Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[
x ]
Quarterly
Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended September 30,
2018
or
[
]
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period from to
Commission File Number 001-32982
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Atrion Corporation
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(Exact
Name of Registrant as Specified in its Charter)
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Delaware
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63-0821819
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(State
or Other Jurisdiction of Incorporation or
Organization)
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(I.R.S.
Employer Identification No.)
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One Allentown Parkway, Allen, Texas 75002
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(Address
of Principal Executive
Offices) (Zip
Code)
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(972) 390-9800
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(Registrant’s
Telephone Number, Including Area Code)
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Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. ☒ Yes ☐ No
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Registration S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). ☒ Yes ☐
No
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See definitions of
“accelerated filer,” “large accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act (Check one):
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Large accelerated filer
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☒
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Accelerated filer
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☐
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Non-accelerated
filer
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☐
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Smaller reporting company
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☐
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Emerging
growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
No
Indicate
the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
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Title of Each Class
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Number of Shares Outstanding at
October 25, 2018
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Common stock, Par Value $0.10 per share
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1,852,756
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ATRION CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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PART
I. Financial
Information
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2
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Item
1.
Financial Statements
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Consolidated
Statements of Income (Unaudited) For the Three and Nine months
Ended September 30, 2018 and 2017
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3
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Consolidated
Statements of Comprehensive Income (Unaudited) For the Three and
Nine months Ended September 30, 2018 and 2017
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4
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Consolidated
Balance Sheets (Unaudited) September 30, 2018 and December 31,
2017
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5
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Consolidated
Statements of Cash Flows (Unaudited) For the Nine months Ended
September 30, 2018 and 2017
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6
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Consolidated
Statement of Changes in Stockholders’ Equity (Unaudited)
September 30, 2018 and December 31, 2017
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7
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Notes
to Consolidated Financial Statements (Unaudited)
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8
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Item
2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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16
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Item 3.
Quantitative and Qualitative
Disclosures About Market Risk
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21
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Item
4.
Controls and
Procedures
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22
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PART II. Other Information
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22
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Item
1.
Legal Proceedings
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22
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Item
1A.
Risk Factors
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22
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Item
6.
Exhibits
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22
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SIGNATURES
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23
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Exhibit Index
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24
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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(in thousands, except per share
amounts)
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Revenues
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$39,274
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$37,903
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$117,522
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$112,571
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Cost
of goods sold
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21,275
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19,498
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61,349
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57,841
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Gross
profit
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17,999
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18,405
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56,173
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54,730
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Operating
expenses:
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Selling
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2,105
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1,691
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6,169
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5,303
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General
and administrative
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3,933
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4,086
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12,470
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12,390
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Research
and development
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1,204
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1,149
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4,145
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4,056
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7,242
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6,926
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22,784
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21,749
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Operating
income
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10,757
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11,479
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33,389
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32,981
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Interest
and dividend income
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439
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287
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1,157
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806
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Other
investment income (losses)
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21
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--
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(1,153)
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--
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Other
income
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20
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--
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20
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1
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480
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287
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24
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807
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Income
before provision for income taxes
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11,237
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11,766
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33,413
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33,788
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Provision
for income taxes
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(2,016)
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(3,795)
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(6,907)
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(5,841)
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Net
income
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$9,221
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$7,971
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$26,506
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$27,947
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Net
income per basic share
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$4.98
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$4.30
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$14.30
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$15.16
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Weighted
average basic shares outstanding
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1,853
|
1,852
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1,853
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1,844
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Net
income per diluted share
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$4.96
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$4.29
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$14.27
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$15.06
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Weighted
average diluted shares outstanding
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1,858
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1,857
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1,857
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1,856
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Dividends
per common share
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$1.35
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$1.20
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$3.75
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$3.30
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The accompanying notes are an integral part of these
statements.
ATRION CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three Months Ended September 30,
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Nine Months Ended September 30,
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Net
Income
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$9,221
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$7,971
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$26,506
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$27,947
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Other Comprehensive
Income
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Unrealized income
on investments, net of tax expense of $23 and $58 in
2017
|
--
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43
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--
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109
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Comprehensive
Income
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$9,221
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$8,014
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$26,506
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$28,056
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The accompanying notes are an integral part of these
statements.
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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Assets
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Current assets:
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Cash and cash
equivalents
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$50,031
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$30,136
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Short-term
investments
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15,465
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35,468
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Accounts
receivable
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20,766
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17,076
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Inventories
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32,172
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29,354
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Prepaid expenses
and other current assets
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2,599
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3,199
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121,033
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115,233
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Long-term
investments
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21,166
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9,136
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Property, plant and
equipment
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177,598
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167,080
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Less accumulated
depreciation and amortization
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105,151
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100,711
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72,447
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66,369
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Other assets and
deferred charges:
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Patents
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1,688
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1,778
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Goodwill
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9,730
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9,730
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Other
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1,679
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1,534
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13,097
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13,042
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Total
assets
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$227,743
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$203,780
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Liabilities
and Stockholders’ Equity
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Current
liabilities:
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Accounts payable
and accrued liabilities
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$11,116
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$8,876
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Accrued income and
other taxes
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871
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746
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11,987
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9,622
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Line of
credit
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--
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--
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Other non-current
liabilities
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10,599
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9,770
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Stockholders’
equity:
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Common stock, par
value $0.10 per share; authorized10,000 shares, issued 3,420
shares
|
342
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342
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Paid-in
capital
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50,022
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48,730
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Accumulated other
comprehensive loss
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--
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(1,215)
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Retained
earnings
|
286,520
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268,194
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Treasury
shares,1,567 at September 30, 2018 and 1,568 at December 31, 2017,
at cost
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(131,727)
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(131,663)
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Total
stockholders’ equity
|
205,157
|
184,388
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Total
liabilities and stockholders’ equity
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$227,743
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$203,780
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The accompanying notes are an integral part of these financial
statements.
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended September 30,
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|
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Cash
flows from operating activities:
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Net
income
|
$26,506
|
$27,947
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
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Depreciation
and amortization
|
6,702
|
6,458
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Deferred
income taxes
|
17
|
1,002
|
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Stock-based
compensation
|
1,297
|
1,240
|
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Net change in
unrealized gains and losses on investments
|
1,143
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--
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Net change in
accrued interest, premiums, and discounts
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on
investments
|
(81)
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(167)
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Other
|
(17)
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(2)
|
|
|
35,567
|
36,478
|
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Changes
in operating assets and liabilities:
|
|
|
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Accounts
receivable
|
(3,690)
|
(2,419)
|
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Inventories
|
(2,818)
|
(909)
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|
Prepaid
expenses
|
600
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180
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Other
non-current assets
|
(145)
|
115
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|
Accounts
payable and accrued liabilities
|
2,240
|
1,719
|
|
Accrued
income and other taxes
|
125
|
1,902
|
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Other
non-current liabilities
|
812
|
39
|
|
|
32,691
|
37,105
|
|
|
|
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|
Cash
flows from investing activities:
|
|
|
|
Property,
plant and equipment additions
|
(12,671)
|
(7,590)
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Purchase
of investments
|
(27,001)
|
(46,712)
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|
Proceeds
from maturities of investments
|
33,913
|
32,000
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(5,759)
|
(22,302)
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Cash
flows from financing activities:
|
|
|
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Shares tendered for employees’ withholding
taxes on stock-based
compensation
|
(90)
|
(7,735)
|
|
Dividends
paid
|
(6,947)
|
(6,095)
|
|
|
(7,037)
|
(13,830)
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
19,895
|
973
|
|
Cash
and cash equivalents at beginning of period
|
30,136
|
20,022
|
|
Cash
and cash equivalents at end of period
|
$50,031
|
$20,995
|
|
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|
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|
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Cash
paid for:
|
|
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Income
taxes
|
$2,027
|
$2,411
|
|
|
|
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|
Non-cash
financing activities:
|
|
|
|
Non-cash
effect of stock option exercises
|
$--
|
$10,237
|
The accompanying notes are an integral part of these financial
statements.
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY
(Unaudited)
(in
thousands)
|
|
|
|
|
|
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Additional
Paid-in Capital
|
Accumulated
Other Comprehensive Income (Loss)
|
|
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Balances, January
1, 2018
|
1,852
|
$342
|
1,568
|
$(131,663)
|
$48,730
|
$(1,215)
|
$268,194
|
$184,388
|
|
|
|
|
|
|
|
|
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Net
income
|
|
|
|
|
|
|
26,506
|
26,506
|
|
Reclass
from adopting ASU 2016-01
|
|
|
|
|
|
1,215
|
(1,215)
|
--
|
|
Stock-based
compensation transactions
|
1
|
|
(1)
|
26
|
1,292
|
|
|
1,318
|
|
Shares
surrendered in stock transactions
|
|
|
|
(90)
|
|
|
|
(90)
|
|
Dividends
|
|
|
|
|
|
|
(6,965)
|
(6,965)
|
|
Balances, September
30, 2018
|
1,853
|
$342
|
1,567
|
$(131,727)
|
$50,022
|
$0
|
$286,520
|
$205,157
|
The accompanying notes are an integral part of these financial
statements.
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
Basis
of Presentation
The
accompanying unaudited consolidated financial statements of Atrion
Corporation and its subsidiaries have been prepared in accordance
with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and
notes required by accounting principles generally accepted in the
United States for complete financial statements. In the opinion of
management, these statements include all normal and recurring
adjustments necessary to present a fair statement of our
consolidated results of operations, financial position and cash
flows. Operating results for any interim period are not necessarily
indicative of the results that may be expected for the full year.
Preparation of the Company’s financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions
that affect the reported amounts in the financial statements and
notes. Actual results could differ from those estimates. This
Quarterly Report on Form 10-Q should be read in conjunction with
the Company’s consolidated financial statements and notes
included in its Annual Report on Form 10-K for the fiscal year
ended December 31, 2017 ("2017 Form 10-K"). References herein
to "Atrion," the "Company," "we," "our," and "us" refer to Atrion
Corporation and its subsidiaries.
Inventories
are stated at the lower of cost or net realizable value. Cost is
determined by using the first-in, first-out method. The following
table details the major components of inventories (in
thousands):
|
|
|
|
|
|
|
|
|
Raw
materials
|
$14,697
|
$13,545
|
|
Work in
process
|
7,500
|
6,647
|
|
Finished
goods
|
9,975
|
9,162
|
|
Total
inventories
|
$32,172
|
$29,354
|
The
following is the computation for basic and diluted income per
share:
|
|
Three Months
Ended
September
30,
|
Nine Months
Ended
September
30,
|
|
|
|
|
|
|
|
|
(in thousands, except per share
amounts)
|
|
Net
income
|
$9,221
|
$7,971
|
$26,506
|
$27,947
|
|
Weighted average
basic shares outstanding
|
1,853
|
1,852
|
1,853
|
1,844
|
|
Add: Effect of
dilutive securities
|
5
|
5
|
4
|
12
|
|
Weighted average
diluted shares outstanding
|
1,858
|
1,857
|
1,857
|
1,856
|
|
Earnings
per share:
|
|
|
|
|
|
Basic
|
$4.98
|
$4.30
|
$14.30
|
$15.16
|
|
Diluted
|
$4.96
|
$4.29
|
$14.27
|
$15.06
|
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Incremental shares
from stock options and restricted stock units were included in the
calculation of weighted average diluted shares outstanding using
the treasury stock method. Dilutive securities representing 447
shares of common stock for the quarter ended September 30, 2017,
were excluded from the computation of weighted average diluted
shares outstanding because their effect would have been
anti-dilutive.
As of
September 30, 2018, we held investments in certificates of deposit,
commercial paper, bonds, mutual funds and equity securities that
are required to be measured for disclosure purposes at fair value
on a recurring basis. The certificates of deposit, commercial paper
and bonds are considered held-to-maturity and are recorded at
amortized cost in the accompanying consolidated balance sheet. The
equity securities and mutual funds are recorded at fair value in
the accompanying consolidated balance sheet. 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 unrealized gains and losses,
were as follows as of the dates shown below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As
of September 30, 2018:
|
|
|
|
|
|
|
Short-term
Investments
|
|
|
|
|
|
|
Certificates of
deposit
|
2
|
2,032
|
$--
|
$(2)
|
$2,030
|
|
Commercial
paper
|
2
|
1,999
|
$--
|
$(1)
|
$1,998
|
|
Bonds
|
2
|
11,434
|
$--
|
$(24)
|
$11,410
|
|
|
|
|
|
|
|
|
Long-term
Investments
|
|
|
|
|
|
|
Bonds
|
2
|
17,571
|
$--
|
$(279)
|
$17,292
|
|
Mutual
funds
|
1
|
599
|
$29
|
$--
|
$628
|
|
Equity
investments
|
2
|
5,675
|
$--
|
$(2,708)
|
$2,967
|
|
|
|
|
|
|
|
|
As
of December 31, 2017:
|
|
|
|
|
|
|
Short-term
Investments
|
|
|
|
|
|
|
Certificates of
deposit
|
2
|
4,020
|
$--
|
$(3)
|
$4,017
|
|
Commercial
paper
|
2
|
31,220
|
$26
|
$(38)
|
$31,208
|
|
Bonds
|
2
|
6
|
$--
|
$--
|
$6
|
|
Mutual
funds
|
1
|
219
|
$3
|
$--
|
$222
|
|
|
|
|
|
|
|
|
Long-term
Investments
|
|
|
|
|
|
|
Bonds
|
2
|
5,000
|
$--
|
$(75)
|
$4,925
|
|
Equity
investments
|
2
|
5,675
|
$--
|
$(1,539)
|
$4,136
|
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
above long-term bonds represent investments in various issuers at
September 30, 2018. The unrealized losses for these investments
relate to a rise in interest rates which resulted in a lower market
price for those securities. Only one of these bond investments has
been in a loss position for more than 12 months.
The
certificate of deposit matures in 2.2 months. The commercial paper
securities will mature in 0.2 month. The bonds have maturities
ranging from 0.8 month to 49.5 months.
Purchased
patents and license fees 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):
|
|
|
Weighted Average
Original Life (years)
|
|
|
Weighted Average
Original Life (years)
|
|
|
|
15.67
|
$13,840
|
$12,152
|
15.67
|
$13,840
|
$12,062
|
Aggregate
amortization expense for patents and licenses was $30,000 for the
three months ended September 30, 2018 and 2017 and $90,000 and
$121,000 for the nine months ended September 30, 2018 and 2017,
respectively.
Estimated future
amortization expense for each of the years set forth below ending
December 31 is as follows (in thousands):
|
2019
|
$119
|
|
2020
|
$119
|
|
2021
|
$119
|
|
2022
|
$117
|
|
2023
|
$113
|
Income
tax expense for the third quarter of 2018 was $2.0 million compared
to income tax expense of $3.8 million for the same period in the
prior year. The effective tax rate for the third quarter of 2018
was 18 percent, compared with 32 percent for the third quarter of
2017. The Tax Cuts and Jobs Act, enacted in December 2017, reduced
the corporate federal income tax rate in the United States from 35
percent to 21 percent effective for us on January 1, 2018. The Tax
Cuts and Jobs Act also ended the domestic production activities
deduction under Section 199 which previously helped lower our
effective tax rate by three percentage points in the third quarter
of 2017.
We
continue to assess the income tax effects of the Tax Cuts and Jobs
Act and whether recorded amounts may be affected due to changes in
our interpretations and assumptions, as well as regulatory guidance
that may be issued.
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7)
Recent
Accounting Pronouncements
Accounting Standards Update 2014-09, Revenue from Contracts with
Customers
In May
2014, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2014-09, Revenue from Contracts
with Customers, also known as ASC 606. This new standard requires
an entity to recognize the amount of revenue to which it expects to
be entitled for the transfer of promised goods or services to
customers. ASC 606 replaced most existing revenue recognition
guidance in United States Generally Accepted Accounting Principles
when it became effective for fiscal years beginning after December
15, 2017. We adopted the new standard on January 1, 2018, using the
full retrospective method. Because accounting for revenue from
contracts with customers did not materially change for us under the
new standard as explained below, prior period consolidated
financial statements did not require adjustment.
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 customer requirements which are driven in
large part by their customers’ needs for medical care which
does not always follow broad economic trends. This affects the
nature, amount, timing and uncertainty of our revenue. Also,
changes in the value of the United States dollar relative to
foreign currencies could make our products more or less affordable
and therefore affect our sales in international
markets.
A
summary of revenues by geographic area, based on shipping
destination, for the three and nine months ended September 30, 2018
and 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
$23,979
|
$24,200
|
$73,419
|
$71,384
|
|
Germany
|
1,675
|
2,033
|
6,637
|
6,989
|
|
Other countries
less than 5% of revenues
|
13,620
|
11,670
|
37,466
|
34,198
|
|
Total
|
$39,274
|
$37,903
|
$117,522
|
$112,571
|
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A
summary of revenues by product line for the three and nine months
ended September 30, 2018 and 2017 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fluid
Delivery
|
$17,106
|
$16,083
|
$54,033
|
$49,718
|
|
Cardiovascular
|
13,292
|
12,837
|
39,505
|
36,523
|
|
Ophthalmology
|
2,768
|
3,595
|
8,405
|
11,030
|
|
Other
|
6,108
|
5,388
|
15,579
|
15,300
|
|
Total
|
$39,274
|
$37,903
|
$117,522
|
$112,571
|
More
than 98 percent of our total revenue in the periods presented
herein is pursuant to shipments initiated
by a purchase order, which under the new ASC 606 guidance is the
contract with the customer. As a result, the vast majority of our
revenue is recognized at a single point in time when the
performance obligation of the product being shipped is satisfied,
rather than recognized over time, and presented as a receivable on
the balance sheet.
Our
payment terms vary by the type and location of our customers and
the products or services offered. The term between invoicing and
when payment is due is 30 days in most cases. For certain products
or services and customer types, we require payment before the
products or services are delivered to the customer.
We
maintain an allowance for doubtful accounts to reflect estimated
losses resulting from the failure of customers to make required
payments. On an ongoing basis, the collectability of accounts
receivable is assessed based upon historical collection trends,
current economic factors and the assessment of the collectability
of specific accounts. We evaluate the collectability of specific
accounts and determine when to grant credit to our customers using
a combination of factors, including the age of the outstanding
balances, evaluation of customers’ current and past financial
condition, recent payment history, current economic environment,
and discussions with our personnel and with the customers directly.
Accounts are written off when it is determined the receivable will
not be collected. If circumstances change, our estimates of the
collectability of amounts could be changed by a material
amount.
We 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.
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.
We
expense sales commissions when incurred because the amortization
period would be one year or less. These costs are recorded within
selling expense.
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
representing less than two percent of our revenues include multiple
performance obligations. For such arrangements, we allocate 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. Lease revenues, including embedded
leases under certain of these contracts, represent less than one
percent of our total revenue in all periods presented herein.
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 about immaterial
contracts under ASC 606 would potentially obscure more useful and
important information.
ASU 2016-02, Leases
On
February 25, 2016 the FASB issued ASU 2016-02, Leases (ASC
842). The main objective of this new standard is to recognize
lease assets and lease liabilities on the balance sheet and
disclose key information about leasing arrangements. The new
leasing standard requires lessees to recognize a right of use asset
and lease liability on the balance sheet. Lessor accounting is
updated to align with certain changes in the lessee model and the
new revenue recognition standard (ASC 606). We elected to
early adopt this new standard as of January 1, 2018, using the
modified retrospective approach as required.
As a
lessee, we have only two leases for equipment used internally which
we account for as operating leases. Upon adoption of ASC 842, we
recorded a right-of-use asset and a lease liability for these
leases as of January 1, 2018. The monthly expense of $2,025 for
these operating leases, which are our only lessee arrangements, is
immaterial and therefore all other lessee disclosures under ASC 842
have been omitted.
As a
lessor, Atrion has agreements with certain customers for the rental
of our equipment for use in hospitals. These arrangements include
sales type leases, fixed monthly rentals and agreements containing
a lease component (embedded lease) and non-lease components. Lease
revenues from all of these agreements represented less than one
percent of our total revenue in the first nine months of 2018 and
in all of 2017.
The
fixed monthly equipment rentals are accounted for as operating
leases under ASC 842. Fixed monthly rentals provide for a flat
rental fee each month.
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Beginning the third
quarter of 2018, the agreements containing an embedded lease
component and non-lease components (formerly accounted for as
operating leases) are now accounted for under ASC 606, as allowed
by the practical expedient under ASU 2018-11 - Leases: Targeted
Improvements, issued in July of 2018.
The
practical expedient provided for in ASU 2018-11 allows lessors to
combine lease and non-lease components into a single performance
obligation. If the non-lease components are the predominant
component of the combined contract, ASU 2018-11 also allows for
these agreements to be accounted for under ASC 606 rather than as
leases under ASC 842. We have elected to implement ASU 2018-11 on a
prospective basis beginning with the third quarter of
2018.
The
lease assets from our sales type leases are recorded in our
accounts receivables in the accompanying consolidated balance
sheet, and as of September 30, 2018 the balance totaled
$499,000.
Our
equipment treated as leases under ASC 842 is included in our
Property Plant and Equipment on our balance sheet. As a result of
our adoption of ASU 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.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial
Liabilities.
In
January 2016, the FASB issued ASU 2016-01, Financial Instruments -
Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities. The main objective of this update
is to enhance the reporting model for financial instruments in
order to provide users of financial statements with more
decision-useful information. Changes to the previous guidance
primarily affect the accounting for equity investments, financial
liabilities under the fair value option, and the presentation and
disclosure requirements for financial instruments.
The
primary impact of this change for us relates to our
available-for-sale equity investment and resulted in unrecognized
gains and losses from this investment being reflected in our income
statement beginning in 2018. We adopted ASU 2016-01 as of
January 1, 2018, applying the update by means of a
cumulative-effect adjustment to the balance sheet by reclassifying
the balance of our Accumulated Other Comprehensive Loss in the
shareholders’ equity section of the balance sheet to Retained
Earnings. The balance reclassified of $1,215,000 was a result
of prior-period unrealized losses from our equity
investment.
In the
third quarter of 2018 we recorded an unrealized gain on our equity
investment of $21,000 as a result of an increase in the market
value of this investment during the quarter. This brings the 2018
year-to-date loss on this investment to $1,169,000. This gain and
year-to-date loss are reflected in other investment income (loss)
in our income statement. This change in accounting is expected to
create greater volatility in our investment income each quarter in
the future.
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ASU 2017-08, Receivables – Non-refundable Fees and Other
Costs (Subtopic 310-20).
In
March 2017, the FASB issued ASU 2017-08, Receivables –
Non-refundable Fees and Other Costs (Subtopic 310-20). The main
objective of this update is to shorten the period of amortization
of the premium on certain callable debt securities to the earliest
call date. However, the update does not require an accounting
change for securities held at a discount; the discount continues to
be amortized to maturity. The update is effective for annual
periods beginning after December 15, 2018, including interim
periods within those annual periods. We elected to early adopt this
update as of January 1, 2018. None of our investments in 2017 had
any premium paid, so no adjustments were needed for prior-period
activity. We do not believe the adoption of this standard will have
a material impact on our Financial Statements in 2018 or future
periods.
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.
Item 2.
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 instrumentation and disposables used in dialysis
and valves and inflation devices used in marine and aviation safety
products.
Our
products are used in a wide variety of applications by numerous
customers. We encounter competition in all of our markets and
compete primarily on the basis of product quality, price,
engineering, customer service and delivery time.
Our
strategy is to provide a broad selection of products in the areas
of our expertise. We focus our research and development, or
R&D, efforts 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 and payoff indebtedness, to fund capital
expenditures, 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;
●
Manufacturing
products to exacting quality standards; and
●
Preserving and
fostering a collaborative and entrepreneurial culture.
For the
three months ended September 30, 2018, we reported revenues of
$39.3 million, operating income of $10.8 million and net income of
$9.2 million, up 4 percent, down 6 percent and up 16 percent,
respectively, from the three months ended September 30, 2017. For
the nine months ended September 30, 2018, we reported revenues of
$117.5 million, operating income of $33.4 million and net income of
$26.5 million, up 4 percent, up 1 percent and down 5 percent,
respectively, from the nine months ended September 30, 2017. The
decline in net income for the nine month period ended September 30,
2018 was attributable to higher effective tax rates in the current
year-to-date period.
Results
for the three months ended September 30, 2018
Consolidated net
income totaled $9.2 million, or $4.98 per basic and $4.96 per
diluted share, in the third quarter of 2018. This is compared with
consolidated net income of $8.0 million, or $4.30 per basic and
$4.29 per diluted share, in the third quarter of 2017. The income
per basic share computations are based on weighted average basic
shares outstanding of 1,853,000 in the 2018 period and 1,852,000 in
the 2017 period. The income per diluted share computations are
based on weighted average diluted shares outstanding of 1,858,000
in the 2018 period and 1,857,000 in the 2017 period.
Consolidated
revenues of $39.3 million for the third quarter of 2018 were 4
percent higher than revenues of $37.9 million for the third quarter
of 2017. This increase was primarily attributable to increased
volumes of our fluid delivery, cardiovascular products and other
products partially offset by decreased ophthalmology revenue. We
expect to continue experiencing decreasing ophthalmology revenue
until the end of the first quarter of 2019 as we wind down certain
products with contract and intellectual property
expirations.
Revenues
by product line were as follows (in thousands):
|
|
Three Months ended September 30,
|
|
|
|
|
|
|
|
|
|
Fluid
Delivery
|
$17,106
|
$16,083
|
|
Cardiovascular
|
13,292
|
12,837
|
|
Ophthalmology
|
2,768
|
3,595
|
|
Other
|
6,108
|
5,388
|
|
Total
|
$39,274
|
$37,903
|
Cost of
goods sold of $21.3 million for the third quarter of 2018 was nine
percent higher than cost of goods sold of $19.5 million for the
third quarter of 2017 primarily due to increased revenues and
increased manufacturing costs partially offset by improved
manufacturing efficiencies and the impact of continued cost
improvement projects. Our cost of goods sold in the third quarter
of 2018 was 54.2 percent of revenues compared with 51.4 percent of
revenues in the third quarter of 2017.
Gross
profit of $18.0 million in the third quarter of 2018 was $406,000,
or two percent, lower than in the comparable 2017 period. Our gross
profit percentage in the third quarter of 2018 was 45.8 percent of
revenues compared with 48.6 percent of revenues in the third
quarter of 2017. The decrease in gross profit percentage in the
2018 period compared to the 2017 period was primarily related to an
unfavorable product sales mix partially offset by improved
manufacturing efficiencies and cost improvement projects mentioned
above.
Our
third quarter 2018 operating expenses of $7.2 million were $316,000
higher than the operating expenses for the third quarter of 2017.
This increase was attributable to a $153,000 decrease in General
and Administrative, or G&A, expenses, a $414,000 increase in
Selling expenses and a $55,000 increase in R&D expenses. The
decrease in G&A expenses for the third quarter of 2018 was
principally attributable to lower compensation and benefit costs
partially offset by increased outside services and increased
software costs. The increase in Selling expenses was principally
attributable to increased outside services, trade shows,
compensation, travel and commissions. The increase in R&D
expenses was primarily related to increased outside services,
increased travel, increased regulatory costs and increased
compensation partially offset by decreased supply
costs.
Operating income in
the third quarter of 2018 decreased $722,000 to $10.8 million, a
six percent decrease compared to our operating income in the
quarter ended September 30, 2017. Operating income was 27 percent
of revenues for the third quarter of 2018 as compared to 30 percent
of revenues for the third quarter of 2017.
Interest and
dividend income in the third quarter of 2018 was $439,000, compared
with $287,000 for the same period in the prior year. Increased
levels of investment and increased interest rates were the primary
reasons for the increase.
Income
tax expense for the third quarter of 2018 was $2.0 million compared
to income tax expense of $3.8 million for the same period in the
prior year. The effective tax rate for the third quarter of 2018
was 18 percent, compared with 32 percent for the third quarter of
2017. The Tax Cuts and Jobs Act, reduced the corporate federal
income tax rate in the United States from 35 percent to 21 percent
effective for us on January 1, 2018. We expect the effective tax
rate for the remainder of 2018 to be approximately 21.0
percent.
Results
for the nine months ended September 30, 2018
Consolidated net
income totaled $26.5 million, or $14.30 per basic and $14.27 per
diluted share, in the first nine months of 2018. This is compared
with consolidated net income of $27.9 million, or $15.16 per basic
and $15.06 per diluted share, in the first nine months of 2017. The
income per basic share computations are based on weighted average
basic shares outstanding of 1,853,000 in the 2018 period and
1,844,000 in the 2017 period. The income per diluted share
computations are based on weighted average diluted shares
outstanding of 1,857,000 in the 2018 period and 1,856,000 in the
2017 period.
Consolidated
revenues of $117.5 million for the first nine months of 2018 were
four percent higher than revenues of $112.6 million for the first
nine months of 2017. This increase was primarily attributable to
increased volumes of our fluid delivery and cardiovascular products
partially offset by reduced ophthalmology revenue.
Revenues
by product line were as follows (in thousands):
|
|
Nine Months ended September 30,
|
|
|
|
|
|
|
|
|
|
Fluid
Delivery
|
$54,033
|
$49,718
|
|
Cardiovascular
|
39,505
|
36,523
|
|
Ophthalmology
|
8,405
|
11,030
|
|
Other
|
15,579
|
15,300
|
|
Total
|
$117,522
|
$112,571
|
Cost of
goods sold of $61.3 million for the first nine months of 2018 was
$3.5 million higher than in the comparable 2017 period. The primary
contributor to the increase in our cost of goods sold was increased
revenues in the first nine months of 2018. Our cost of goods sold
in the first nine months of 2018 was 52.2 percent of revenues
compared with 51.4 percent of revenues in the first nine months of
2017.
Gross
profit of $56.2 million in the first nine months of 2018 was $1.4
million, or three percent, higher than in the comparable 2017
period. Our gross profit percentage in the first nine months of
2018 was 47.8 percent of revenues compared with 48.6 percent of
revenues in the first nine months of 2017. The decrease in gross
profit percentage in the 2018 period compared to the 2017 period
was primarily related to an unfavorable product sales mix partially
offset by favorable manufacturing efficiencies in the first nine
months of 2018.
Operating expenses
of $22.8 million for the first nine months 2018 were $1.0 million
higher than the operating expenses for the first nine months of
2017. This increase was comprised of an $80,000 increase in
G&A, an $866,000 increase in Selling expenses and an $89,000
increase in R&D expenses. The increase in G&A expenses for
the first nine months of 2018 was principally attributable to
increased outside services, increased travel and increased software
costs partially offset by decreased compensation and benefit costs.
The increase in Selling expenses was primarily related to increased
travel, increased promotion costs, increased outside services and
increased compensation. The increase in R&D costs was primarily
related to increased compensation, increased outside services and
increased travel costs partially offset by decreased supply costs
and reduced repairs.
Operating income in
the first nine months of 2018 increased $408,000 to $33.4 million,
a one percent increase from our operating income in the nine months
ended September 30, 2017. Operating income was 28 percent of
revenues in the first nine months of 2018 and 29 percent of
revenues in the first nine months of 2017.
Interest and
dividend income for the first nine months of 2018 was $1.2 million,
compared with $806,000 for the same period in the prior year.
Increased levels of investment and increased interest rates were
the primary reasons for the increase.
We
adopted ASU 2016-01 as of January 1, 2018 (see Note 7). For the
first nine months of 2018 we recorded an unrealized loss on an
equity investment of $1.2 million as a result of a decline in the
market value of this investment during the 2018 period which was
reflected as an Other investment income (losses) on our income
statement.
Income
tax expense for the first nine months of 2018 was $6.9 million
compared to income tax expense of $5.8 million for the same period
in the prior year. The effective tax rate for the first nine months
of 2018 was 21 percent, compared with 17 percent for the first nine
months of 2017. The effective tax rate for the first nine months of
2017 was favorably impacted by a tax benefit of $5.3 million
related to excess tax benefits from stock compensation together
with the benefit from Section 199 deductions.
Liquidity
and Capital Resources
As of
September 30, 2018, we had a $75.0 million revolving credit
facility with a money center bank, entered into on February 28,
2017, pursuant to which the lender is obligated to make advances
until February 28, 2022. The credit facility is secured by
substantially all of our inventories, equipment and accounts
receivable. We had no outstanding borrowings under our credit
facility at September 30, 2018. Our ability to borrow funds under
the credit agreement 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 September 30, 2018,
we were in compliance with all financial covenants.
At
September 30, 2018, we had a total of $86.7 million in cash and
cash equivalents, short-term investments and long-term investments,
an increase of $11.9 million from December 31, 2017. The principal
contributor to this increase was operating results.
Cash
flows from operating activities of $32.7 million for the nine
months ended September 30, 2018 were primarily comprised of net
income plus the net effect of non-cash expenses, increases to
accounts payable and accrued liabilities partially offset by
increases to accounts receivable and inventories.
During
the first nine months of 2018, we expended $12.7 million for the
addition of property and equipment, $27.0 million for the purchase
of investments and $6.9 million for dividends. During the same period, maturities
of investments generated $33.9 million in cash.
At
September 30, 2018, we had working capital of $109.0 million,
including $50.0 million in cash and cash equivalents and $15.5
million in short-term investments. The $3.4 million increase in
working capital during the first nine months of 2018 was primarily
related to increases in cash and cash equivalents, accounts
receivable and inventories. This increase was partially offset by
decreases in short-term investments and increases in accounts
payable and accrued liabilities. The increase in cash was offset by
the decrease in short-term investments. The increase in receivables
was primarily related to the increase in revenues in the third
quarter of 2018 as compared to the fourth quarter of 2017. The
increase in inventories was primarily related to replenishment of
inventories to levels required for operational effectiveness. The
increase in accounts payable and accrued liabilities is primarily
related to timing of payments for replenishment of inventories and
operating expenditures.
We
believe that our $86.7 million in cash, cash equivalents,
short-term investments and long-term investments, along with 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, including
the costs associated with the planned expansion of one of our
manufacturing facilities. We believe that our strong financial
position would allow us to access equity or debt financing should
that be necessary. Additionally, we believe that our cash and cash
equivalents, short-term investments and long-term investments, as a
whole, will continue to increase during the remainder of
2018
Forward-Looking Statements
Statements
in this Management’s Discussion and Analysis and elsewhere in
this Quarterly Report on Form 10-Q that are forward looking are
based upon current expectations, and actual results or future
events may differ materially. Therefore, the inclusion of such
forward-looking information should not be regarded as a
representation by us that our objectives or plans will be achieved.
Such statements include, but are not limited to, our effective tax
rate for the remainder of 2018, ophthalmology revenue until the end
of the first quarter of 2019, our ability to fund our cash
requirements for the foreseeable future with our current assets,
long-term investments, cash flow and borrowings under the credit
facility, our access to equity and debt financing, and the increase
in cash, cash equivalents, and investments during the remainder of
2018. Words such as “expects,” “believes,”
“anticipates,” “intends,”
“should,” “plans,” and variations of such
words and similar expressions are intended to identify such
forward-looking statements. Forward-looking statements contained
herein involve numerous risks and uncertainties, and there are a
number of factors that could cause actual results or future events
to differ materially, including, but not limited to, the following:
changing economic, market and business conditions; acts of war or
terrorism; the effects of governmental regulation; the impact of
competition and new technologies; slower-than-anticipated
introduction of new products or implementation of marketing
strategies; implementation of new manufacturing processes or
implementation of new information systems; our ability to protect
our intellectual property; changes in the prices of raw materials;
changes in product mix; intellectual property and product liability
claims and product recalls; the ability to attract and retain
qualified personnel; and the loss of, 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 Quarterly Report
on Form 10-Q 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.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
For
the quarter ended September 30, 2018, we did not experience any
material changes in market risk exposures that affect the
quantitative and qualitative disclosures presented in our 2017 Form
10-K.
Item 4. Controls and Procedures
Our
management, with the participation of our Chief Executive Officer
and our Chief Financial Officer, evaluated our disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of September 30, 2018. Based upon this evaluation,
our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are
effective. There were no changes in our internal control over
financial reporting for the quarter ended September 30, 2018 that
have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
PART II
OTHER INFORMATION
Item
1.
Legal Proceedings
From time to time, we may be involved in claims or
litigation that arise in the normal course of business. We are not
currently a party to any legal proceedings, which, if decided
adversely, would have a material adverse effect on our business,
financial condition, or results of operations.
There
were no material changes to the risk factors disclosed in our 2017
Form 10-K.
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
Sarbanes-Oxley Act Section 302 Certification of Chief Executive
Officer
|
|
|
|
Sarbanes-Oxley Act Section 302 Certification of Chief Financial
Officer
|
|
|
|
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of The Sarbanes – Oxley Act Of
2002
|
|
|
|
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of The Sarbanes – Oxley Act Of
2002
|
|
101.INS
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
Atrion
Corporation
(Registrant)
|
|
|
|
|
|
|
|
Date: November 9, 2018
|
By:
|
/s/ David A. Battat
|
|
|
|
|
David A. Battat
|
|
|
|
|
President and
Chief Executive Officer
|
|
|
|
|
|
|
|
Date: November 9, 2018
|
By:
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/s/ Jeffery Strickland
|
|
|
|
|
Jeffery Strickland
|
|
|
|
|
Vice President and
Chief Financial Officer
(Principal Accounting and Financial Officer)
|
|
Exhibit Index
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
Sarbanes-Oxley Act Section 302 Certification of Chief Executive
Officer
|
|
|
|
Sarbanes-Oxley Act Section 302 Certification of Chief Financial
Officer
|
|
|
|
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of The Sarbanes – Oxley Act Of
2002
|
|
|
|
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of The Sarbanes – Oxley Act Of
2002
|
|
101.INS
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|