Annual Report 2020
A focus on what’s essential
2020
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.
Financial Highlights
For the Year Ended
December 31
Revenues
Operating Income
Net Income
Income per Diluted Share
Weighted Average Diluted
Shares Outstanding
$
$
$
$
2020
2019
As of
December 31
147,591,000
$ 155,066,000
Total Assets
35,668,000
32,115,000
17.44
$
$
$
40,529,000
36,761,000
Cash and
Investments
2020
266,890,000
87,915,000
2019
262,031,000
100,586,000
$
$
$
$
19.73
Long-term Debt
—
—
1,841,000
1,863,000
Stockholders’
Equity
$
240,442,000
$
237,870,000
2016
2017
2018
2019
2020
$14.85
$19.71
$18.44
2016
2017
2018
$19.73
2019
$17.44
2020
$143
$147
$152
$155
$148
2016
2017
2018
2019
2020
$39.1
$41.3
$41.7
$40.5
$35.7
INCOME PER DILUTED SHARE
REVENUES (IN MILLIONS)
OPERATING INCOME (IN MILLIONS)
Comparison of 5-Year Cumulative Total Return
Among Atrion Corporation, Russell 2000 Index and SIC Code Index
Atrion Corporation
Russell 2000 Index
SIC Code Index
400
300
s
r
a
l
l
o
D
200
100
0
The graph set forth at left compares the total
cumulative return for the five-year period ended
December 31, 2020 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, 2015 in our
common stock, the Russell 2000 Index and the SIC
Code Index and dividends were reinvested.
2015
2016
2017
2018
2019
2020
Company/Index
Atrion Corporation
Russell 2000 Index
SIC Code Index
2015
$100.00
$100.00
$100.00
2016
$134.26
$121.31
$116.43
2017
$168.21
$139.08
$144.67
2018
$199.25
$123.76
$140.90
2019
$203.54
$155.35
$169.11
2020
$175.78
$186.36
$184.59
1
ATRION 2020 ANNUAL REPORT To our stockholders,
2020 was a year in which the true meaning of essential became apparent. What’s essential is the
philosophy that guides us: a relentless focus on building a business to withstand any storm. And
what’s essential is the resolute purpose and commitment of our people.
Last year, our employees were legally designated as essential to fighting the pandemic. This was
just the law recognizing what I’ve always known about my co-workers. Despite the fear, despite
the need to care for loved ones and to supervise remote learning for their kids, our people made
sure that our facilities in Alabama, Florida, and Texas kept frontline healthcare workers supplied
with our products. For example, we have always made a critical component for ventilators. As the
government called for the production of 50,000 ventilators in 90 days, our teams rose to this
enormous challenge. Work cells were redesigned, equipment was retooled, and a massive logistics
effort was launched. Similarly, as hospitals pleaded for personal protective equipment,
a group of employees came to work over a weekend, purchased the appropriate equipment and
taught themselves how to make face shields. In less than two weeks, thousands of face shields
were made, all of which were donated to hospitals and first responders. This is the quiet, but
critical, dedication of my co-workers.
Our work was supported by a business foundation built long before the pandemic. Just as we
weathered the worst financial crisis since the Great Depression back in 2008, we withstood the
devastation of 2020 with no debt and plenty of cash and other liquid investments. This is not to
say the year was an easy one. There was heavy demand for our critical care products, but our
portfolio also includes a number of products used in surgeries that were deferred as hospitals
reserved beds for COVID-19 patients and individuals postponed procedures, opting to remain in
quarantine at home. At the same time, our aviation component business also saw deep declines
as air travel declined dramatically.
2
ATRION 2020 ANNUAL REPORT While sales slowed, our pace of investing in our future growth did not.
Because the core of our business approach is sensible investment in both
proven and new product lines, R&D spending increased, as did investments
in equipment to enhance our quality, capacity, and efficiency. In fact, 2020
saw record levels of capital investment. Confident in our future growth, we
began the process of substantially expanding one of our facilities. We also
further refined our unparalleled MPS 3 technology, receiving FDA clearance
to launch two different models in 2020. The expansion of our MPS platform
will position us to stay ahead of the market and meet future demand.
Finally, for 17 years in a row, our stockholders were rewarded with a double-
digit percentage increase in dividends.
I’m exceedingly proud of the kindness and dedication of our people.
I equally appreciate your continued belief in how we execute on our
business philosophy.
2020 REVENUES BY PRODUCT LINE
3%
13%
51%
33%
Fluid Delivery
75,228,000
$
Cardiovascular
48,524,000
$
Other
$
19,139,000
Opthalmology
4,700,000
$
51%
33%
13%
3%
Respectfully,
David A. Battat
President and CEO
3
ATRION 2020 ANNUAL REPORT
ATRION CORPORATION CONSOLIDATED BALANCE SHEETS
As of December 31, 2020 and 2019
Assets:
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $41 and $36 in 2020 and 2019, 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 $12,419 and $12,301 in 2020 and 2019, respectively
Goodwill
Other
Total Assets
The accompanying notes are an integral part of these consolidated financial statements.
2020
2019
(in thousands)
$
22,450
$
19,258
16,445
50,298
3,868
112,319
46,207
218,912
123,977
94,935
1,421
9,730
2,278
13,429
45,048
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
$
266,890 $
262,031
4
ATRION 2020 ANNUAL REPORT
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable
Accrued liabilities
Accrued income and other taxes
Total Current Liabilities
Line of credit
Other Liabilities and Deferred Credits:
Deferred income taxes
Other
Total Liabilities
Commitments and Contingencies
Stockholders’ Equity:
Common stock, par value $.10 per share, authorized 10,000 shares, issued 3,420 shares
Additional paid-in capital
Retained earnings
Treasury shares, 1,594 shares in 2020 and 1,565 shares in 2019, at cost
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
2020
2019
(in thousands)
$
6,635
$
6,565
436
13,636
—
10,768
2,044
12,812
26,448
342
53,527
337,700
(151,127)
240,442
5,707
5,148
419
11,274
—
8,496
4,391
12,887
24,161
342
52,043
317,745
(132,260)
237,870
$
266,890
$
262,031
5
ATRION 2020 ANNUAL REPORT
ATRION CORPORATION CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, 2020, 2019 and 2018
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
Income before Provision for Income Taxes
Provision for Income Taxes
Net Income
Net Income Per Basic Share
Weighted Average Basic Shares Outstanding
Net Income Per Diluted Share
Weighted Average Diluted Shares Outstanding
Dividends Per Common Share
The accompanying notes are an integral part of these consolidated financial statements.
2020
2019
2018
(in thousands, except per share amounts)
$
147,591
$
155,066
$
152,448
81,428
66,163
7,520
17,330
5,645
30,495
35,668
1,444
1,355
84,378
70,688
8,813
16,308
5,038
30,159
40,529
2,487
152
—
—
38,467
(6,352)
32,115
17.49
1,836
$
$
43,168
(6,407)
36,761
19.82
1,855
$
$
17.44
$
19.73
$
1,841
1,863
6.60
$
5.80
$
$
$
$
$
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
18.44
1,858
5.10
6
ATRION 2020 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2020, 2019 and 2018
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Stock-based compensation
Net change in unrealized gains and losses on investments
Net change in accrued interest, premiums, and discounts on investments
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other non-current assets
Accounts payable and accrued liabilities
Accrued income and other taxes
Other non-current liabilities
Cash Flows From Investing Activities:
Property, plant and equipment additions
Purchase of investments
Proceeds from sale of investments
Proceeds from maturities of investments
Cash Flows From Financing Activities:
Shares tendered for employees’ withholding taxes on stock-based compensation
Purchase of treasury stock
Dividends paid
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash paid for:
Income taxes, net of refunds
The accompanying notes are an integral part of these consolidated financial statements.
2020
2019
2018
(in thousands)
$
32,115
$
36,761
$
34,255
11,652
2,282
1,731
(1,093)
112
21
10,853
1,809
1,682
(135)
(281)
(6)
9,123
(625)
1,659
1,399
47
(18)
46,820
50,683
45,840
2,438
(8,205)
(1,323)
(275)
2,095
17
(2,347)
38,970
(21,886)
(45,768)
899
35,923
(30,832)
(55)
(18,831)
(12,100)
(30,986)
(22,598)
45,048
(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
$
$
22,450
$
45,048
$
58,753
5,565
$
4,178
$
9,858
7
ATRION 2020 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the year ended December 31, 2020, 2019 and 2018 (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 31, 2018
1,852
$ 342
1,568
$ (131,663)
$ 48,730
$
(1,215) $ 268,194
$ 184,388
Net income
Reclass from adopting ASU 2016-01
Stock-based compensation transactions
1
(1)
Shares surrendered in stock transactions
Dividends
26
(90)
1,661
34,255
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
Cumulative change in accounting principle
(36)
(36)
Adjusted Balance at January 1, 2020
1,855
$ 342
1,565
$ (132,260)
$ 52,043
$ 0
$ 317,709
$ 237,834
Net income
Stock-based compensation transactions
Shares surrendered in stock transactions
19
(55)
1,484
Purchase of treasury stock
(29)
29
(18,831)
Dividends
32,115
32,115
1,503
(55)
(18,831)
(12,124)
(12,124)
Balances, December 31, 2020
1,826
$ 342
1,594
$ (151,127)
$ 53,527
$
0
$ 337,700
$ 240,442
The accompanying notes are an integral part of this consolidated financial statement.
8
ATRION 2020 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,
2020 and 2019 are as follows (in thousands):
Cash and Cash Equivalents:
Cash deposits
Money market funds
Commercial paper
December 31,
2020
2019
$
16,628
$
38,942
4,822
1,000
3,460
2,646
Total cash and cash equivalents
$
22,450
$
45,048
Short-term investments:
Commercial paper (held-to-maturity)
$
5,178
$
Bonds (held-to-maturity)
Allowance for credit losses
14,101
(21)
6,778
16,988
—
Total short-term investments
$
19,258
$
23,766
Long-term investments:
Mutual funds (available for sale)
$
563
$
1,105
Bonds (held-to-maturity)
Allowance for credit losses
Equity securities (available for sale)
Total long-term investments
Total cash, cash equivalents and
short and long-term investments
$
$
41,619
(52)
4,077
27,845
—
2,822
46,207
$
31,772
87,915
$
100,586
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 2020 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 (in thousands):
December 31,
2020
2019
Raw materials
Work in process
Finished goods
Total inventories
$
$
20,308
$
11,339
18,651
50,298
$
18,157
8,525
15,411
42,093
Accounts Payable
We reflect disbursements as trade accounts payable until such
time as payments are presented to our bank for payment. At
December 31, 2020 and 2019, disbursements totaling
approximately $1,434,000 and $1,236,000, 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
cost reported on an employer’s tax return for equity instruments
10
in excess of the compensation cost for those instruments
recognized for financial reporting purposes.
During the years ended December 31, 2020 and 2019, we
made quarterly payments in excess of federal and state income
taxes due of approximately $1,525,000 and $4,000,
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,
2020
2019
Useful Lives
$
5,511
$
35,114
5,511
34,582
—
30-40 yrs
178,287
160,897
3 -15 yrs
$
218,912
$
200,990
Land
Buildings
Machinery and
equipment
Total property, plant
and equipment
Depreciation expense of $11,533,000, $10,733,000 and
$9,003,000 was recorded for the years ended December 31,
2020, 2019 and 2018, 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., (2)
Halkey-Roberts Corporation and (3) Quest Medical, Inc. The
ATRION 2020 ANNUAL REPORT Notes to Consolidated Financial Statements total carrying amount of goodwill in each of the years ended
December 31, 2020 and 2019 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 (in
thousands):
December 31,
2020
2019
Accrued payroll and related expenses
$
5,656 $
4,233
Accrued vacation
Other accrued liabilities
Total accrued liabilities
276
633
311
604
$
6,565
$
5,148
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 2020, 2019 and 2018 is as follows (in
thousands):
Year ended December 31,
2020
2019
2018
$
85,682
$
98,496
$
95,757
9,712
7,996
8,898
52,197
48,574
47,793
United States
Germany
Other countries less
than 5% of revenues
Total
$
147,591
$
155,066
$
152,448
A summary of revenues by product line for 2020, 2019 and
2018 is as follows (in thousands):
Year ended December 31,
2020
2019
2018
$
75,228
$
72,117
$
70,606
48,524
4,700
19,139
54,799
7,124
21,026
50,904
10,473
20,465
$
147,591
$
155,066
$
152,448
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 2020 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 four 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, 2020 and 2019 the balance
totaled $315,000 and $398,000, 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 three leases in total for equipment and
facilities used internally, which we account for as operating
leases. At December 31, 2020, our right-of-use asset balance
was $295,000 and our lease liability at December 31, 2020 for
these leases was $272,000. The monthly expense of $27,000
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.
Liability-classified awards
The Company classifies certain awards that can or will be settled
in cash as liability awards. The fair value of a liability-classified
award is determined on a quarterly basis beginning at the grant
date until final vesting. Changes in the fair value of liability-
classified awards are recorded to general and administrative
expense over the vesting period of the award.
New Accounting Pronouncements
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. The ASU introduced a new credit loss
methodology, Current Expected Credit Losses (CECL), which
requires earlier recognition of credit losses, while also providing
additional transparency about credit risk. Since its original
issuance in 2016, the FASB has issued several updates to the
original ASU.
The CECL methodology utilizes a lifetime “expected credit loss”
measurement objective for the recognition of credit losses for
loans, held-to-maturity securities and trade and other
receivables at the time the financial asset is originated or
acquired. The expected credit losses are adjusted each period
for changes in expected lifetime credit losses. The methodology
ATRION 2020 ANNUAL REPORT Notes to Consolidated Financial Statements replaces the multiple existing impairment methods in current
GAAP, which generally require that a loss be incurred before it
is recognized.
On January 1, 2020, we adopted the guidance prospectively
with a cumulative adjustment to retained earnings. Atrion has
not restated comparative information for 2019 and, therefore,
the comparative information for 2019 is reported under the
old model and is not comparable to the information presented
for 2020.
At adoption, we recognized an incremental allowance for credit
losses on our allowance for credit losses related to our held-to-
maturity debt securities of approximately $42,000 and our
trade accounts receivable of approximately $4,000.
Additionally, we recorded an approximately $36,000 decrease
in retained earnings associated with the increased estimated
credit losses on our trade accounts receivable and investments.
The impact on our operating results for 2020 from our adoption
of this pronouncement was not material.
From time to time new accounting pronouncements applicable
to us are issued by the FASB, or other standards setting bodies,
which we will adopt as of the specified effective date. Unless
otherwise discussed, we believe the impact of recently issued
standards that are not yet effective will not have a material
impact on our consolidated financial statements upon adoption.
Fair Value Measurements
Accounting standards use a three-tier fair value hierarchy which
prioritizes the inputs used in measuring fair value. These tiers
are: Level 1, defined as observable inputs such as quoted prices
in active markets; Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in which
little or no market data exists therefore requiring an entity to
develop its own assumptions.
As of December 31, 2020 and 2019, 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,
2020, 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, 2020 and 2019, we had allowances
for doubtful accounts of approximately $41,000 and $36,000,
respectively. The carrying amount of the receivables
approximates their fair value. We had two customers which
accounted for 12% each of our accounts receivable as of
December 31, 2020 and one customer which accounted for
12% of our accounts receivable as of December 31, 2019.
(2) Investments
As of December 31, 2020 and 2019, 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. The amortized cost
and fair value of our investments, and the related gross
13
Notes to Consolidated Financial Statements ATRION 2020 ANNUAL REPORT 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, 2020
Money market funds
Commercial paper
Bonds
Mutual funds
Equity investments
1
2
2
1
2
$ 4,822
$ 6,178
$ 55,720
$
599
$ 5,675
$
$
$
$
$
— $
— $
4,822
— $
— $
6,178
505
$
(44)
$ 56,181
— $
(36) $
563
— $ (1,598)
$
4,077
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
The above equity investments represent an investment in one
company at December 31, 2020 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. As of December
31, 2020 we had no bond investments in a loss position for more
than 12 months.
The following table summarizes the amortized cost of our
held-to-maturity bonds at December 31, 2020, aggregated by
credit quality indicator (in thousands):
Held-to-Maturity Bonds
Credit Quality
Indicators
Asset
Backed
Bonds
Fed Govt.
Bonds/Notes
Municipal
Bonds
Corporate
Bonds
Totals
AAA/AA/A $
1,413 $
3,222 $
637 $ 32,126 $ 37,398
BBB/BB
—
—
— 18,322
18,322
Total
$
1,413 $
3,222 $
637 $ 50,448 $ 55,720
(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, 2020
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
15.67
$
13,840
$
12,419
December 31, 2019
Weighted Average
Original Life (years)
Gross Carrying
Amount
Accumulated
Amortization
15.67
$
13,840
$
12,301
At December 31, 2020, the length of time until maturity of the
bonds we currently own ranged from one to 51 months and the
length of time until maturity of the commercial paper ranged
from one to nine months.
Aggregate amortization expense for patents and licenses was
$119,000 for both 2020 and 2019. Estimated future
amortization expense for each of the years set forth below
ending December 31 is as follows (in thousands):
Topic 326 utilizes a lifetime “expected credit loss” measurement
objective for the recognition of credit losses for held-to-maturity
securities at the time the financial asset is originated or acquired.
The expected credit losses are adjusted each period for changes
in expected lifetime credit losses. Our credit loss calculations for
held-to-maturity securities are based upon historical default and
recovery rates of bonds rated with the same rating as our
portfolio. We also apply an adjustment factor to these credit loss
calculations based upon our assessment of the expected impact
from current economic conditions on our investments, including
the impact of COVID-19. We monitor the credit quality of debt
securities classified as held-to-maturity through the use of their
respective credit ratings and update them on a quarterly basis
with our latest assessment completed on December 31, 2020.
During the year 2020, our allowance for credit losses related to
short-term and long-term investments increased by $12,000 and
$18,000, respectively.
2021
2022
2023
2024
2025
$119
$117
$113
$113
$112
(4) Line of Credit
As of December 31, 2020 and 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. On February 12, 2021 this credit facility was amended
to, among other things, extend the date for advances to
February 28, 2024. 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 (1.035 percent at
December 31, 2020) and is payable monthly. We had no
outstanding borrowings under the credit facility at December 31,
2020 or December 31, 2019. 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,
2020, we were in compliance with all of the covenants.
14
ATRION 2020 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,
2020
2019
2018
Current — Federal
$
3,166 $
3,508 $
— State
Deferred — Federal
— State
904
4,070
2,111
171
2,282
1,090
4,598
1,660
149
1,809
6,405
2,001
8,406
(626)
1
(625)
At December 31, 2020, our deferred tax valuation allowance of
$580,000 primarily related to a deferred tax asset for a
remaining capital loss carryover deduction of $2.6 million which
will expire in 2021 if not utilized.
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, 2018
$
865
Increase in tax positions for prior years
Increase in tax positions for current year
Lapse in statutes of limitation
25
—
(397)
Provision for Income Taxes
$
6,352 $
6,407 $
7,781
Gross unrecognized tax benefits at December 31, 2018
$
493
Temporary differences and carryforwards which have given rise
to deferred tax liabilities as of December 31, 2020 and 2019 are
as follows (in thousands):
Increase in tax positions for prior years
Increase in tax positions for current year
Lapse in statutes of limitation
2020
2019
Gross unrecognized tax benefits at December 31, 2019
$
19
—
(62)
450
8
—
(458)
Increase in tax positions for prior years
Increase in tax positions for current year
Lapse in statutes of limitation
Gross unrecognized tax benefits at December 31, 2020
$
—
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 2016.
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
and $19,000 at December 31, 2019 and 2018, respectively. Tax
expense for the years ended December 31, 2020, 2019 and 2018
included a net interest benefit of $35,000, $16,000 and $18,000,
respectively.
Deferred tax liabilities (assets):
Property, plant and equipment
$
11,532
$
Patents and goodwill
Benefit plans
Inventories
Capital loss carryover
Other
Plus: Valuation allowance
1,775
(1,976)
(420)
(544)
(179)
10,188
580
9,697
1,756
(2,131)
(350)
(556)
(513)
7,903
593
Total deferred tax liabilities
$
10,768 $
8,496
Total income tax expense differs from the amount that would
be provided by applying the statutory federal income tax rate to
pretax earnings as illustrated below (in thousands):
Income tax expense at the
statutory federal income tax rate
Increase (decrease) resulting from:
State income taxes
R&D tax credits
Foreign-derived intangible
income deduction
Excess tax benefit from
stock compensation
Change in valuation
allowance
Year ended December 31,
2020
2019
2018
$
8,078 $
9,065 $
8,828
839
(1,589)
978
(1,470)
1,572
(1,212)
(1,051)
(1,700)
(1,000)
(81)
(13)
(412)
(16)
(95)
—
(373)
Uncertain tax positions
(450)
(42)
Other, net
Provision for Income Taxes
$
6,352
$
6,407 $
7,781
619
4
61
15
Notes to Consolidated Financial Statements ATRION 2020 ANNUAL REPORT
(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, 2020, there remained
202,018 for repurchasing under this program. As of December
31, 2019, there remained 231,765 shares available for
repurchase under this program. During 2020 we repurchased a
total of 29,747 shares of our common stock in the open-market.
There were no stock repurchases during 2019 or 2018.
We increased our quarterly cash dividend payments in September
of each of the past three years. The quarterly dividend was
increased to $1.35 per share in September 2018, to $1.55 per share
in September 2019 and to $1.75 per share in September 2020.
Holders of our stock units earned non-cash dividend equivalents of
$24,000 in 2020, $22,000 in 2019 and $25,000 in 2018.
(7) Income Per Share
The following is the computation of basic and diluted income
per share:
Year ended December 31,
2020
2019
2018
(in thousands, except per share amounts)
Net Income
$
32,115 $
36,761 $
34,255
Weighted average basic
shares outstanding
Add: Effect of dilutive
securities
Weighted average diluted
shares outstanding
Net Income Per Share
1,836
1,855
1,853
5
8
5
1,841
1,863
1,858
Basic
Diluted
$
$
17.49 $
19.82 $
17.44 $
19.73 $
18.49
18.44
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 six, seven and 501 shares of common stock for the
years ended December 31, 2020, 2019 and 2018, respectively,
were excluded from the computation of weighted average
diluted shares outstanding because their effect would have been
anti-dilutive.
16
(8) Stock-based Compensation
At December 31, 2020, 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 were reserved for awards. The purchase price of
shares issued on the exercise of options were required to 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, 2020, no
future stock-based awards were permitted under the 2006 Plan.
A summary of stock option transactions for the year ended
December 31, 2020, is presented below:
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Outstanding at
December 31, 2019
Granted
Exercised
Outstanding at
December 31, 2020
Exercisable at
December 31, 2020
20,000 $
501.03
2.3 years
—
—
—
—
20,000 $
501.03
1.3 years
12,000 $
501.03
1.3 years
All nonvested options outstanding at December 31, 2020 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 2020 and 2019.
ATRION 2020 ANNUAL REPORT Notes to Consolidated Financial Statements
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, 2020, was $2.8 million.
The total intrinsic value of exercisable options at December 31,
2020, was $1.7 million.
There were no restricted stock grants during 2020 and 2019.
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,
2020, is presented below:
Nonvested Shares
Shares
Weighted
Average Award
Date Fair Value
Per Share
Restricted stock at December 31, 2019
3,540 $
445.47
Granted in 2020
Vested in 2020
—
(1,180) $
Restricted stock at December 31, 2020
2,360 $
—
445.47
445.47
All shares of nonvested restricted stock outstanding at
December 31, 2020 are expected to vest. The total fair value of
restricted stock vested during 2020, 2019 and 2018 was
$762,000, $994,000 and $699,000, respectively.
During 2020, restricted stock units were added to certain
employee accounts under the 2006 Plan as dividend
equivalents. All of our restricted stock units granted under the
2006 Plan 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 restricted 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 restricted stock units earn dividends in the
form of additional units. During 2020, 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 Director.
A summary of changes in stock units for the year ended
December 31, 2020, 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
3,601 $
623.19
33 $
635.04
(40) $
766.48
—
16
—
$
711.75
(479) $
388.02
(16) $
711.75
3,115 $
657.70
—
Nonvested
Stock Units
Nonvested at
December
31, 2019
Added
Forfeited
Vested
Nonvested at
December
31, 2020
All nonvested restricted stock units set forth above at December
31, 2020 are expected to vest. The total intrinsic value of these
outstanding stock units which were not convertible at December
31, 2020, including 503 stock units held for the accounts of
non-employee directors, was $2,324,000. The total fair value of
directors’ stock units that vested during 2020, 2019 and 2018
was $11,000, $7,000 and $6,000, respectively.
In addition to the above, during 2020 we granted 3,865 restricted
stock units to three employees outside of the 2006 Plan that will
be settled in cash and are treated as liability-classified awards.
The grant-date fair value per unit for these awards was $646.90.
No grants of this type were made outside the 2006 Plan prior to
2020. These units will vest 20 percent each year over a five-year
period beginning in 2021. Changes in the fair value of these
awards are recorded to G&A expense over the vesting period of
the award. The liability recorded for these units is adjusted to the
current market value at the end of each reporting period. At
December 31, 2020, none of these units had vested and our
recorded liability for these units was $250,000. The intrinsic value
of these units at December 31, 2020 was $2,496,000 including
accrued amounts for dividend equivalents.
There were no stock awards to nonemployee directors under the
2006 Plan in 2020. The total value of stock awards to
nonemployee directors awarded under the 2006 Plan was
$240,000 in each of 2019 and 2018. These awards vested
immediately at the time of the grants. Compensation related to
stock awards, restricted stock and stock units that are treated as
equity-classified awards 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.
17
Notes to Consolidated Financial Statements ATRION 2020 ANNUAL REPORT
(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 $917,000, $845,000 and
$752,000 in 2020, 2019 and 2018, respectively.
The Company has a Nonqualified Deferred Compensation Plan
for certain key management or highly-compensated employees.
The plan allows for the deferral of salary and bonus
compensation until retirement or other specified payment
events occur. Employees’ deferred compensation amounts are
deemed to be invested in certain investment funds, indexes or
vehicles selected by our Compensation Committee and
designated by each participant and their deferral balances are
adjusted for earnings based upon the performance of these
deemed investments. Our deferred compensation obligation
under the plan was $1,544,000 and $3,266,000 at December
31, 2020 and 2019, respectively. These amounts are reflected
in “Other Liabilities and Deferred Credits” in the accompanying
consolidated balance sheets.
For the years ended December 31, 2020, 2019 and 2018, we
recorded stock-based compensation expense as a G&A expense
in the amount of $1,731,000, $1,682,000 and $1,659,000,
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, 2020, 2019
and 2018 was $444,000, $765,000 and $441,000, respectively.
These amounts include excess tax benefits in each year.
Unrecognized compensation cost information for our various
stock-based compensation awards is shown below as of
December 31, 2020:
Unrecognized
Compensation Cost
Weighted Average
Remaining Years
in Amortization
Period
$
Stock options
Restricted stock
Restricted stock units
Restricted stock units
(to be settled in cash)
682,000
687,000
990,000
2,246,000
Total
$
4,605,000
1.3
1.3
2.8
4.5
We have a policy of utilizing treasury shares to satisfy stock
option exercises, stock unit conversions and restricted stock
awards that are equity-classified 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 42
percent, 36 percent and 37 percent of our net revenues in 2020,
2019 and 2018, respectively. We have no assets located
outside the United States.
18
ATRION 2020 ANNUAL REPORT Notes to Consolidated Financial Statements (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, 2020, 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
$2.0 million in potential future payments under this settlement as
of December 31, 2020 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, 2020,
could have resulted in payments aggregating $4.9 million.
At December 31, 2020, the Company had lease obligations
totaling $272,000 with certain lessors for equipment and facilities
for 2021.
Notes to Consolidated Financial Statements ATRION 2020 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, 2020 and 2019, 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, 2020, and the
related notes and 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,
2020 and 2019, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2020,
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, 2020, based on criteria established in the 2013
Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated February 26, 2021 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 Public
Company Accounting Oversight Board (United States) (“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 regarding 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
February 26, 2021
20
ATRION 2020 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, 2020 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, 2020, our
internal control over financial reporting was effective.
Management’s Report on Internal Control Over Financial Reporting ATRION 2020 ANNUAL REPORT
21
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Definition and limitations of internal control over financial
reporting
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Grant Thornton LLP
Dallas, Texas
February 26, 2021
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, 2020, 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, 2020, 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 of the Company
as of and for the year ended December 31, 2020, and our report
dated February 26, 2021 expressed an unqualified opinion on
those financial statements.
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 2020 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 2020, approximately 42 percent of our sales were outside
the United States.
Our products are used in a wide variety of applications by
numerous customers. We encounter competition in all of our
markets and compete primarily on the basis of product quality,
price, engineering, customer service and delivery time.
Our business strategy is to provide hospitals, physicians and
other healthcare providers with the tools they need to improve
the lives of the patients they serve. To do so, we provide a
broad selection of products in the areas of our expertise. We
have diverse product lines serving primarily the fluid delivery,
cardiovascular and ophthalmic markets, and this diversity has
served us well as we encounter changing market conditions.
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, 2020, we reported revenues
of $147.6 million, operating income of $35.7 million and net
income of $32.1 million.
Results of Operations
Our net income was $32.1 million, or $17.49 per basic and
$17.44 per diluted share, in 2020 compared to $36.8 million,
or $19.82 per basic and $19.73 per diluted share in 2019.
Revenues were $147.6 million in 2020 compared with $155.1
million in 2019.
Annual revenues by product lines were as follows (in thousands):
Fluid Delivery
Cardiovascular
Ophthalmology
Other
Total
2020
2019
$
75,228 $
48,524
4,700
19,139
72,117
54,799
7,124
21,026
$
147,591 $
155,066
Consolidated revenues of $147.6 million in 2020 were 5 percent
lower than revenues in 2019. The decrease was primarily related
to lower volumes in 2020. Healthcare facilities prepared for the
COVID-19 pandemic surge and postponed selective surgeries
that impacted our products. We anticipate sales will increase in
2021 assuming the pandemic eases and at least the level of
elective surgeries performed in the first month of 2021 is
maintained. Our cost of goods sold was $81.4 million in 2020
compared with $84.4 million in 2019. Decreased sales volumes
and favorable product sales mix partially offset by increased
manufacturing overhead expenses were the primary
contributors to the decrease in cost of goods sold in 2020
compared to 2019.
Gross profit in 2020 was $66.2 million compared with $70.7
million in 2019. Our gross profit was 45 percent of revenues
in 2020 compared with 46 percent of revenues in 2019. The
decrease in gross profit percentage in 2020 from 2019 was
primarily related to an increase in manufacturing overhead
expenses coupled with lower sales volumes, partially offset by
a favorable sales mix.
Operating expenses were $30.5 million in 2020 and $30.2
million in 2019. R&D expenses increased $607,000 in 2020
as compared with 2019. Outside services for testing and
compensation expense were the main contributors to this
increase. 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 2020, selling expenses
decreased $1,293,000 compared with 2019 primarily as a result
of travel restrictions and cancelled events and outside services
related to the COVID-19 pandemic. Selling expenses consist
primarily of salaries, commissions and other related expenses
23
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2020 ANNUAL REPORT for sales and marketing personnel, marketing, advertising and
promotional expenses. General and Administrative, or G&A,
expenses increased $1,022,000 in 2020 as compared to 2019
primarily as a result of increased salaries and higher 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 2020 was $35.7 million compared
with $40.5 million in 2019. Operating income was 24 percent
of revenues in 2020 and 26 percent of revenues in 2019. A
decrease in 2020 gross profit primarily attributed to a decrease
in sales and increased manufacturing overhead costs adversely
affected operating income for 2020 as compared to the
previous year.
Interest and Dividend income for 2020 was $1.4 million
compared with $2.5 million in 2019. The decline in interest and
dividend income was largely due to lower interest rates in the
2020 period as compared to the 2019 period.
Other Investment Income was $1.4 million in 2020 compared
to $0.2 million in 2019. The improvement from 2019 to 2020
was primarily related to unrealized gains on equity investments
as a result of an increase in the market value on the
investments.
Income tax expense in 2020 totaled $6.35 million compared with
$6.4 million in 2019. The effective tax rates were 16.5 percent in
2020 and 14.8 percent in 2019. The higher effective tax rate in
2020 was primarily related to decreased tax benefits booked for
sales outside the United States under the FDII deduction and
from lower stock compensation deductions. We expect our
effective tax rate for 2021 to be approximately 18.0 percent.
For information on the Company’s results of operations for the
fiscal year ended December 31, 2018 and a comparison of that
information to that for the year ended December 31, 2019, see
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on
Form 10-K for the year ended December 31, 2019, which was
filed with the U.S. Securities and Exchange Commission on
February 26, 2020
Liquidity and Capital Resources
As of December 31, 2020, 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.
On February 12, 2021 this credit facility was amended to,
among other things, extend the date for advances to February
28, 2024. 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 (1.035 percent at
24
December 31, 2020) and is payable monthly. We had no
outstanding borrowings under the credit facility at December 31,
2020 or December 31, 2019. 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, 2020, we
were in compliance with all of these covenants.
At December 31, 2020, we had a total of $87.9 million in cash
and cash equivalents, short-term investments and long-term
investments, a decrease of $12.7 million from December 31,
2019. The principal contributor to this decrease was purchases
of our stock in the open market totaling $18.8 million in 2020.
Cash flows provided by operations of $39.2 million in 2020 were
primarily comprised of net income plus the net effect of
non-cash expenses. At December 31, 2020, we had working
capital of $98.7 million, including $22.5 million in cash and cash
equivalents and $19.3 million in short-term investments. The
$22.4 million decrease in working capital during 2020 was
primarily related to a decrease in cash and cash equivalents
partially offset by an increase in inventory. The increase in
inventories was primarily related to inventory build for a new
product launch. 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
$21.9 million in 2020, compared with $20.4 million in 2019.
These expenditures were primarily for machinery and
equipment. Purchases of investments totaled $45.8 million in
2020, compared to $83.7 million in 2019. Proceeds from
maturities of investments totaled $35.9 million in 2020 and
$59.3 million in 2019. We expect 2021 capital expenditures for
machinery and equipment to be consistent with total average
capital expenditure amounts expended during each of the past
two years. In addition, we expect to commence an expansion
of one of our facilities in 2021 that is expected to cost $23.0
million over a 15-month period.
We paid cash dividends totaling $12.1 million and $10.8 million
during 2020 and 2019, respectively. We expect to fund future
dividend payments with cash flows from operations. Treasury
stock totaling $18.8 million was purchased during 2020. No
treasury stock was purchased in 2019.
Our current contractual obligations are normal due to our line of
business and mainly consist of purchase orders for raw
materials. These obligations will be funded through funds
generated through operations and require no additional
funding. We have initiated plans to expand one of our facilities.
The expansion will require funds in an amount estimated at
$23.0 million. We believe this expansion is required to support
ATRION 2020 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations our anticipated increases in capacity in the coming years. 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.
The table below summarizes debt, lease and other contractual
obligations outstanding at December 31, 2020:
Payments Due by Period
Total
2021
(in thousands)
2022-
2023
2024-
2025
2026 and
thereafter
$
251 $
251 $ — $
— $
—
Contractual
Obligations
Lease
Obligations
Purchase
Obligations
$ 23,841
$ 23,501 $ 340
$ — $
Total
$ 24,092 $ 23,752 $ 340
$ — $
—
—
COVID-19 Impact
The COVID-19 pandemic has resulted in travel and other
restrictions to reduce the spread of the disease, including
governmental orders across the globe, which, among other
things, direct individuals to shelter at their places of residence,
direct businesses and governmental agencies to cease
non-essential operations at physical locations, prohibit certain
non-essential gatherings, maintain social distancing, and order
cessation of non-essential travel. As a result of these
developments, we have implemented work-from-home policies
for certain of our employees. In addition, many of our
customers implemented and are continuing similar measures
in their facilities, which have delayed, and may continue to
delay, the timing of some orders and deliveries. The effects of
shelter-in-place and social distancing orders, government-
imposed quarantines, and work-from-home policies may
further negatively impact productivity, disrupt our business,
and delay our development timelines beyond the delays we
have already experienced and disclosed, the magnitude of
which will depend, in part, on the length and severity of the
restrictions and other limitations on our ability to conduct our
business in the ordinary course. Such restrictions and
limitations may also further negatively impact our access to
regulatory authorities (which are affected, among other
things, by applicable travel restrictions and may be delayed in
responding to inquiries, reviewing filings, and conducting
inspections); our ability to perform regularly scheduled quality
checks and maintenance; and our ability to obtain services
from third-party specialty vendors and other providers or to
access their expertise as fully and timely as needed. The
COVID-19 pandemic may also result in the loss of some of our
key personnel, either temporarily or permanently. In addition,
our sales and marketing efforts have been negatively
impacted and may be further negatively impacted by
postponement or cancellation of face-to-face meetings and
restrictions on access by non-essential personnel to hospitals
or clinics to the extent such measures slow down adoption or
further commercialization of our marketed products. The
demand for our products may also be adversely impacted by
the restrictions and limitations adopted in response to the
COVID-19 pandemic, particularly to the extent they affect the
patients’ ability or willingness to undergo elective surgeries. As
a result, some of our inventory may become obsolete and may
need to be written off, impacting our operating results. These
and similar, and perhaps more severe, disruptions in our
operations may materially adversely impact our business,
operating results, and financial condition.
The global COVID-19 pandemic continues to rapidly evolve.
The ultimate impact of this pandemic is highly uncertain and
subject to change. We do not yet know the full extent of
potential delays or impacts on our business, healthcare
systems, or the global economy as a whole. These effects
could have a material impact on our operations.
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 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. The ASU introduced a new credit loss
methodology, Current Expected Credit Losses (CECL), which
requires earlier recognition of credit losses, while also providing
additional transparency about credit risk. Since its original
issuance in 2016, the FASB has issued several updates to the
original ASU.
The CECL methodology utilizes a lifetime “expected credit loss”
measurement objective for the recognition of credit losses
for loans, held-to-maturity securities and trade and other
receivables at the time the financial asset is originated or
25
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2020 ANNUAL REPORT acquired. The expected credit losses are adjusted each period
for changes in expected lifetime credit losses. The methodology
replaces the multiple existing impairment methods in prior
GAAP, which generally require that a loss be incurred before it
is recognized.
On January 1, 2020, we adopted the guidance prospectively
with a cumulative adjustment to retained earnings. Atrion has
not restated comparative information for 2019 and, therefore,
the comparative information for 2019 is reported under the
old model and is not comparable to the information presented
for 2020.
At adoption, we recognized an incremental allowance for credit
losses on our allowance for credit losses related to our held-to-
maturity debt securities of approximately $42,000 and our
trade accounts receivable of approximately $4,000.
Additionally, we recorded an approximately $36,000 decrease
in retained earnings associated with the increased estimated
credit losses on our trade accounts receivable and investments.
The impact on our operating results for 2020 from our adoption
of this pronouncement was not material.
From time to time new accounting pronouncements applicable
to us are issued by the FASB, or other standards setting bodies,
which we will adopt as of the specified effective date. Unless
otherwise discussed, we believe the impact of recently issued
standards that are not yet effective will not have a material
impact on our consolidated financial statements upon adoption.
Significant 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 significant accounting policies
and estimates, which are those that are most important to the
portrayal of our financial condition and results and require
management’s most difficult, subjective and complex
judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Actual
results could differ significantly from those estimates under
different assumptions and conditions.
From time to time we accrue legal costs associated with certain
litigation. In making determinations of likely outcomes of
litigation matters, we consider the evaluation of legal counsel
knowledgeable about each matter, case law and other case-
specific issues. We believe these accruals are adequate to cover
the legal fees and expenses associated with litigating these
26
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.
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.
ATRION 2020 ANNUAL REPORT Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 2020, 2019 and 2018, none of our significant
accounting estimates required material adjustments. We did
not note any material events or changes in circumstances
indicating that the carrying value of long-lived assets were not
recoverable.
Quantitative and Qualitative Disclosures About
Market Risks
Foreign Exchange Risk
We are not exposed to material fluctuations in currency
exchange rates that would result in realized gains or losses being
reflected in the consolidated statements of income because the
payments from our international customers are received
primarily in United States dollars.
However, fluctuations in exchange rates may affect the prices
that our international customers are willing to pay and may
put us at a price disadvantage compared to other 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 effects of
expanding our MPS platform, our effective tax rate for 2021, our
2021 capital expenditures, the expansion of one of our facilities,
funding future dividend payments with cash flows from
operations, availability of equity and debt financing, our ability
to meet our cash requirements for the foreseeable future, the
impact on our consolidated financial statement of recently
issued accounting standards when we adopt those standards,
and the effect that the COVID-19 pandemic may have on our
business and operations, as well as those of many of our key
customers, suppliers, and other counterparties. 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: the risk that the COVID-19
pandemic continues to lead to material delays and cancellations
of, or reduced demand for, procedures in which our products are
utilized; curtailed or delayed capital spending by hospitals and
other healthcare providers; disruption to our supply chain;
closures of our facilities; delays in training; delays in gathering
clinical evidence; diversion of management and other resources
to respond to the COVID-19 outbreak; the impact of global and
regional economic and credit market conditions on healthcare
spending; the risk that the COVID-19 virus continues to disrupt
local economies and causes economies in our key markets to
enter prolonged recessions; changing economic, market and
business conditions; acts of war or terrorism; the effects of
governmental regulation; the impact of competition and new
technologies; slower-than-anticipated introduction of new
products or implementation of marketing strategies;
implementation of new manufacturing processes or
27
Management’s Discussion and Analysis of Financial Condition and Results of Operations ATRION 2020 ANNUAL REPORT 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, or any material
reduction in sales to any significant customers. In addition,
assumptions relating to budgeting, marketing, product
development and other management decisions are subjective in
many respects and thus susceptible to interpretations and
periodic review which may cause us to alter our marketing, capital
expenditures or other budgets, which in turn may affect our
results of operations and financial condition. The forward-looking
statements in this Annual Report are made as of the date hereof,
and we do not undertake any obligation, and disclaim any duty,
to supplement, update or revise such statements, whether as a
result of subsequent events, changed expectations or otherwise,
except as required by applicable law.
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
Operating Results for the Year ended December 31,
Revenues
Operating income
Net income
Depreciation and amortization
Per Share Data:
Net income per diluted share
Cash dividends per common share
Average diluted shares outstanding
Financial Position at December 31,
Total assets
Long-term debt
2020
2019
2018
2017
2016
$
147,591
$
155,066 $
152,448 $
146,595 $
143,487
35,668
32,115
11,652
40,529
36,761
10,853
41,707
34,255
9,123
41,274
36,593
8,677
39,126
27,581
8,953
$
$
17.44 $
19.73 $
18.44 $
19.71 $
14.85
6.60
$
5.80 $
5.10 $
4.50 $
1,841
1,863
1,858
1,857
3.90
1,857
$
266,890 $
262,031 $
231,216 $
203,780 $
181,942
—
—
—
—
—
28
ATRION 2020 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 12, 2021, we had 106 record holders, and approximately 9,725 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 2020 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 2020 ANNUAL REPORT 29
ATRION CORPORATION
One Allentown Parkway
Allen, Texas 75002
www.atrioncorp.com
972.390.9800