Annual Report 2019
DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION
PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY
ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE
DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION
PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY
ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE
DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION
PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY
ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE
DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION
PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY
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DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION
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DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION
PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY
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DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION
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DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION
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DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION
PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY
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PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY
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DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION
PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY
ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE
DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION
2019
Contents
Letter to Stockholders ..............................2
Financial Statements ...................................4
Management’s Discussion ........................23
Selected Financial Data ..............................28
Corporate Information ................................29
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.
DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE DISCOVERY ACCELERATION PERFORMANCE Financial Highlights
For the Year Ended
December 31
Revenues
Operating Income
Net Income
Income per Diluted Share
Weighted Average Diluted
Shares Outstanding
$
$
$
$
2019
2018
As of
December 31
155,066,000
$ 152,448,000
Total Assets
40,529,000
36,761,000
19.73
$
$
$
41,707,000
34,255,000
Cash and
Investments
2019
262,031,000
100,586,000
$
$
2018
231,216,000
89,485,000
$
$
18.44
Long-term Debt
—
—
1,863,000
1,858,000
Stockholders’
Equity
$
237,870,000
$
210,767,000
2015
2016
2017
2018
2019
$15.47
$14.85
$19.71
$18.44
$19.73
2015
2016
2017
2018
2019
$146
$143
2015
2016
2017
2018
$147
$152
$155
2019
$42.5
$39.1
$41.3
$41.7
$40.5
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, 2019 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, 2014 in our
common stock, the Russell 2000 Index and the
SIC Code Index and dividends were reinvested.
2014
2015
2016
2017
2018
2019
Company/Index
Atrion Corporation
Russell 2000 Index
SIC Code Index
2014
$100.00
$100.00
$100.00
2015
$113.10
$95.59
$106.07
2016
$151.85
$115.95
$123.01
2017
$190.25
$132.94
$154.51
2018
$225.35
$118.30
$150.06
2019
$230.21
$148.49
$179.58
1
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It is my great pleasure to report to you on the progress we made in 2019, and to speak to strides we
are focused on making in 2020.
Performance
In 2019, our earnings per share grew 7% to $19.73. We increased our dividend by 15%, the
sixteenth consecutive year of double-digit increases. Our operating margin was an enviable 26%,
reflecting the focus on operating efficiently and effectively. Sales were up slightly—just 2%, in part
impacted by a nationwide shortage of contract sterilization capacity. Our cash and short- and
long-term investments increased over 12% to $100.6 million at the end of the year, and we
remained debt-free.
Discovery
Whether developing products to combat illness or to increase survivability in marine and aviation
emergencies, exploration of new ideas, materials, and manufacturing techniques underlies our work.
The third generation of our Quest Myocardial Protection System (MPS 3) received regulatory
clearance in Canada at the end of 2018, and a limited market release was conducted there in 2019.
This console and its related disposables represent the most complex new product program in our
history. This successful effort—ranging from writing millions of lines of software code to seamlessly
integrating electrical and mechanical systems—has greatly expanded the capabilities of this
uniquely powerful platform. We anticipate our MPS 3 receiving FDA clearance, and being introduced
in the U.S., later this year. This introduction will further advance our status as the market leader in this
clinical niche.
Central to this effort and the many others we undertake each and every year is an extremely talented
team of experts in the sciences, engineering, manufacturing, and quality assurance, as well as
support services and an incredible production team.
Acceleration
Our approach to growth is rooted in continuously investing in our people, products and new
manufacturing technologies. Over the past year, the pace of new product development and
launches increased—a trend that we expect to continue in the years ahead. We currently have over
two dozen products in various stages of development. As they come to market, they will help us
expand our market share. We also invested record amounts of capital in manufacturing technologies
in both 2018 and 2019 to ensure the highest levels of quality and efficiency.
2
ATRION 2019 ANNUAL REPORT In 2019, we increased our focus on talent discovery, development, and
management to shape our next generation of leadership, and we are
continuing to focus on those aspects of our business this year.
These investments in people and products are aggressive, and they are
key to solidifying the foundation of our work. However, at the same time
we continue to manage the Company in the fiscally conservative manner
that has guided our approach for years.
Appreciation
At the time of this writing, we are greatly concerned about the COVID-19
pandemic. To protect the health and safety of our employees, we are
closely monitoring the guidance provided by the Centers for Disease
Control and Prevention, and, at the same time, we are mindful of our
special responsibility to supply hospitals with critical products that will be
needed for various illnesses. Any breaks in the supply chain to hospitals
will have profound implications for the critically ill. I do not know what
tomorrow will bring, but I am extremely grateful for the courage and grace
of my co-workers who are working with great dedication.
When we released our earnings for 2019, we predicted 2020 would bring
high single-digit top line growth and low double-digit operating income
growth. Whether the COVID-19 contagion will affect this outlook or the
timing of regulatory approvals for new products is unclear at this time.
Regardless of whether our results are impacted, at Atrion we focus on
sustainable growth and responsible management. Our priority is to ensure
the Company’s growth over the long term, not just on achieving certain
results for a specific calendar year.
I am grateful to you, our stockholders, for your continued support.
Respectfully,
David A. Battat
President and CEO
2019 REVENUES BY PRODUCT LINE
5%
14%
35%
Fluid Delivery
72,117,000
$
Cardiovascular
54,799,000
$
Other
$
21,026,000
Opthalmology
7,124,000
$
46%
46%
35%
14%
5%
3
ATRION 2019 ANNUAL REPORT
ATRION CORPORATION CONSOLIDATED BALANCE SHEETS
As of December 31, 2019 and 2018
Assets:
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $36 and $21 in 2019 and 2018, 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 $12,301 and $12,181 in 2019 and 2018, respectively
Goodwill
Other
Total Assets
The accompanying notes are an integral part of these consolidated financial statements.
2019
2018
(in thousands)
$
45,048
$
58,753
23,766
18,886
42,093
2,545
132,338
31,772
200,990
116,384
84,606
1,539
9,730
2,046
13,315
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
$
262,031 $
231,216
4
ATRION 2019 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, 1,565 shares in 2019 and 1,567 shares in 2018, at cost
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
2019
2018
(in thousands)
$
5,707
$
5,148
419
11,274
—
8,496
4,391
12,887
24,161
342
52,043
5,082
4,519
619
10,220
—
6,687
3,542
10,229
20,449
342
50,391
—
—
317,745
(132,260)
237,870
291,761
(131,727)
210,767
$
262,031
$
231,216
5
ATRION 2019 ANNUAL REPORT
ATRION CORPORATION CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, 2019, 2018 and 2017
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
2019
2018
2017
(in thousands, except per share amounts)
$
155,066
$
152,448
$
146,595
84,378
70,688
8,813
16,308
5,038
30,159
40,529
2,487
152
—
43,168
(6,407)
36,761
19.82
1,855
$
$
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
$
$
19.73
$
18.44
$
1,863
1,858
5.80
$
5.10
$
$
$
$
$
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
19.71
1,857
4.50
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended December 31, 2019, 2018 and 2017
Net Income
Other Comprehensive Loss, net of tax: Unrealized Loss on investments, net of tax benefits
of $68 in 2017
2019
2018
2017
(in thousands)
$
36,761 $
34,255
$
36,593
—
—
(741)
Comprehensive Income
$
36,761 $
34,255
$
35,852
The accompanying notes are an integral part of these consolidated financial statements.
6
ATRION 2019 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2019, 2018 and 2017
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 maturities of investments
Cash Flows From Financing Activities:
Shares tendered for employees’ withholding taxes on stock-based compensation
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 consolidated financial statements.
2019
2018
2017
(in thousands)
$
36,761
$
34,255
$
36,593
10,853
1,809
1,682
(135)
(281)
(6)
9,123
(625)
1,659
1,399
47
(18)
8,677
(1,374)
1,602
—
(195)
49
50,683
45,840
45,352
(1,872)
(8,521)
697
62
(4,218)
(43)
(425)
(87)
1,254
(200)
849
42,465
(20,446)
(83,721)
59,331
(44,836)
(579)
(10,755)
(11,334)
(13,705)
58,753
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
$
$
$
45,048
$
58,753
$
30,136
4,178
$
9,858
$
4,959
—
$
—
$
10,237
7
ATRION 2019 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the year ended December 31, 2019, 2018 and 2017 (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, 2017
1,824
$ 342
1,596
$ (114,274) $ 37,448
($474) $ 239,946 $ 162,988
Net income
Other comprehensive income
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
1,661
26
(90)
34,255
34,255
1,215
(1,215)
—
1,687
(90)
(9,473)
(9,473)
Balances, December 31, 2018
1,853
342
1,567
(131,727)
50,391
0
291,761
210,767
Net income
Stock-based compensation transactions
Shares surrendered in stock transactions
3
(1)
(3)
1
46
(579)
1,652
Dividends
36,761
36,761
1,698
(579)
(10,777)
(10,777)
Balances, December 31, 2019
1,855
$ 342
1,565
$ (132,260) $ 52,043 $
0
$ 317,745 $ 237,870
The accompanying notes are an integral part of this consolidated financial statement.
8
ATRION 2019 ANNUAL REPORT
ATRION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Atrion Corporation and its subsidiaries (“we,” “our,” “us,” “Atrion”
or the “Company”) develop and manufacture products primarily
for medical applications. We market our products throughout
the United States and internationally. Our customers include
physicians, hospitals, distributors and other manufacturers.
Atrion Corporation’s principal subsidiaries through which these
operations are conducted are Atrion Medical Products, Inc.,
Halkey-Roberts Corporation and Quest Medical, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of
Atrion Corporation and its subsidiaries. All intercompany
transactions and balances have been eliminated in
consolidation. Certain prior-year balances have been reclassified
in order to conform to the current year presentation.
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 cash
deposits in the bank as well as money market funds and debt
securities with maturities at the time of purchase of 90 days or
less. Cash deposits in the bank include amounts in operating
accounts, savings accounts and money market accounts.
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 2018,
unrealized gains and losses for our available-for-sale securities
were reported in stockholders’ equity as accumulated other
comprehensive income.
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,
2019 and 2018 are as follows (in thousands):
Cash and Cash Equivalents:
Cash deposits
Money market funds
Commercial paper
December 31,
2019
2018
$
38,942
$
41,774
3,460
2,646
13,861
3,118
Total cash and cash equivalents
$
45,048
$
58,753
Short-term investments:
Commercial paper (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)
$
$
$
$
6,778
16,988
23,766
$
$
$
1,275
8,409
9,684
1,105
$
674
27,845
2,822
17,513
2,861
Total long-term investments
$
31,772
$
21,048
Total cash, cash equivalents and
short and long-term investments
$
100,586
$
89,485
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. Accounts are written off when we determine the
receivable will not be collected.
9
Notes to Consolidated Financial Statements ATRION 2019 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,
2019
2018
Raw materials
Work in process
Finished goods
Total inventories
$
$
18,157
$
8,525
15,411
42,093
$
14,994
7,214
11,364
33,572
Accounts Payable
We reflect disbursements as trade accounts payable until such
time as payments are presented to our bank for payment. At
December 31, 2019 and 2018, disbursements totaling
approximately $1,236,000 and $388,000, 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
sheets. 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 years ended December 31, 2019 and 2018, we
made quarterly payments in excess of federal income taxes due
of approximately $4,000 and $1,180,000, respectively. These
amounts were recorded in prepaid expenses and other current
assets on our consolidated balance sheets.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated
using the straight-line method over the estimated useful lives of
the related assets. Additions and improvements are capitalized,
including all material, labor and engineering costs to design,
install or improve the asset. Expenditures for repairs and
maintenance are charged to expense as incurred. The following
table represents a summary of property, plant and equipment
at original cost (in thousands):
December 31,
2019
2018
Useful Lives
$
5,511
$
34,582
5,511
32,719
—
30-40 yrs
160,897
143,352
3 -15 yrs
$
200,990
$
181,582
Land
Buildings
Machinery and
equipment
Total property, plant
and equipment
Depreciation expense of $10,733,000, $9,003,000 and
$8,526,000 was recorded for the years ended December 31,
2019, 2018 and 2017, 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 of each year 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 2019 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, 2019 and 2018 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,
2019
2018
Accrued payroll and related expenses
$
4,233
$
3,608
Accrued vacation
Other accrued liabilities
Total accrued liabilities
311
604
291
620
$
5,148
$
4,519
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’ or patients’ 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 2019, 2018 and 2017 is as follows (in
thousands):
Year ended December 31,
2019
2018
2017
$
98,496
$
95,757
$
93,082
7,996
8,898
8,172
48,574
47,793
45,341
United States
Germany
Other countries less
than 5% of revenues
Total
$
155,066
$
152,448
$
146,595
A summary of revenues by product line for 2019, 2018 and
2017 is as follows (in thousands):
Year ended December 31,
2019
2018
2017
$
72,117
$
70,606
$
54,799
7,124
21,026
50,904
10,473
20,465
65,053
48,073
13,537
19,932
$
155,066
$
152,448
$
146,595
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
More than 99 percent of our total revenue in the periods
presented herein is pursuant to shipments initiated by a
purchase order. Under the 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
consolidated balance sheets.
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.
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.
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 2019 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 percent 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 receivable in the accompanying consolidated balance
sheets, and as of December 31, 2019 and 2018 the balance
totaled $398,000 and $478,000, respectively.
Our equipment treated as leases to customers under ASC 842 is
included in our Property, Plant and Equipment on our
consolidated balance sheets. After our adoption of ASU
12
2018-11, the cost of the assets 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.
Leased Property and Equipment
As a lessee, we have four leases in total for equipment and
facilities used internally, which we account for as operating
leases. At December 31, 2019, our right-of-use asset balance
was $592,000 and our lease liability at December 31, 2019 for
these leases was $567,000. The monthly expense of $26,000
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
Research and Development, or 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 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 our consolidated balance sheets by reclassifying
the balance of our Accumulated Other Comprehensive Loss in
the stockholders’ equity section of the consolidated balance
sheets to Retained Earnings. The balance reclassified of
$1,215,000 was a result of prior-period unrealized losses from
our equity investment.
In 2019 we recorded a net unrealized gain of $135,000 as a
result of a net increase in market value of our equity
investments during the year. In 2018 we recorded a 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. These
ATRION 2019 ANNUAL REPORT Notes to Consolidated Financial Statements gains and losses are reflected in other investment income (loss)
in our Consolidated Statement of Income.
In June 2016, the FASB issued ASU No. 2016-13, Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments, which amends the impairment
model by requiring entities to use a forward-looking approach
based on expected losses rather than incurred losses to estimate
credit losses on certain types of financial instruments, including
trade receivables. This may result in the earlier recognition of
allowances for losses. The ASU is effective for public entities for
fiscal years beginning after December 15, 2019. In November
2018, the FASB issued ASU No. 2018-19, Codification
Improvements to Topic 326, Financial Instruments—Credit
Losses, which provided additional implementation guidance on
the previously issued ASU. Management has reviewed the
guidance, performed an assessment of this guidance and
expects the outcome of adoption of this standard to be
immaterial to the financial statements.
From time to time new accounting pronouncements applicable
to us are issued by the FASB, or other standards setting bodies,
which we will adopt as of the specified effective date. Unless
otherwise discussed, we believe the impact of recently issued
standards that are not yet effective will not have a material
impact on our consolidated financial statements upon adoption.
Fair Value Measurements
Accounting standards use a three-tier fair value hierarchy which
prioritizes the inputs used in measuring fair value. These tiers are:
Level 1, defined as observable inputs such as quoted prices in
active markets; Level 2, defined as inputs other than quoted prices
in active markets that are either directly or indirectly observable;
and Level 3, defined as unobservable inputs in which little or no
market data exists therefore requiring an entity to develop its own
assumptions.
As of December 31, 2019 and 2018, we held investments in
commercial paper, bonds, money market funds, mutual funds
and equity securities that are required to be measured for
disclosure purposes at fair value on a recurring basis. The fair
values of these investments and their tier levels are shown in Note
2 below.
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 deposits 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,
2019, approximately 98 percent of our cash deposits 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 money market funds, 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 as
compared with cash deposits.
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, 2019 and 2018, we had allowances
for doubtful accounts of approximately $36,000 and $21,000,
respectively. The carrying amount of the receivables
approximates their fair value. We had one customer, which
accounted for 12% of our accounts receivable as of December
31, 2019, and no customer exceeded 10% of our accounts
receivable as of December 31, 2018.
(2) Investments
As of December 31, 2019 and 2018, we held investments in
commercial paper, bonds, money market funds, mutual funds and
equity securities that are required to be measured for disclosure
purposes at fair value on a recurring basis. The commercial paper
and bonds are considered held-to-maturity and are recorded at
amortized cost in the accompanying consolidated balance sheets.
The money market funds, equity securities and mutual funds are
recorded at fair value in the accompanying consolidated balance
sheets. These investments are considered Level 1 or Level 2 as
detailed in the table below. We consider as current assets those
investments which will mature in the next 12 months including
interest receivable on the long-term bonds. The remaining
investments are considered non-current assets including our
investment in equity securities we intend to hold longer than 12
months. The fair values of these investments were estimated using
recently executed transactions and market price quotations.
13
Notes to Consolidated Financial Statements ATRION 2019 ANNUAL REPORT The amortized cost and fair value of our investments, and the
related gross unrealized gains and losses, were as follows as of the
dates shown below (in thousands):
Gross Unrealized
Level
Cost
Gains
Losses
Fair Value
As of December 31, 2019
Money market funds
Commercial paper
Bonds
Mutual funds
Equity investments
1
2
2
1
2
$ 3,460
$ 9,424
$ 44,833
$ 1,052
$ 5,675
$
$
$
$
$
— $
— $
3,460
2
138
53
$
$
$
— $
9,426
(19)
$ 44,952
— $
1,105
— $ (2,853)
$
2,822
As of December 31, 2018
Money market funds
Commercial paper
Bonds
Mutual funds
Equity investments
1
2
2
1
2
$ 13,861
$
4,393
$ 25,922
$
$
795
5,675
$
$
$
$
$
— $
— $ 13,861
— $
— $
4,393
— $
(211)
$ 25,711
— $
(121)
— $ (2,814)
$
$
674
2,861
The above equity investments represent an investment in one
company at December 31, 2019 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 bonds is attributable to a rise in interest rates which
resulted in a lower market price for those securities. As of
December 31, 2019 we had no bond investments in a loss
position for more than 12 months.
At December 31, 2019, the length of time until maturity of the
bonds we currently own ranged from one to 58 months and the
length of time until maturity of the commercial paper ranged
from one to seven months.
(3) Patents and Licenses
Purchased patents and licenses paid for the use of other entities’
patents are amortized over the useful life of the patent or
license. The following tables provide information regarding
patents and licenses (dollars in thousands):
December 31, 2019
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
15.67
$
13,840
$
12,301
December 31, 2018
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
15.67
$
13,840
$
12,181
Aggregate amortization expense for patents and licenses was
$119,000 for both 2019 and 2018. Estimated future
amortization expense for each of the years set forth below
ending December 31 is as follows (in thousands):
2020
2021
2022
2023
2024
$119
$119
$117
$113
$113
(4) Line of Credit
As of December 31, 2019 and 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. 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 0.875 percent (2.64 percent at
December 31, 2019) and is payable monthly. We had no
outstanding borrowings under the credit facility at December
31, 2019 or December 31, 2018. 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, 2019, we were in compliance with all of the
covenants.
14
ATRION 2019 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,
2019
2018
2017
Current — Federal
$
3,508 $
6,405 $
6,244
— State
Deferred — Federal
— State
1,090
4,598
1,660
149
1,809
2,001
8,406
(626)
1
(625)
877
7,121
(1,542)
168
(1,374)
Provision for Income Taxes
$
6,407 $
7,781 $
5,747
Temporary differences and carryforwards which have given rise
to deferred tax liabilities as of December 31, 2019 and 2018 are
as follows (in thousands):
2019
2018
Deferred tax liabilities (assets):
Property, plant and equipment
$
9,697
$
Patents and goodwill
Benefit plans
Inventories
Capital loss carryover
Other
Plus: Valuation allowance
1,756
(2,131)
(350)
(556)
(513)
7,903
593
7,540
1,742
(1,847)
(367)
(572)
(418)
6,078
609
Total deferred tax liabilities
$
8,496 $
6,687
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):
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 percent to 21 percent 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 year ended
December 31, 2017. Also, in 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 in 2017 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. 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 of $1.7
million in 2019 and $1.0 million in 2018.
A reconciliation of the beginning and ending balances of the
total amounts of gross unrecognized tax benefits as required by
ASC 740 is as follows (in thousands):
Gross unrecognized tax benefits at January 1, 2017
$
Decrease in tax positions for prior years
Increase in tax positions for current year
Lapse in statutes of limitation
—
865
—
—
Gross unrecognized tax benefits at December 31, 2017
$
865
Decrease in tax positions for prior years
Increase in tax positions for current year
Lapse in statutes of limitation
25
—
(397)
Gross unrecognized tax benefits at December 31, 2018
$
493
Income tax expense at the
statutory federal income tax rate
Increase (decrease) resulting from:
Year ended December 31,
2019
2018
2017
Decrease in tax positions for prior years
Increase in tax positions for current year
$
9,065
$
8,828
$
14,819
Lapse in statutes of limitation
Gross unrecognized tax benefits at December 31, 2019
$
19
—
(62)
450
State income taxes
978
1,572
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
—
—
(1,470)
(1,212)
(1,700)
(1,000)
662
(630)
(983)
—
As of December 31, 2019, 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.
(412)
(95)
(5,782)
—
—
(4,053)
(16)
(42)
4
—
(373)
61
609
865
240
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, as well as all material
state and local income tax matters, for years through 2015.
Provision for Income Taxes
$
6,407
$
7,781
$
5,747
15
Notes to Consolidated Financial Statements ATRION 2019 ANNUAL REPORT
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 $20,000,
$19,000 and $1,000 at December 31, 2019, 2018 and 2017,
respectively. Tax expense for the years ended December 31,
2019, 2018 and 2017 included a net interest charge of $16,000,
$18,000 and $1,000, respectively.
(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, 2019, there remained
231,765 shares available for repurchase under this program.
There were no stock repurchases during 2019 and 2018.
We increased our quarterly cash dividend payments in
September of each of the past three years. The quarterly
dividend was increased to $1.20 per share in September 2017,
to $1.35 per share in September 2018 and to $1.55 per share in
September 2019. Holders of our stock units earned non-cash
dividend equivalents of $22,000 in 2019, $25,000 in 2018 and
$27,000 in 2017.
(7) Income Per Share
The following is the computation of basic and diluted income
per share:
Year ended December 31,
2019
2018
2017
(in thousands, except per share amounts)
Net Income
$
36,761 $
34,255 $
36,593
Weighted average basic
shares outstanding
Add: Effect of dilutive
securities
Weighted average
diluted shares
outstanding
Net Income Per Share
1,855
1,853
1,846
8
5
11
1,863
1,858
1,857
Basic
Diluted
$
$
19.82 $
18.49 $
19.73 $
18.44 $
19.82
19.71
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 7 and148 shares of common stock for the year
ended December 31, 2019 and 2017, respectively, 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.
(8) Stock Plans
At December 31, 2019, 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, 2019, there
remained 21,858 shares reserved for future stock-based awards
under the 2006 Plan.
A summary of stock option transactions for the year ended
December 31, 2019, is presented below:
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Outstanding at
December 31, 2018
Granted
Exercised
Outstanding at
December 31, 2019
Exercisable at
December 31, 2019
20,000 $
501.03
3.3 years
—
—
—
—
20,000 $
501.03
2.3 years
8,000 $
501.03
2.3 years
16
ATRION 2019 ANNUAL REPORT Notes to Consolidated Financial Statements
All nonvested options outstanding at December 31, 2019 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 2019 and 2018. 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
2019
2018
2017
—
—
—
—
—
—
—
—
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, 2019, was $5.0 million.
The total intrinsic value of exercisable options at December 31,
2019, was $2.0 million.
There were no restricted stock grants during 2019 and 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,
2019, is presented below:
Nonvested Shares
Shares
Weighted
Average Award
Date Fair Value
Per Share
Restricted stock at December 31, 2018
4,720 $
445.47
Granted in 2019
Vested in 2019
—
(1,180) $
Restricted stock at December 31, 2019
3,540 $
—
445.47
445.47
All shares of nonvested restricted stock outstanding at
December 31, 2019 are expected to vest. The total fair value of
restricted stock vested during 2019, 2018 and 2017 was
$994,000, $699,000 and $803,000, respectively.
During 2019, 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 2019, 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, 2019, 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
5,168 $
450.25
—
1,046 $
765.92
9
$
761.76
(151) $
596.18
—
(2,462) $
322.48
(9) $
761.76
3,601 $
623.19
—
Nonvested
Stock Units
Nonvested at
December
31, 2018
Granted
Forfeited
Vested
Nonvested at
December
31, 2019
All nonvested restricted stock units at December 31, 2019 are
expected to vest. The total intrinsic value of all outstanding
stock units which were not convertible at December 31, 2019,
including 487 stock units held for the accounts of non-employee
directors, was $3,072,000. The total fair value of directors’ stock
units that vested during 2019, 2018 and 2017 was $7,000,
$6,000 and $6,000, respectively.
The total value of stock awards to nonemployee directors
awarded under the 2006 Plan was $240,000, $240,000 and
$312,000 in 2019, 2018 and 2017, respectively. These awards
17
Notes to Consolidated Financial Statements ATRION 2019 ANNUAL REPORT
vested immediately at the time of the grants. Compensation
related to stock awards, restricted stock and stock units is based
on the fair market value of the stock on the date of the award.
These fair values are then amortized on a straight-line basis over
the requisite service periods of the entire awards, which is
generally the vesting period. Compensation related to stock
options is based on the fair value of stock options granted using
the Black-Scholes option-pricing formula and a single option
award approach.
For the years ended December 31, 2019, 2018 and 2017, we
recorded stock-based compensation expense as a G&A expense
in the amount of $1,682,000, $1,659,000 and $1,602,000,
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, 2019, 2018 and
2017 was $765,000, $441,000 and $6,342,000, 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, 2019:
Weighted Average
Remaining Years
in Amortization
Period
2.3
2.3
3.7
Unrecognized
Compensation Cost
$
$
1,203,000
1,213,000
1,446,000
3,862,000
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 36
percent of our net revenues in 2019 and 37 percent of our net
revenues in each of 2018 and 2017. We have no assets located
outside the United States.
18
(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 $845,000, $752,000 and
$720,000 in 2019, 2018 and 2017, respectively.
We 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 $3,266,000 and
$1,774,000 at December 31, 2019 and 2018, 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, 2019, we 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
$2.5 million in potential future payments under this settlement as
of December 31, 2019 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,
2019, could have resulted in payments aggregating $4.9 million.
At December 31, 2019, the Company had purchase obligations
totaling $29.7 million with certain suppliers to purchase inventory
for 2020 to be used in the production of the Company’s products.
At December 31, 2019, the Company had lease obligations
totaling $299,000 with certain lessors for equipment and facilities
for 2020.
ATRION 2019 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
$
$
3/31/19
6/30/19
9/30/19
12/31/19
3/31/18
6/30/18
9/30/18
12/31/18
41,614 $
11,037 $
9,438 $
5.09 $
40,103
38,883
34,466
10,966
10,450
8,075
9,664
9,595
8,064
5.21
5.17
4.35
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
5.07
5.18
5.15
4.33
4.57
4.74
4.96
4.17
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 2019 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, 2019 and 2018, 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, 2019, 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,
2019 and 2018, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2019,
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, 2019, based on criteria established in the 2013
Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated March 2, 2020 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.
Critical audit matters
Critical audit matters are matters arising from the current period
audit of the financial statements that were communicated or
required to be communicated to the audit committee and that:
(1) relate to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging,
subjective, or complex judgments. We determined that there are
no critical audit matters.
Grant Thornton LLP
We have served as the Company’s auditor since 2002
Dallas, Texas
March 2, 2020
20
ATRION 2019 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, 2019 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, 2019, our
internal control over financial reporting was effective.
Management’s Report on Internal Control Over Financial Reporting ATRION 2019 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
March 2, 2020
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, 2019, 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, 2019, 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, 2019,
and our report dated March 2, 2020 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 2019 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 2019, approximately 36 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, 2019, we reported revenues
of $155.1 million, operating income of $40.5 million and net
income of $36.8 million.
Results of Operations
Our net income was $36.8 million, or $19.82 per basic and
$19.73 per diluted share, in 2019 compared to $34.3 million,
or $18.49 per basic and $18.44 per diluted share in 2018.
Revenues were $155.1 million in 2019 compared with $152.5
million in 2018.
Annual revenues by product lines were as follows (in thousands):
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
2019
2018
$
72,117 $
54,799
7,124
21,026
70,606
50,904
10,473
20,465
$
155,066 $
152,448
Consolidated revenues of $155 million in 2019 were 2 percent
higher than revenues in 2018. This increase was primarily
related to increased volumes in 2019. In the third quarter of
2019, the United States Food and Drug Administration, or FDA,
issued a caution concerning a nationwide shortage of medical
devices due to issues with contract sterilizers. Specifically, two
significant contract sterilization facilities utilized by many
medical device companies were shut down because of
environmental concerns - one permanently and one temporarily.
This loss of sterilization capacity caused significant delays at the
country’s remaining sterilization facilities. Due to this loss of
capacity, we experienced delays in some of our sales during the
third and fourth quarters of 2019. The sterilization capacity
shortage affecting our products was resolved in early 2020 as
we were able to validate the use of a new sterilization facility.
We anticipate most of the sales that were delayed in 2019 will
be completed and products shipped by the end of the second
quarter of 2020.
Our cost of goods sold was $84.4 million in 2019 compared
with $80.7 million in 2018. Increased sales volumes and
increased manufacturing overhead expenses partially offset
by favorable product sales mix, improved manufacturing
efficiencies and the impact of continued cost improvement
projects were the primary contributors to the increase in cost
of goods sold in 2019 compared to 2018.
Gross profit in 2019 was $70.7 million compared with $71.8
million in 2018. Our gross profit was 46 percent of revenues
in 2019 compared with 47 percent of revenues in 2018. The
decrease in gross profit percentage in 2019 from 2018 was
primarily related to an increase in manufacturing overhead
expenses.
23
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2019 ANNUAL REPORT Operating expenses were $30.2 million in 2019 and $30.1
million in 2018. R&D expenses decreased $475,000 in 2019 as
compared with 2018 primarily as a result of decreased costs in
supplies and outside services. R&D expenses consist primarily of
salaries and other related expenses of our R&D personnel as well
as costs associated with regulatory matters. In 2019, selling
expenses increased $472,000 compared with 2018 primarily as
a result of increased salaries and commissions partially offset by
reduced travel costs and outside services. Selling expenses
consist primarily of salaries, commissions and other related
expenses for sales and marketing personnel, marketing,
advertising and promotional expenses. General and
Administrative, or G&A, expenses increased $91,000 in 2019 as
compared to 2018 primarily as a result of 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.
Our operating income for 2019 was $40.5 million compared
with $41.7 million in 2018. Operating income was 26 percent
of revenues in 2019 and 27 percent of revenues in 2018. A
decrease in 2019 gross profit primarily attributed to increased
manufacturing overhead costs and delays in shipments due to
third-party sterilization capacity issues adversely affected
operating income for 2019 as compared to the previous year.
Interest and Dividend income for 2019 was $2.5 million
compared with $1.7 million in 2018. Increased levels of
investments, increased interest rates and increased dividends on
our equity investments were the primary reasons for the
increase in 2019 compared to 2018.
Other Investment Income was $0.2 million in 2019 compared
to $1.4 million loss in 2018. The improvement from 2018 to
2019 was primarily related to unrealized gains on equity
investments as a result of an increase in market value on the
investments. In 2018, our equity investments had a decline in
market value.
Income tax expense in 2019 totaled $6.4 million compared
with $7.8 million in 2018. The effective tax rates were 14.8
percent in 2019 and 18.5 percent in 2018. The lower effective
tax rate in 2019 was primarily related to increased tax benefits
from foreign-derived intangible income deduction, R&D tax
credits, excess tax benefits related to employee stock
compensation and lower state income taxes. We expect our
effective tax rate for 2020 to be approximately 18.0 percent.
For information on the Company’s results of operations for the
fiscal year ended December 31, 2017 and a comparison of that
information to that for the year ended December 31, 2018,
Management’s Discussion and Analysis of Financial Condition
and Results of Operations in our Annual report for the year
ended December 31, 2018, which was filed with the U.S.
Securities and Exchange Commission on February 26, 2019.
24
Liquidity and Capital Resources
As of December 31, 2019, 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.
The credit facility is secured by substantially all of 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 0.875 percent (2.64 percent at December
31, 2019) and is payable monthly. We had no outstanding
borrowings under the credit facility at December 31, 2019 or
December 31, 2018. 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, 2019, we were
in compliance with all of these covenants.
At December 31, 2019, we had a total of $100.6 million in cash
and cash equivalents, short-term investments and long-term
investments, an increase of $11.1 million from December 31,
2018. The principal contributor to this increase was positive
cash flows from operations.
Cash flows provided by operations of $42.5 million in 2019
were primarily comprised of net income plus the net effect of
non-cash expenses. At December 31, 2019, we had working
capital of $121.1 million, including $45.0 million in cash and
cash equivalents and $23.8 million in short-term investments.
The $9.0 million increase in working capital during 2019 was
primarily related to increases in short-term investments and
inventories partially offset by decreases in cash and cash
equivalents. The net increase in short-term investments was
primarily in bonds and commercial paper. The increase in
inventories was primarily related to delays in shipments to
customers due to the sterilization capacity issue from the
shutdown of two of our contract sterilization facilities and the
replenishment of inventories to levels required for operational
effectiveness. 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
$20.4 million in 2019, compared with $17.5 million in 2018.
These expenditures were primarily for machinery and
equipment. Purchases of investments totaled $83.7 million in
2019, compared to $28.5 million in 2018. Proceeds from
maturities of investments totaled $59.3 million in 2019 and
$40.9 million in 2018. We expect 2020 capital expenditures,
primarily machinery and equipment, to be greater than the
average amounts expended during each of the past three years.
We paid cash dividends totaling $10.8 million and $9.5 million
during 2019 and 2018, respectively. We expect to fund future
ATRION 2019 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations dividend payments with cash flows from operations. No treasury
stock was purchased in 2019 or 2018.
The table below summarizes debt, lease and other contractual
obligations outstanding at December 31, 2019:
Payments Due by Period
Total
2020
(in thousands)
2021-
2022
2023-
2024
2025 and
thereafter
$
567 $
299 $ 268
$
— $
—
Contractual
Obligations
Lease
Obligations
Purchase
Obligations
$ 30,004
$ 29,691 $ 280
Total
$ 30,571 $ 29,990 $ 548
$
$
33 $
33 $
—
—
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, to continue
increasing in 2020.
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 January 2016, the FASB issued ASU 2016-01 Financial
Instruments – Overall 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 our consolidated balance sheets by reclassifying
the balance of our Accumulated Other Comprehensive Loss in
the stockholders’ equity section of the consolidated balance
sheets to Retained Earnings. The balance reclassified of
$1,215,000 was a result of prior-period unrealized losses from
our equity investments.
In 2019, we recorded a net unrealized gain of $135,000 as a
result of a net increase in market value of our equity
investments during the year. In 2018 we recorded a 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. These
gains and losses are reflected in other investment income (loss)
in our Consolidated Statements of Income.
In June 2016, the FASB issued ASU No. 2016-13, Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments, which amends the impairment
model by requiring entities to use a forward-looking approach
based on expected losses rather than incurred losses to estimate
credit losses on certain types of financial instruments, including
trade receivables. This may result in the earlier recognition of
allowances for losses. The ASU is effective for public entities for
fiscal years beginning after December 15, 2019. In November
2018, the FASB issued ASU No. 2018-19, Codification
Improvements to Topic 326, Financial Instruments—Credit
Losses, which provided additional implementation guidance on
the previously issued ASU. Management has reviewed the
guidance, performed an assessment of this guidance and
expects the outcome of adoption of this standard to be
immaterial to the financial statements.
From time to time new accounting pronouncements applicable
to us are issued by the FASB, or other standards setting bodies,
which we will adopt as of the specified effective date. Unless
otherwise discussed, we believe the impact of recently issued
standards that are not yet effective will not have a material
impact on our consolidated financial statements upon adoption.
Critical Accounting Policies
The discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
In the preparation of these financial statements, we make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. We believe the following
discussion addresses our most critical accounting policies and
estimates, which are those that are most important to the
portrayal of our financial condition and results and require
management’s most difficult, subjective and complex
25
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2019 ANNUAL REPORT 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.
Inventories are stated at the lower of cost (first-in, first-out
method) or net realizable value. Inventories are carried as
standard cost, which approximates actual cost, and includes
material, labor and allocated overhead. Standard costs are
reviewed at least quarterly by management, or more often in
the event circumstances indicate a change in cost has occurred.
Adjustments to the cost basis of our inventory are made for
excess and obsolete items based on usage, orders and
technological obsolescence.
During 2019, 2018 and 2017, 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.
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 we
determine the receivable will not be collected. If circumstances
change, our estimates of the collectability of amounts could be
changed by a material amount.
We are required to estimate our provision for income taxes and
uncertain tax positions in each of the jurisdictions in which we
operate. This process involves estimating our actual current tax
exposure, including assessing the risks associated with tax
audits, together with assessing temporary differences resulting
from the different treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included within the balance sheet. We
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and, to the extent we
believe that recovery is more likely than not, do not establish a
valuation allowance. In the event that actual results differ from
these estimates, the provision for income taxes could be
materially impacted.
We assess the impairment of our long-lived identifiable assets,
excluding goodwill which is tested for impairment as explained
below, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. This review is
based upon projections of anticipated future cash flows.
Although we believe that our estimates of future cash flows are
reasonable, different assumptions regarding such cash flows or
changes in our business plan could materially affect our
evaluations. No such changes are anticipated at this time.
26
ATRION 2019 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 competitors.
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
Our cash deposits 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 money market funds, 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 as
compared with cash deposits. 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.
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 the following: the
timing of FDA clearance for our MPS 3 and its introduction in the
U.S.; the pace of new product development and launches;
expansion of market share as products come to market; focus on
talent discovery, development and management; the timing of
the completion of sales and deliveries of products that were
delayed due to a shortage in third-party sterilization capacity;
our effective tax rate for 2020; our 2020 capital expenditures;
funding future dividend payments with cash flows from
operations; the availability of equity and debt financing; our
ability to meet our cash requirements for the foreseeable future;
the impact on our consolidated financial statement of recently
issued accounting standards when we adopt those standards;
and increases in 2020 in cash, cash equivalents and investments.
Words such as “expects,” “believes,” “anticipates,” “intends,”
“should,” “plans,” and variations of such words and similar
expressions are intended to identify such forward-looking
statements. Forward-looking statements contained herein
involve numerous risks and uncertainties, and there are a number
of factors that could cause actual results or future events to differ
materially, including, but not limited to, the following: changing
economic, market and business conditions; acts of war or
terrorism or a pandemic; 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.
27
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2019 ANNUAL REPORT
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
2019
2018
2017
2016
2015
$
155,066 $
152,448 $
146,595 $
143,487 $
145,733
40,529
36,761
10,853
41,707
34,255
9,123
41,274
36,593
8,677
39,126
27,581
8,953
$
$
19.73 $
18.44 $
19.71 $
14.85 $
5.80 $
5.10 $
4.50 $
3.90 $
1,863
1,858
1,857
1,857
42,510
28,925
8,823
15.47
3.30
1,870
$
262,031 $
231,216 $
203,780 $
181,942 $
164,336
—
—
—
—
—
28
ATRION 2019 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 14, 2020, we had 109 record holders, and approximately 8,200 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 2019 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 2019 ANNUAL REPORT 29
ATRION
CORPORATION
One Allentown Parkway
Allen, Texas 75002
www.atrioncorp.com
972.390.9800
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