability account in “Other Liabilities and
Deferred Credits.”
In May 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers, also known as ASC 606. This new
standard 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 replaced most
existing revenue recognition guidance in United States
Generally Accepted Accounting Principles when it became
effective for fiscal years beginning after December 15, 2017.
ASU 2014-09 permits the use of either the retrospective or
cumulative effect transition method. We conducted and
completed a comprehensive review of contracts and their
associated business terms and conditions and performed
detailed analysis on the impact of this standard to our current
contracts. Based on our evaluation, we adopted the new
standard on January 1, 2018, using the full retrospective
method and expect no material change to our financial
statements and internal controls over financial reporting as a
result. Because accounting for revenue under contracts will not
materially change for us under the new standard, prior period
financial statements will not require adjustment.
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities.
Changes to the current guidance primarily affect the accounting
for equity investments, financial liabilities under the fair value
option, and the presentation and disclosure requirements for
financial instruments. The primary impact of this change relates
to our available-for-sale equity investment and will result in
unrecognized gains and losses from this investment being
reflected in our income statement beginning in 2018. We
adopted ASU 2016-01 as of January 1, 2018, applying the
update by means of a cumulative-effect adjustment to the
balance sheet by reclassifying Accumulated Other
Comprehensive Loss in the shareholders’ equity section of the
balance sheet to Retained Earnings. We do not anticipate that
the adoption of ASU 2016-01 will have a material impact on
our financial statements.
On February 25, 2016 the FASB issued ASU 2016-02, Leases
(ASC 842). The main objective of this new standard is to
recognize lease assets and lease liabilities on the balance sheet
and disclose key information about leasing arrangements. The
new leasing standard requires lessees to recognize a right of use
asset and lease liability on the balance sheet. Lessor accounting
is updated to align with certain changes in the lessee model and
the new revenue recognition standard (ASC 606). Atrion
elected to early adopt this new standard as of January 1, 2018,
using the modified retrospective approach as required. We have
concluded that the adoption of this new standard will not have
a material impact on our financial statements.
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.
Critical Accounting Policies
The discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
In the preparation of these financial statements, we make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. We believe the following
discussion addresses our most critical accounting policies and
estimates, which are those that are most important to the
portrayal of our financial condition and results and require
management’s most difficult, subjective and complex
judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Actual
results could differ significantly from those estimates under
different assumptions and conditions.
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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2017 ANNUAL REPORT
25
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 ASC 350,
Intangibles—Goodwill and Other, which requires that goodwill
be assessed on an annual basis, or whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable, 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 circumstances 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 2017, 2016 and 2015, none of our critical accounting
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 that would result in realized gains or losses being
reflected in the consolidated statements of income 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 and
commercial paper and in certificates of deposit. 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, and a greater exposure to, credit or default 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 stock and mutual funds. 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 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 revenues and
pre-tax results in 2018 and thereafter, the results of our
investments in research and development over the last five years,
26
ATRION 2017 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations
our focus on maintaining a solid financial position and dedication
to steady and sustainable growth, our 2018 effective tax rate, our
2018 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, and increases in 2018 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.
The forward-looking statements in this Annual Report are made
as of the date hereof, and we do not undertake any obligation,
and disclaim any duty, to supplement, update or revise such
statements, whether as a result of subsequent events, changed
expectations or otherwise, except as required by applicable law.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2017 ANNUAL REPORT
27
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
2017
2016
2015
2014
2013
$
146,595 $
143,487 $
145,733 $
140,762 $
131,993
41,274
36,593
8,677
39,126
27,581
8,953
42,510
28,925
8,823
40,817
27,808
8,723
$
$
19.71 $
14.85 $
15.47 $
14.08 $
4.50 $
3.90 $
3.30 $
2.78 $
1,857
1,857
1,870
1,975
37,944
26,582
8,592
13.18
2.40
2,017
$
203,780 $
181,942 $
164,336 $
171,514 $
172,066
—
—
—
—
—
28
ATRION 2017 ANNUAL REPORT Selected Financial Data
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
Birmingham, Alabama
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 2017 Annual
Report on Form 10-K, as filed with the
Securities and Exchange Commission,
may be obtained by any stockholder
without charge by written request to:
Corporate Secretary
Atrion Corporation
One Allentown Parkway
Allen, Texas 75002
Stock Information
The Company’s common stock is traded on The Nasdaq Global Select Market (Symbol: ATRI).
As of February 13, 2018, we had 126 record holders, and approximately 4,800 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 2016 and 2017.
2016 Quarter Ended
High
Low
Dividends
March 31
June 30
September 30
December 31
2017 Quarter Ended
March 31
June 30
September 30
December 31
$
415.00
$
350.00
$
0.90
442.50
490.45
522.05
High
385.00
393.96
418.00
Low
$
512.10
$
454.10
$
688.95
691.95
694.00
459.50
605.70
612.10
0.90
1.05
1.05
Dividends
1.05
1.05
1.20
1.20
The Company presently plans to pay quarterly cash dividends in the future.
ATRION 2017 ANNUAL REPORT 29
ATRION CORPORATION
One Allentown Parkway
Allen, Texas 75002
www.atrioncorp.com
972.390.9800