Annual Report 2018
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.
2018
Contents
Letter to Stockholders ............................................ 2
Financial Statements ...................................................4
Management’s Discussion ........................................23
Selected Financial Data ..............................................28
Corporate Information ................................................29
Financial Highlights
For the Year Ended
December 31
2018
2017
As of
December 31
2018
2017
Revenues
$
152,448,000
$ 146,595,000
Total Assets
$
231,216,000
$ 203,780,000
Operating Income
41,707,000
41,274,000
Net Income
34,255,000
36,593,000
Cash and
Investments
89,485,000
74,740,000
Income per Diluted Share
$
18.44
$
19.71
Long-term Debt
—
—
Weighted Average Diluted
Shares Outstanding
1,858,000
1,857,000
Stockholders’
Equity
$
210,767,000
$ 184,388,000
2014
2015
2016
2017
2018
$14.08
$15.47
$14.85
2014
2015
2016
$19.71
2017
$18.44
2018
$141
$146
$143
$147
2014
2015
2016
2017
$152
2018
$40.8
$42.5
$39.1
$41.3
$41.7
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, 2018 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, 2013 in our
common stock, the Russell 2000 Index and the
SIC Code Index and dividends were reinvested.
2013
2014
2015
2016
2017
2018
Company/Index
Atrion Corporation
Russell 2000 Index
SIC Code Index
2013
$100.00
$100.00
$100.00
2014
$115.79
$104.89
$115.24
2015
$130.96
$100.26
$123.26
2016
$175.83
$121.63
$143.46
2017
$220.29
$139.44
$178.39
2018
$260.94
$124.09
$171.09
1
ATRION 2018 ANNUAL REPORT To our stockholders,
Year after year, Atrion delivers on performance. In 2018, when the Russell
2000 index of small cap stocks like ours declined 12%, our stock was up
18%. This strong outcome—even in a period of slower growth as we
phase out some commoditized products—is supported by the quality
of our earnings. Operating income as a percentage of sales was still an
outstanding 27%—a testament to the clinical value of our products and
the efficiency of our manufacturing facilities. Cash generated in 2018
allowed us to meet all of our investment needs, raise dividends by 13%,
and add $15 million to our holdings of cash and short- and long-term
investments, bringing that total to just shy of $90 million at year end.
We remain debt-free.
A clear strategy for growth
At Atrion, we continuously invest in our long-term future. A lot of
companies say things like this, but our numbers reflect the depth of
this commitment. To ensure our continued growth, in 2018 we spent
an amount equal to 67% of our net income on R&D and capital
expenditures. Over the last five years, total investments in these two
areas have grown at a compounded rate of 14%.
We amplify these aggressive investments with a strategic approach to
developing and manufacturing new products. By co-locating R&D and
manufacturing at our three facilities, we are able to constantly learn how
to make our products better. When we add talent, it is aimed not only
at supplementing our skills, but also at refreshing our perspective.
2
ATRION 2018 ANNUAL REPORT A solidified market lead
In the fourth quarter of 2018, we began a limited market release in
Canada of the third generation of our Myocardial Protection System
(MPS 3), an unparalleled perfusion and drug delivery platform used
in open heart surgery. This launch marks the culmination of a
multi-year R&D program to enhance this technology for even better
patient outcomes. This addition to our portfolio will ensure that we
will both remain the market leader and expand our market share.
A consistent philosophy to guide us
I’ve outlined here some of the things we do to grow: target niche
markets, develop strong IP, and invest in high-quality talent and
production technology. However, the things we do not do say just
as much about our values.
We do not tout our stock at investment conferences, nor do we hold
analyst calls, as these sorts of self-promotion are a distraction from
our mission: caring for our employees and promoting the health and
safety of our end users with high-quality products. By remaining
focused on our mission, we are confident that healthy financial
results will follow.
Finally, while we are determined to succeed, we never assume past
success is a given as we move forward. To this end, we are
relentlessly introspective about how we operate. I am grateful to our
employees who make it possible to execute our business philosophy
every day, and equally grateful to you for your belief in it.
Respectfully,
David A. Battat
President and CEO
2018 REVENUES BY PRODUCT LINE
7%
14%
33%
Fluid Delivery
70,606,000
$
Cardiovascular
50,904,000
$
Other
$
20,465,000
Ophthalmology
10,473,000
$
46%
46%
33%
14%
7%
3
ATRION 2018 ANNUAL REPORT
ATRION CORPORATION CONSOLIDATED BALANCE SHEETS
As of December 31, 2018 and 2017
Assets:
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $21 and $28 in 2018 and 2017, respectively
Inventories
Prepaid expenses and other current assets
Total Current Assets
Long-term investments
Property, Plant and Equipment
Less accumulated depreciation
Other Assets and Deferred Charges:
Patents and licenses, net of accumulated amortization of $12,181 and $12,062 in 2018 and 2017, respectively
Goodwill
Other
Total Assets
The accompanying notes are an integral part of these statements.
2018
2017
(in thousands)
$
58,753
$
30,136
9,684
17,014
33,572
3,242
122,265
21,048
181,582
106,689
74,893
1,659
9,730
1,621
13,010
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
$
231,216
$
203,780
4
ATRION 2018 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, 1,567 shares in 2018 and 1,568 shares in 2017, at cost
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these statements.
2018
2017
(in thousands)
$
5,082
$
4,519
619
10,220
—
6,687
3,542
10,229
20,449
342
50,391
—
291,761
(131,727)
210,767
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
$
231,216 $
203,780
5
ATRION 2018 ANNUAL REPORT
ATRION CORPORATION CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, 2018, 2017 and 2016
Revenues
Cost of Goods Sold
Gross Profit
Operating Expenses:
Selling
General and administrative
Research and development
Operating Income
Interest and Dividend Income
Other Investment Income (Loss)
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
2018
2017
2016
(in thousands, except per share amounts)
$
152,448
$
146,595
$
143,487
80,670
71,778
8,341
16,217
5,513
30,071
41,707
1,667
(1,380)
42
42,036
(7,781)
34,255 $
18.49
$
1,853
75,841
70,754
7,251
16,430
5,799
29,480
41,274
1,061
4
1
42,340
(5,747)
36,593
19.82
1,846
$
$
18.44 $
19.71
$
1,858
1,857
5.10 $
4.50
$
75,857
67,630
6,611
15,319
6,574
28,504
39,126
448
(311)
3
39,266
(11,685)
27,581
15.12
1,824
14.85
1,857
3.90
$
$
$
$
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended December 31, 2018, 2017 and 2016
Net Income
Other Comprehensive Loss, net of tax: Unrealized Loss on investments, net of tax benefits of $68 and
$408 in 2017 and 2016, respectively
2018
2017
2016
(in thousands)
$
34,255 $
36,593
$
27,581
—
(741)
(757)
Comprehensive Income
$
34,255 $
35,852
$
26,824
The accompanying notes are an integral part of these statements.
6
ATRION 2018 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2018, 2017 and 2016
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Stock-based compensation
Net change in unrealized gains and losses on investments
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
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:
Non-cash effect of stock option exercises
The accompanying notes are an integral part of these statements.
2018
2017
2016
(in thousands)
$
34,255
$
36,593
$
27,581
9,123
(625)
1,659
1,399
47
(18)
8,677
(1,374)
1,602
—
(195)
49
8,953
(247)
1,566
345
(37)
—
45,840
45,352
38,161
62
(4,218)
(43)
(87)
725
(127)
1,084
43,236
(17,507)
(28,472)
—
40,898
(5,081)
(90)
—
(9,448)
(9,538)
28,617
30,136
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
37,403
(10,639)
(30,799)
210
5,000
(36,228)
(1,112)
(1,276)
(7,111)
(9,499)
(8,324)
28,346
$
$
$
58,753
$
30,136
$
20,022
9,858
$
4,959
$
10,750
—
$
10,237
$
—
7
ATRION 2018 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the year ended December 31, 2018, 2017 and 2016 (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, 2016
1,824 $ 342
1,596
$ (111,988)
$ 35,945
$
283
$ 219,516
$ 144,098
Net income
Other comprehensive income
Stock-based compensation transactions
Shares surrendered in stock transactions
Purchase of treasury stock
Dividends
7
(3)
(4)
(7)
3
4
102
(1,112)
(1,276)
(757)
1,503
27,581
27,581
(757)
1,605
(1,112)
(1,276)
(7,151)
(7,151)
Balances, December 31, 2016
1,824
342
1,596
(114,274)
37,448
(474)
239,946
162,988
Net income
Other comprehensive loss
Stock-based compensation transactions
Shares surrendered in stock transactions
61
(33)
(61)
33
583
11,282
(17,972)
Dividends
(741)
36,593
36,593
(741)
11,865
(17,972)
(8,345)
(8,345)
Balances, December 31, 2017
1,852
342
1,568
(131,663)
48,730
(1,215)
268,194
184,388
Net income
Reclass from adopting ASU 2016-01
Stock-based compensation transactions
1
(1)
Shares surrendered in stock transactions
Dividends
26
(90)
1,661
34,255
(1,215)
1,215
(9,473)
34,255
—
1,687
(90)
(9,473)
Balances, December 31, 2018
1,853 $ 342
1,567
$ (131,727) $
50,391
$
0
$ 291,761
$
210,767
The accompanying notes are an integral part of this statement.
8
ATRION 2018 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.
We consider as current assets those investments which will
mature in the next 12 months including interest receivable on
long-term bonds. The remaining investments are considered
non-current assets including our investment in equity securities
which we intend to hold longer than 12 months. 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,
2018 and 2017 are as follows (in thousands):
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 corporate and government bonds,
commercial paper, mutual funds 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 our available-for-sale and trading securities at fair
value with changes in fair value recognized in other investment
income (loss) in the Consolidated Statement of Income. Prior to
our adoption of ASU 2016-01, Financial Instruments-Overall,
Subtopic 825-10: Recognition and Measurement of Financial
Assets and Financial Liabilities (ASU 2016-01) in January of
2018, unrealized gains and losses for our available-for-sale
securities were reported in stockholders’ equity as accumulated
other comprehensive income.
Cash and Cash Equivalents:
Cash deposits
Money market funds
Commercial paper
December 31,
2018
2017
$
24,670
$
12,730
30,965
3,118
17,406
—
Total cash and cash equivalents
$
58,753
$
30,136
Short-term investments:
Mutual funds (trading)
$
— $
Commercial paper (held-to-maturity)
Certificates of deposit (held-to-maturity)
Bonds (held-to-maturity)
Total short-term investments
Long-term investments:
Mutual funds (available for sale)
Bonds (held-to-maturity)
Equity securities (available for sale)
Total long-term investments
Total cash, cash equivalents and
short and long-term investments
1,275
—
8,409
222
31,220
4,020
6
$
$
$
$
9,684
$
35,468
674
$
17,513
2,861
21,048
$
—
5,000
4,136
9,136
89,485
$
74,740
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. The allowance for doubtful
accounts is updated periodically to reflect our estimate of
collectability issues. Accounts are written off when we determine
the receivable will not be collected.
9
Notes to Consolidated Financial Statements ATRION 2018 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,
2018
2017
Raw materials
$
14,994
$
Work in process
Finished goods
7,214
11,364
Total inventories
$
33,572
$
13,545
6,647
9,162
29,354
Accounts Payable
We reflect disbursements as trade accounts payable until such
time as payments are presented to our bank for payment. At
December 31, 2018 and 2017, disbursements totaling
approximately $388,000 and $411,000, 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 basis
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 within “Other non-
current liabilities” in the accompanying consolidated balance
sheet. We classify interest expense on underpayments of
income taxes and accrued penalties related to unrecognized tax
benefits in the income tax provision.
We account for excess tax benefits (“windfalls”) and deficiencies
(“shortfalls”) related to employee stock compensation as
required by ASU 2016-09, Stock Compensation: Improvements
to Employee Share-Based Payment Accounting (ASU 2016-09),
within income tax expense. An excess tax benefit is the realized
tax benefit related to the amount of deductible compensation
10
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.
During the year ended December 31, 2018 we made quarterly
payments in excess of federal income taxes due of
approximately $1,180,000. This amount was recorded in
prepaid expenses and other current assets on our Consolidated
Balance Sheet.
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,
2018
2017
Useful Lives
$
5,511
$
32,719
5,511
32,461
—
30-40 yrs
143,352
129,108
3 -15 yrs
$
181,582
$
167,080
Land
Buildings
Machinery and
equipment
Total property, plant
and equipment
Depreciation expense of $9,003,000, $8,526,000 and
$8,689,000 was recorded for the years ended December 31,
2018, 2017 and 2016, 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.,
ATRION 2018 ANNUAL REPORT Notes to Consolidated Financial Statements (2) Halkey-Roberts Corporation and (3) Quest Medical, Inc. The
total carrying amount of goodwill in each of the years ended
December 31, 2018 and 2017 was $9,730,000. Our evaluation
of goodwill during each year resulted in no impairment losses.
Current Accrued Liabilities
The items comprising current accrued liabilities are as follows (in
thousands):
December 31,
2018
2017
Accrued payroll and related expenses
$
3,608 $
3,943
Accrued vacation
Other accrued liabilities
Total accrued liabilities
291
620
273
731
$
4,519 $
4,947
Revenues
We recognize revenue when obligations under the terms of a
contract with our customer are satisfied. This occurs with the
transfer of control of our products to customers when products
are shipped. Revenue is measured as the amount of consideration
we expect to receive in exchange for transferring products or
services. Sales and other taxes we may collect concurrent with
revenue-producing activities are excluded from revenue.
We believe that our medical device business will benefit in the
long term from an aging world population along with an
increase in life expectancy. In the near term however, demand
for our products fluctuates based on our customers’
requirements which are driven in large part by their customers’
needs for medical care which does not always follow broad
economic trends. This affects the nature, amount, timing and
uncertainty of our revenue. Also, changes in the value of the
United States dollar relative to foreign currencies could make
our products more or less affordable and therefore affect our
sales in international markets.
A summary of revenues by geographic area, based on
shipping destination, for 2018, 2017 and 2016 is as follows
(in thousands):
A summary of revenues by product line for 2018, 2017 and
2016 is as follows (in thousands):
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
2018
2017
2016
$
70,606
$
65,053
$
60,889
50,904
10,473
20,465
48,073
13,537
19,932
47,064
15,427
20,107
$
152,448
$
146,595
$
143,487
More than 98 percent of our total revenue in the periods
presented herein is pursuant to shipments initiated by a
purchase order. Under the new guidance from Accounting
Standards Update (ASU) 2014-09, Revenue from Contracts with
Customers (ASC 606), the purchase order is the contract with
the customer. As a result, the vast majority of our revenue is
recognized at a single point in time when the performance
obligation of the product being shipped is satisfied, rather than
recognized over time, and presented as a receivable on the
balance sheet.
Our payment terms vary by the type and location of our
customers and the products or services offered. The term
between invoicing and when payment is due is 30 days in most
cases. For certain products or services and customer types, we
require payment before the products or services are delivered to
the customer.
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. We apply these same factors and more when
evaluating certain aged receivables for collectability issues and
to determine changes necessary to our allowance for doubtful
accounts. If circumstances change, our estimates of the
collectability of amounts could be changed by a material
amount.
Year ended December 31,
2018
2017
2016
$
95,757
$
93,082
$
91,092
8,898
8,172
6,396
We have elected to recognize the cost for shipping as an
expense in cost of sales when control over the product has
transferred to the customer. Shipping and handling fees
charged to customers are reported as revenue.
United States
Germany
Other countries less
than 5% of revenues
Total
$
152,448
$
146,595
$
143,487
47,793
45,341
45,999
We do not make any material accruals for product returns and
warranty obligations. Our manufactured products come with a
standard warranty to be free from defect and, in the event of a
defect, may be returned by the customer within a reasonable
period of time. Historically, our returns have been unpredictable but
very low due to our focus on quality control. A one-year warranty is
provided with certain equipment sales but warranty claims and our
accruals for these obligations have been minimal.
11
Notes to Consolidated Financial Statements ATRION 2018 ANNUAL REPORT We expense sales commissions when incurred because the
amortization period would be one year or less. These costs are
recorded within selling expense.
Atrion has contracts in place with customers for equipment
leases, equipment financing, and equipment and other services.
These contracts represent less than 4% of our total revenue in
all periods presented herein. A portion of these contracts
contain multiple performance obligations including embedded
leases. For such arrangements, we historically allocated revenue
to each performance obligation which is capable of being
distinct and accounted for as a separate performance obligation
based on relative standalone selling prices. We generally
determine standalone selling prices based on observable inputs,
primarily the prices charged to customers.
Beginning July 1, 2018, for agreements with an embedded
lease component, we adopted the practical expedient in ASU
2018-11 Leases: Targeted Improvements (ASU 2018-11) that
allows us to treat these agreements as a single performance
obligation and recognize revenue under ASC 606 rather than
under the lease accounting guidelines, since the predominant
component of revenue is the non-lease component.
Our fixed monthly equipment rentals to customers are
accounted for as operating leases under ASU 2016-02, Leases
(ASC 842). Fixed monthly rentals provide for a flat rental fee
each month.
A limited number of our contracts have variable consideration
including tiered pricing and rebates which we monitor closely for
potential constraints on revenue. For these contracts we
estimate our position quarterly using the most-likely-outcome
method, including customer-provided forecasts and historical
buying patterns, and we accrue for any asset or liability these
arrangements may create. The effect of accruals for variable
consideration on our consolidated financial statements is
immaterial.
We do not disclose the value of unsatisfied performance
obligations for contracts for which we recognize revenue at the
amount which we have the right to invoice. We believe that the
complexity added to our disclosures by the inclusion of a large
amount of insignificant detail in attempting to disclose
information under ASC 606 about immaterial contracts would
potentially obscure more useful and important information.
Leases to Customers
The lease assets from our sales type leases are recorded in our
accounts receivables in the accompanying consolidated balance
sheet, and as of December 31, 2018 and 2017 the balance
totaled $478,000 and $551,000 respectively.
Our equipment treated as leases to customers under ASC 842 is
included in our Property, Plant and Equipment on our balance
sheet. After our adoption of ASU 2018-11, the cost of the assets
12
and associated depreciation that remain under lease
agreements is immaterial. Due to the immaterial amount of
revenue from our lessor activity, all other lessor disclosures under
ASC 842 have been omitted.
As a lessee, we have only two leases for equipment used
internally which we account for as operating leases. Upon
adoption of ASC 842, we recorded a right-of-use asset and a
lease liability for these leases as of January 1, 2018. The
monthly expense of $2,025 for these operating leases, which
are our only lessee arrangements, is immaterial and therefore all
other lessee disclosures under ASC 842 have been omitted.
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 a stock-based compensation plan 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 May 2014, the Financial Accounting Standards Board (FASB)
issued 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. ASC 606 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. We adopted the new standard on
January 1, 2018, using the full retrospective method. Because
accounting for revenue from contracts with customers did not
materially change for us under the new standard, prior period
consolidated financial statements did not require adjustment.
On February 25, 2016 the FASB issued ASC 842. The main
objective of this standard is to recognize lease assets and lease
liabilities on the balance sheet and disclose key information
about leasing arrangements. This 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). We elected to early adopt this
standard as of January 1, 2018, using the modified retrospective
approach as required. The impact of this change on our
consolidated financial statements was not material.
In July 2018, we adopted the practical expedient in ASU
2018-11 which allows lessors to combine lease and non-lease
components into a single performance obligation. If the
non-lease components are the predominant component of
the combined contract, ASU 2018-11 also allows for these
agreements to be accounted for under ASC 606 rather than as
ATRION 2018 ANNUAL REPORT Notes to Consolidated Financial Statements leases under ASC 842. The impact of this change on our
consolidated financial statements was not material.
In January 2016, the FASB issued ASU 2016-01. The main
objective of this update is to enhance the reporting model for
financial instruments in order to provide users of financial
statements with more decision-useful information. Changes to
the previous 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 for us relates to our
available-for-sale equity investments and resulted in
unrecognized gains and losses from our investments being
reflected in our Consolidated Statement of Income 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 the balance of
our Accumulated Other Comprehensive Loss in the
shareholders’ equity section of the balance sheet to Retained
Earnings. The balance reclassified of $1,215,000 was a result of
prior-period unrealized losses from our equity investment.
In 2018 we recorded an additional loss on our equity
investments of $1,399,000 as a result of a decrease in the
market value of these investments during the year. This loss is
reflected in other investment income (loss) in our Consolidated
Statement of Income. This change in accounting is expected to
create greater volatility in our investment income each quarter
in the future.
In March 2017, the FASB issued ASU 2017-08, Receivables –
Non-refundable Fees and Other Costs (Subtopic 310-20). The
main objective of this update is to shorten the period of
amortization of the premium on certain callable debt securities
to the earliest call date. However, the update does not require
an accounting change for securities held at a discount; the
discount continues to be amortized to maturity. The update is
effective for annual periods beginning after December 15,
2018, including interim periods within those annual periods. We
elected to early adopt this update as of January 1, 2018. None
of our investments in 2017 and 2016 had any premium paid, so
no adjustments were needed for prior-period activity. The
impact of this change on our consolidated financial statements
was not material.
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, 2018 and 2017, we held certain
investments in corporate and government bonds, 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, 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.
Our cash and cash equivalents are held in accounts with
financial institutions that we believe are creditworthy. Certain of
these amounts at times may exceed federally-insured limits. At
December 31, 2018, 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 bonds and commercial paper. 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, 2018 and 2017, we had allowances for
doubtful accounts of approximately $21,000 and $28,000,
respectively. The carrying amount of the receivables
approximates their fair value. No customer exceeded 10% of
our accounts receivable as of December 31, 2018. One
customer, which accounted for 15.5% of accounts receivable as
of December 31, 2017, was the only customer that exceeded
10% of our accounts receivable at December 31, 2017.
13
Notes to Consolidated Financial Statements ATRION 2018 ANNUAL REPORT (2) Investments
As of December 31, 2018 and 2017, 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.
(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):
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
December 31, 2018
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
15.67
$
13,840
$
12,181
Level
Cost
Gains
Losses
Fair Value
December 31, 2017
As of December 31, 2018
Short-term Investments:
Bonds
Commercial paper
Long-term Investments:
Bonds
Mutual funds
Equity investment
2
2
2
1
2
$
8,409
$
1,275
$ 17,513
$
795
$
5,675
$
$
$
$
$
— $
(13)
$
8,396
— $
— $
1,275
— $
(198)
$ 17,315
— $
(121)
— $ (2,814)
$
$
674
2,861
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
15.67
$
13,840
$
12,062
Aggregate amortization expense for patents and licenses was
$119,000, $151,000 and $264,000 for 2018, 2017 and 2016,
respectively. Estimated future amortization expense for each
of the years set forth below ending December 31 is as follows
(in thousands):
2019
2020
2021
2022
2023
$119
$119
$119
$117
$113
(4) Line of Credit
As of December 31, 2018 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 (3.38 percent at December
31, 2018) and is payable monthly. We had no outstanding
borrowings under the credit facility at December 31, 2018 or
December 31, 2017. 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,
2018, we were in compliance with all of the covenants.
As of December 31, 2017
Short-term Investments:
Certificates of deposit
Commercial paper
Corporate bonds
Mutual funds
Long-term Investments:
Corporate bonds
Equity investment
2
2
2
1
2
2
$
4,020
$ 31,220
$
$
6
219
$
5,000
$
5,675
$
$
$
$
$
$
— $
(3)
$
4,017
26
$
(38)
$
31,208
— $
— $
6
3
$
— $
222
— $
(75)
$ 4,925
— $ (1,539)
$ 4,136
The above short-term and long-term bonds represent
investments in multiple issuers at December 31, 2018. The
above equity investment represents an investment in one
company at December 31, 2018 and is classified as available for
sale. 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 our long-term bonds is attributable to a rise in interest
rates which resulted in a lower market price for those securities.
One of our bond investments has been in a loss position for
more than 12 months due to the rise in interest rates. As of
December 31, 2018 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 2018.
At December 31, 2018, the length of time until maturity of the
bonds we currently own ranged from 14 to 29.5 months and the
length of time until maturity of the commercial paper ranged
from 3.8 to 6.4 months.
Our accumulated other comprehensive loss at December 31,
2017 was comprised solely of unrealized losses on our above
equity investment, net of tax.
14
ATRION 2018 ANNUAL REPORT Notes to Consolidated Financial Statements
(5) Income Taxes
The items comprising Provision for Income Taxes are as follows
(in thousands):
Year ended December 31,
2018
2017
2016
Current — Federal
$
6,405 $
6,244 $
10,706
— State
Deferred — Federal
— State
2,001
8,406
(626)
1
(625)
877
7,121
(1,542)
168
(1,374)
1,226
11,932
(92)
(155)
(247)
Provision for Income Taxes
$
7,781 $
5,747 $
11,685
Temporary differences and carryforwards which have given rise
to deferred tax liabilities as of December 31, 2018 and 2017 are
as follows (in thousands):
2018
2017
Deferred tax liabilities (assets):
Property, plant and equipment
$
7,540 $
Patents and goodwill
Benefit plans
Inventories
Capital loss carryover
Other
Plus: Valuation allowance
Total deferred tax liabilities
1,742
(1,847)
(367)
(572)
(418)
6,078
609
6,787
1,740
(854)
(282)
(572)
(116)
6,703
609
The Tax Cuts and Jobs Act of 2017, or Tax 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 Act.
The Tax Act also ended the domestic production activities
deduction under Section 199 which previously helped lower our
effective tax rate by three percentage points in 2017 and 2016.
The Tax Act added a new deduction starting in 2018 for
foreign-derived intangible income under Section 250 which
created a tax benefit for us in 2018 of $1.0 million. 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.
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):
$
6,687 $
7,312
Gross unrecognized tax benefits at January 1, 2016
$
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):
Decrease in tax positions for prior years
Increase in tax positions for current year
Lapse in statutes of limitation
Year ended December 31,
Gross unrecognized tax benefits at December 31, 2016
$
2018
2017
2016
Decrease in tax positions for prior years
$
8,828 $
14,819
$
13,743
Increase in tax positions for current year
Lapse in statutes of limitation
120
(120)
0
0
0
0
865
0
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
Foreign-derived intangible
income deduction
Excess tax benefit from
stock compensation
Impact from tax law
rate change
Change in valuation
allowance
Uncertain tax positions
Other, net
1,572
—
(1,212)
(1,000)
662
(630)
(983)
—
730
(1,165)
(1,070)
—
(95)
(5,782)
(687)
—
—
(373)
61
(4,053)
609
865
240
—
—
(120)
254
Provision for Income Taxes
$
7,781
$
5,747
$
11,685
Gross unrecognized tax benefits at December 31, 2017
$
865
Increase in tax positions for prior years
Increase in tax positions for current year
Lapse in statutes of limitation
25
0
(397)
Gross unrecognized tax benefits at December 31, 2018
$
493
As of December 31, 2018 all of the unrecognized tax benefits,
which were comprised of uncertain tax positions, would impact
the effective tax rate if recognized. Unrecognized tax benefits
that are affected by statutes of limitation that expire within the
next 12 months are immaterial.
We are subject to United States federal income tax as well as to
income tax of multiple state jurisdictions. We have concluded
all United States federal income tax matters for years through
15
Notes to Consolidated Financial Statements ATRION 2018 ANNUAL REPORT
2014. All material state and local income tax matters have been
concluded for years through 2014.
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 $19,000
and $1,000 at December 31, 2018 and 2017, respectively. Tax
expense for the year ended December 31, 2018 and 2017
included a net interest charge of $18,000 and $1,000,
respectively. There were no tax expenses or tax benefits for
interest and penalties in 2016.
(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 May 21, 2015 our Board
of Directors adopted a 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, 2018, there remained
231,765 shares available for repurchase under this program.
There were no stock repurchases during 2018 and 2017. We
repurchased 3,427 shares under this program during 2016.
We increased our quarterly cash dividend payments in
September of each of the past three years. The quarterly
dividend was increased to $1.05 per share in September 2016,
to $1.20 per share in September 2017 and to $1.35 per share in
September 2018. Holders of our stock units earned non-cash
dividend equivalents of $25,000 in 2018, $27,000 in 2017 and
$40,000 in 2016.
(7) Income Per Share
The following is the computation of basic and diluted income per
share:
Year ended December 31,
2018
2017
2016
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 2018 and 2016.
(8) Stock Plans
At December 31, 2018, we had one stock-based compensation plan
that is described below. We account for our plan 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, 2018, there remained 23,100 shares reserved for
future stock-based awards under the 2006 Plan.
A summary of stock option transactions for the year ended
December 31, 2018, is presented below:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(in thousands, except per share amounts)
Options
Shares
Net Income
$
34,255
$
36,593
$
27,581
Outstanding at
December 31, 2017
20,000
$
501.03
4.3 years
Weighted average basic
shares outstanding
Add: Effect of dilutive
securities
Weighted average
diluted shares
outstanding
Net Income Per Share
1,853
1,846
1,824
Granted
5
11
33
1,858
1,857
1,857
Exercised
Outstanding at
December 31, 2018
Exercisable at
December 31, 2018
—
—
—
—
20,000
$
501.03
3.3 years
4,000
$
501.03
3.3 years
Basic
Diluted
$
$
18.49
18.44
$
$
19.82
19.71
$
$
15.12
14.85
16
ATRION 2018 ANNUAL REPORT Notes to Consolidated Financial Statements
All nonvested options outstanding at December 31, 2018 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 2018 and 2016. 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
2018
2017
2016
—
—
—
—
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 outstanding at December 31, 2018, was $4.8 million.
The total intrinsic value of exercisable options at December 31,
2018, was $1.0 million.
There were no restricted stock grants during 2018. 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:
Nonvested Shares
Shares
Weighted
Average Award
Date Fair Value
Per Share
Restricted stock at December 31, 2017
5,900 $
445.47
Granted in 2018
Vested in 2018
—
(1,180) $
Restricted stock at December 31, 2018
4,720 $
445.47
445.47
All shares of nonvested restricted stock outstanding at
December 31, 2018 are expected to vest. The total fair value of
restricted stock vested during 2018, 2017 and 2016 was
$699,000, $803,000 and $1,177,000, respectively.
During 2018, 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 2018, 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, 2018, 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
6,200
869
(667)
$
$
$
361.28
589.66
219.69
—
10
$
645.00
(10) $
645.00
6,402
$
407.03
—
Nonvested
Stock Units
Nonvested at
December
31, 2017
Granted
Vested
Nonvested at
December
31, 2018
All nonvested restricted stock units at December 31, 2018 are
expected to vest. The total intrinsic value of all outstanding
stock units which were not convertible at December 31, 2018,
including 478 stock units held for the accounts of non-employee
directors, was $5,099,000. The total fair value of directors’ stock
units that vested during 2018, 2017 and 2016 was $6,000,
$6,000 and $10,000, respectively.
The total value of stock awards to nonemployee directors
awarded under the 2006 Plan was $240,000, $312,000 and
$240,000 in 2018, 2017 and 2016, respectively. These awards
vested immediately at the time of grants. Compensation
related to stock awards, restricted stock and stock units is based
17
Notes to Consolidated Financial Statements ATRION 2018 ANNUAL REPORT 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, 2018, 2017 and 2016, we
recorded stock-based compensation expense as a G&A expense
in the amount of $1,659,000, $1,602,000 and $1,566,000,
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, 2018, 2017
and 2016, was $441,000, $6,342,000 and $1,235,000,
respectively. These amounts include excess tax benefits in
each year.
Unrecognized compensation cost information for our various
stock-based compensation types is shown below as of
December 31, 2018:
Weighted Average
Remaining Years
in Amortization
Period
3.3
3.3
3.5
Unrecognized
Compensation Cost
$
$
1,725,000
1,738,000
1,150,000
4,613,000
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 2018, 2017 and 2016. We have
no assets located outside the United States.
(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 $752,000, $720,000 and $667,000 in 2018, 2017 and
2016, 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 these deemed investments. Our deferred
compensation obligation under the plan was $1,774,000 and
$426,000 at December 31, 2018 and 2017, respectively. These
amounts are reflected in “Other Liabilities and Deferred Credits” in the
accompanying Consolidated Balance Sheets.
(11) Commitments and Contingencies
From time to time and in the ordinary course of business, we may
be subject to various claims, charges and litigation. In some cases,
the claimants may seek damages, as well as other relief, which, if
granted, could require significant expenditures. We accrue the
estimated costs of settlement or damages when a loss is deemed
probable and such costs are estimable, and accrue for legal costs
associated with a loss contingency when a loss is probable and such
amounts are estimable. Otherwise, these costs are expensed as
incurred. If the estimate of a probable loss or defense costs is a
range and no amount within the range is more likely, we accrue the
minimum amount of the range. As of December 31, 2018, 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
$3.0 million in potential future payments under this settlement as
of December 31, 2018 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, 2018,
could have resulted in payments aggregating $5.0 million.
At December 31, 2018, the Company had purchase obligations
with certain suppliers for the purchase of inventory for 2019. These
contracts were commitments to purchase inventory used in the
production of the Company’s products totaling $1.9 million.
18
ATRION 2018 ANNUAL REPORT Notes to Consolidated Financial Statements (12) Quarterly Financial Data (Unaudited)
Quarter Ended
Operating Revenue
Operating Income
Net Income
(in thousands, except per share amounts)
Income Per
Basic Share
Income Per
Diluted Share
03/31/18
06/30/18
09/30/18
12/31/18
03/31/17
06/30/17
09/30/17
12/31/17
$
39,401
$
11,366
$
8,487
$
4.58
$
38,847
39,274
34,926
11,266
10,757
8,318
8,797
9,221
7,749
4.75
4.98
4.18
$
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
4.57
4.74
4.96
4.17
5.36
5.40
4.29
4.66
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.
Notes to Consolidated Financial Statements ATRION 2018 ANNUAL REPORT
19
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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash
flows for each of the three years in the period ended December
31, 2018, 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, 2018, 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 26, 2019 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 26, 2019
20
ATRION 2018 ANNUAL REPORT Report of Independent Registered Public Accounting Firm
MANAGEMENT’S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
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.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2018 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, 2018, our
internal control over financial reporting was effective.
Management’s Report on Internal Control Over Financial Reporting ATRION 2018 ANNUAL REPORT
21
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
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 26, 2019
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, 2018, 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, 2018, 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 of
the Company as of and for the year ended December 31, 2018,
and our report dated February 26, 2019 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.
22
ATRION 2018 ANNUAL REPORT Report of Independent Registered Public Accounting Firm
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 2018, 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, 2018, we reported revenues
of $152.5 million, operating income of $41.7 million and net
income of $34.3 million
Results of Operations
Our net income was $34.3 million, or $18.49 per basic and
$18.44 per diluted share, in 2018 compared to $36.6 million, or
$19.82 per basic and $19.71 per diluted share, in 2017 and net
income of $27.6 million, or $15.12 per basic and $14.85 per
diluted share, in 2016. Revenues were $152.5 million in 2018
compared with $146.6 million in 2017 and $143.5 million in
2016. The four percent revenue increase in 2018 over 2017 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.
Annual revenues by product lines were as follows (in thousands):
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
2018
2017
2016
$ 70,606
$ 65,053
$
60,889
50,904
10,473
20,465
48,073
13,537
19,932
47,064
15,427
20,107
$ 152,448
$ 146,595
$ 143,487
Although we have experienced decreasing revenues from sales
of ophthalmic products over the last three years, we expect
revenues from those products to remain at approximately the
2018 level for at least 2019.
Our cost of goods sold was $80.7 million in 2018, $75.8 million
in 2017 and $75.9 million in 2016. Increased sales volumes and
an unfavorable product sales mix partially offset by improved
manufacturing efficiencies and the impact of continued cost
improvement projects were the primary contributors to the
increase in cost of goods sold in 2018 compared to 2017. A
favorable product sales mix, improved manufacturing
efficiencies and the impact of continued cost improvement
projects partially offset by higher sales volumes were the
primary contributors to the decrease in cost of goods sold in
2017 compared to 2016.
Gross profit in 2018 was $71.8 million compared with $70.8
million in 2017 and $67.6 million in 2016. Our gross profit was
47 percent of revenues in 2018, 48 percent of revenues in 2017
and 47 percent of revenues in 2016. The decrease in gross profit
percentage in 2018 from 2017 was primarily related to an
unfavorable product mix. The increase in gross profit percentage
in 2017 from 2016 was primarily related to increased revenues
and a favorable product sales mix.
23
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2018 ANNUAL REPORT Operating expenses were $30.1 million in 2018, $29.5 million in
2017 and $28.5 million in 2016. R&D expenses decreased
$286,000 in 2018 as compared with 2017 primarily as a result
of decreased costs for outside services and supplies partially
offset by increased compensation costs. R&D expenses consist
primarily of salaries and other related expenses of our R&D
personnel as well as costs associated with regulatory matters. In
2018, selling expenses increased $1.1 million as compared with
2017 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 decreased $213,000 in 2018 as compared to 2017
primarily as a result of decreased compensation and
compensation related costs partially offset by increased outside
services and increased computer hardware and software 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 decreased $775,000 in 2017 as compared with
2016 primarily as a result of decreased costs for outside
services and supplies. In 2017, selling expenses increased
$640,000 as compared with 2016 primarily as a result of
increased commissions, outside services, compensation and
travel costs. 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.
Our operating income for 2018 was $41.7 million compared
with $41.3 million in 2017 and $39.1 million in 2016. Operating
income was 27 percent of revenues in 2018, 28 percent of
revenues for 2017 and 27 percent of revenues for 2016. An
increase in 2018 gross profit partially offset by increased
operating expenses was the major contributor to the increase in
operating income for 2018 as compared to the previous year.
The increase in 2017 gross profit was the major contributor to
the increase in operating income for 2017 as compared to the
previous year.
Interest and Dividend income for 2018 was $1.7 million
compared with $1.1 million in 2017 and $448,000 in 2016.
Increased levels of investments, increased interest rates and
increased dividends on our equity investments were the primary
reason for the increases in both 2018 and 2017 as compared to
the previous years.
Other Investment Loss in 2018 of $1.4 million was primarily
related to an unrealized loss on an equity investment as a result
of a drop in the market value on this investment. Other
Investment Loss in 2016 was primarily related to a $311,000
impairment loss on one of our long-term corporate bonds which
experienced a significant decline in market value.
Income tax expense in 2018 totaled $7.8 million, compared
with $5.7 million in 2017 and $11.7 million in 2016. The
effective tax rates for 2018, 2017 and 2016 were 18.5 percent,
13.6 percent and 29.8 percent, respectively. The Tax 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. We recorded
excess tax benefits related to employee stock compensation of
$95,000, $5.8 million and $687,000 for the years ended
December 31, 2018, 2017 and 2016, respectively. Benefits from
R&D tax credits totaled $1.2 million in 2018, $1.0 million in
2017 and $1.1 million in 2016. Benefits from tax incentives for
domestic production totaled $630,000 in 2017 and $1.2 million
in 2016. The Tax Act ended the domestic production activities
deduction under Section 199 for 2018. The Tax Act added a
new deduction starting in 2018 for foreign-derived intangible
income under Section 250 which created a tax benefit for us in
2018 of $1.0 million. Charges from changes in uncertain tax
positions totaled $865,000 in 2017. Benefits from changes in
uncertain tax positions totaled $373,000 in 2018 and $120,000
in 2016. Charges for state income taxes totaled $1.6 million in
2018, $662,000 in 2017 and $730,000 in 2016. We expect our
effective tax rate for 2019 to be approximately 20.0 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, 2018 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 (3.38 percent at December 31, 2018) and is
payable monthly. We had no outstanding borrowings under the
credit facility at December 31, 2018 or December 31, 2017.
Our ability to borrow funds under the credit facility from time to
time is contingent on meeting certain covenants in the loan
24
ATRION 2018 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations agreement, the most restrictive of which is the ratio of total
debt to earnings before interest, income tax, depreciation and
amortization. At December 31, 2018, we were in compliance
with all of these covenants.
At December 31, 2018, we had a total of $89.5 million in cash
and cash equivalents, short-term investments and long-term
investments, an increase of $14.7 million from December 31,
2017. The principal contributor to this increase was positive
cash flows resulting from operations.
Cash flows provided by operations of $43.2 million in 2018 were
primarily comprised of net income plus the net effect of
non-cash expenses. At December 31, 2018, we had working
capital of $112.1 million, including $58.8 million in cash and
cash equivalents and $9.7 million in short-term investments.
The $6.4 million increase in working capital during 2018 was
primarily related to increases in cash and inventories partially
offset by decreases in short-term investments. The net 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
$17.5 million in 2018, compared with $9.7 million in 2017 and
$10.6 million in 2016. These expenditures were primarily for
machinery and equipment. Purchases of investments totaled
$28.5 million in 2018, compared to $69.2 million in 2017 and
$30.8 million in 2016. Proceeds from maturities of investments
totaled $40.9 million in 2018, $58.0 million in 2017 and $5.0
million in 2016. We expect 2019 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 $9.5 million, $8.3 million and
$7.1 million during 2018, 2017 and 2016, respectively. We
expect to fund future dividend payments with cash flows from
operations. We purchased treasury stock totaling $1.3 million
during 2016. No treasury stock was purchased in 2018 or 2017.
The table below summarizes debt, lease and other contractual
obligations outstanding at December 31, 2018:
Contractual
Obligations
Payments Due by Period
Total
2019
(in thousands)
2020 and
thereafter
Purchase Obligations
Total
$
$
1,915
1,915
$
$
1,915
1,915
$
$
—
—
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 2019.
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 May 2014, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (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. ASC 606 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. We
adopted the new standard on January 1, 2018, using the full
retrospective method. Because accounting for revenue from
contracts with customers did not materially change for us under
the new standard, prior period consolidated financial
statements did not require adjustment.
On February 25, 2016 the FASB issued ASU 2016-02, Leases
(ASC 842). The main objective of this standard is to recognize
lease assets and lease liabilities on the balance sheet and
disclose key information about leasing arrangements. This
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). We elected to
early adopt this standard as of January 1, 2018, using the
modified retrospective approach as required. The impact of this
change on our consolidated financial statements was not
material.
In July 2018, we adopted the practical expedient in ASU
2018-11 - Leases: Targeted Improvements which allows lessors
to combine lease and non-lease components into a single
performance obligation. If the non-lease components are the
25
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2018 ANNUAL REPORT predominant component of the combined contract, ASU
2018-11 also allows for these agreements to be accounted for
under ASC 606 rather than as leases under ASC 842. The
impact of this change on our consolidated financial statements
was not material.
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The
main objective of this update is to enhance the reporting model
for financial instruments in order to provide users of financial
statements with more decision-useful information. Changes to
the previous 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 for us relates to our
available-for-sale equity investments and resulted in
unrecognized gains and losses from our investments being
reflected in our Consolidated Statement of Income 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 the balance of
our Accumulated Other Comprehensive Loss in the
shareholders’ equity section of the balance sheet to Retained
Earnings. The balance reclassified of $1,215,000 was a result of
prior-period unrealized losses from our equity investments.
In 2018 we recorded an additional loss on our equity
investments of $1,399,000 as a result of a decrease in the
market value of these investments during the year. This loss is
reflected in other investment income (loss) in our Consolidated
Statement of Income. This change in accounting is expected to
create greater volatility in our investment income each quarter
in the future.
In March 2017, the FASB issued ASU 2017-08, Receivables
– Non-refundable Fees and Other Costs (Subtopic 310-20). The
main objective of this update is to shorten the period of
amortization of the premium on certain callable debt securities
to the earliest call date. However, the update does not require
an accounting change for securities held at a discount; the
discount continues to be amortized to maturity. The update is
effective for annual periods beginning after December 15,
2018, including interim periods within those annual periods. We
elected to early adopt this update as of January 1, 2018. None
of our investments in 2017 and 2016 had any premium paid, so
no adjustments were needed for prior-period activity. The
impact of this change on our consolidated financial statements
was not material.
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.
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
26
ATRION 2018 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations audits, together with assessing temporary differences resulting
from the different treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included within the balance sheet. We
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and, to the extent we
believe that recovery is more likely than not, do not establish a
valuation allowance. In the event that actual results differ from
these estimates, the provision for income taxes could be
materially impacted.
We assess the impairment of our long-lived identifiable assets,
excluding goodwill which is tested for impairment as explained
below, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. This review is
based upon projections of anticipated future cash flows.
Although we believe that our estimates of future cash flows are
reasonable, different assumptions regarding such cash flows or
changes in our business plan could materially affect our
evaluations. No such changes are anticipated at this time.
We assess goodwill for impairment pursuant to Accounting
Standards Codification, or ASC 350, Intangibles—Goodwill and
Other, which requires that goodwill be assessed 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 2018, 2017 and 2016, none of our critical accounting
estimates required significant adjustments. We did not note any
material events or changes in circumstances indicating that the
carrying value of long-lived assets were not recoverable.
Quantitative and Qualitative Disclosures About
Market Risks
Foreign Exchange Risk
We are not exposed to material fluctuations in currency
exchange rates 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 commercial paper and corporate and
government bonds. As a result, we are exposed to potential loss
from market risks that may occur as a result of changes in
interest rates, changes in credit quality of the issuer and
otherwise. These securities have a higher degree of, 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 equity securities
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.
27
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2018 ANNUAL REPORT 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 R&D program
in 2019, our ability to continue operations in the event of a supply
disruption, our effective tax rate for 2019, the impact of the
restrictive covenants in our credit facility on our liquidity and
capital resources, our earnings in 2019, our 2019 capital
expenditures, future dividend payments, 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, increases in 2019 in cash, cash
equivalents and investments, and the impact of the addition of
MPS 3 on our market position. 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.
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
2018
2017
2016
2015
2014
$
152,448
$
146,595
$
143,487
$
145,733
$
140,762
41,707
34,255
9,123
41,274
36,593
8,677
39,126
27,581
8,953
42,510
28,925
8,823
$
$
$
$
18.44
5.10
1,858
$
$
19.71
4.50
1,857
$
$
14.85
3.90
1,857
$
$
15.47
3.30
1,870
40,817
27,808
8,723
14.08
2.78
1,975
$
231,216
$
203,780
$
181,942
$
164,336
$
171,514
—
—
—
—
—
28
ATRION 2018 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operation and 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
Morganton, North Carolina
Ronald N. Spaulding
Private Investor
Former President of
Worldwide Commercial Operations
Abbott Vascular
Miami, Florida
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
Stock Information
The Company’s common stock is traded on The Nasdaq Global Select Market (Symbol: ATRI).
As of February 13, 2019, we had 115 record holders, and approximately 6,100 beneficial
owners, of our common stock.
The Company presently plans to pay quarterly cash dividends in the future.
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 2018 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
ATRION 2018 ANNUAL REPORT 29
ATRION CORPORATION
One Allentown Parkway
Allen, Texas 75002
www.atrioncorp.com
972.390.9800