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 March 31,
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 and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted 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 and post 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):
Large accelerated
filer ☒
Accelerated
filer ☐
Non-accelerated
filer ☐
Smaller reporting
company ☐
Emerging growth
company ☐
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
April
20, 2018
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Common
stock, Par Value $0.10 per share
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1,851,842
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ATRION CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I. Financial Information
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3
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Item 1. Financial Statements
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3
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Consolidated
Statements of Income (Unaudited) For the Three months Ended March
31, 2018 and 2017
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3
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Consolidated
Statements of Comprehensive Income (Unaudited) For the Three months
Ended March 31, 2018 and 2017
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4
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Consolidated
Balance Sheets (Unaudited) March
31, 2018 and December 31, 2017
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5
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Consolidated
Statements of Cash Flows (Unaudited) For the Three Months Ended
March 31, 2018 and 2017
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6
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Consolidated
Statement of Changes in Stockholders’ Equity (Unaudited)
March
31, 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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19
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Item
4. Controls and
Procedures
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20
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PART II. Other Information
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20
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Item 1.
Legal Proceedings
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20
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Item 1A.
Risk Factors
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20
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Item 6. Exhibits
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20
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SIGNATURES
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20
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Exhibit Index
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21
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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
March
31,
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(in thousands,
except per share amounts)
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Revenues
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$39,401
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$38,504
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Cost
of goods sold
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20,450
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19,873
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Gross
profit
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18,951
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18,631
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Operating
expenses:
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2,018
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1,748
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General
and administrative
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4,229
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4,017
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1,338
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1,539
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7,585
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7,304
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Operating
income
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11,366
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11,327
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Interest
and dividend income
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330
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148
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Other
investment income/(losses)
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(789)
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1
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(459)
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149
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Income
before provision for income taxes
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10,907
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11,476
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Provision
for income taxes
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(2,420)
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(1,526)
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Net
income
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$8,487
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$9,950
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Net
income per basic share
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$4.58
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$5.42
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Weighted
average basic shares outstanding
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1,852
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1,835
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Net
income per diluted share
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$4.57
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$5.36
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Weighted
average diluted shares outstanding
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1,856
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1,855
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Dividends
per common share
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$1.20
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$1.05
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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 March 31,
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Net
Income
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$8,487
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$9,950
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Other Comprehensive
Loss
Unrealized loss on
investments, net of tax benefit of $169 in
2017
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--
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(313)
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Comprehensive
Income
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$8,487
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$9,637
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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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$20,181
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$30,136
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Short-term
investments
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34,795
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35,468
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Accounts
receivable
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20,604
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17,076
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Inventories
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29,907
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29,354
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Prepaid expenses
and other current assets
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2,064
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3,199
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107,551
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115,233
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Long-term
investments
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23,953
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9,136
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Property, plant and
equipment
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170,313
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167,080
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Less accumulated
depreciation and amortization
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102,828
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100,711
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67,485
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66,369
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Other assets and
deferred charges:
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Patents
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1,748
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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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1,786
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1,534
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13,264
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13,042
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Total
assets
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$212,253
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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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$8,208
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$8,876
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Accrued income and
other taxes
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2,975
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746
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11,183
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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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10,102
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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
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342
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342
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Paid-in
capital
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49,044
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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
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273,240
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268,194
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Treasury
shares,1,584 at March 31, 2018 and 1,584 at December 31, 2017, at
cost
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(131,658)
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(131,663)
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Total
stockholders’ equity
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190,968
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184,388
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Total
liabilities and stockholders’ equity
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$212,253
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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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Three Months Ended
March 31,
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Cash
flows from operating activities:
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Net
income
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$8,487
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$9,950
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Adjustments
to reconcile net income tonet cash provided by operating
activities:
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Depreciation
and amortization
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2,183
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2,099
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Deferred
income taxes
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(138)
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217
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Stock-based
compensation
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316
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275
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Net change in
unrealized gains and losses on investments
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789
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--
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Net change in
accrued interest, premiums, and discounts
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on
investments
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(104)
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(28)
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11,533
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12,513
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Changes
in operating assets and liabilities:
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Accounts
receivable
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(3,528)
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(3,513)
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Inventories
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(553)
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(1,339)
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Prepaid
expenses
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1,135
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1,178
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Other
non-current assets
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(252)
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66
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Accounts
payable and accrued liabilities
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(668)
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773
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Accrued
income and other taxes
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2,229
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278
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Other
non-current liabilities
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470
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39
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10,366
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9,995
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Cash
flows from investing activities:
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Property,
plant and equipment additions
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(3,269)
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(2,373)
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Purchase
of investments
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(25,521)
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(19,911)
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Proceeds
from maturities of investments
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10,691
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15,000
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(18,099)
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(7,284)
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Cash
flows from financing activities:
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Shares tendered for employees’ withholding
taxes on stock-based
compensation
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--
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(3,275)
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Dividends
paid
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(2,222)
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(1,929)
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(2,222)
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(5,204)
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Net
change in cash and cash equivalents
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(9,955)
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(2,493)
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Cash
and cash equivalents at beginning of period
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30,136
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20,022
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Cash
and cash equivalents at end of period
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$20,181
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$17,529
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Cash
paid for:
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Income
taxes
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$24
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$29
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Non-cash
financing activities:
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Non-cash
effect of stock option exercises
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$--
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$4,535
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The
accompanying notes are an integral part of these financial
statements.
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY
(Unaudited)
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Additional
Paid-in Capital
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Accumulated
Other Comprehensive Income (Loss)
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Balances, January
1, 2017
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1,836
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$342
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1,584
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$(131,663)
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$48,730
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$(1,215)
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$268,194
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$184,388
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Net
income
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8,487
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8,487
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Reclass
from adopting ASU 2016-01
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1,215
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(1,215)
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--
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Stock-based
compensation transactions
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5
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314
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319
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Dividends
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(2,226)
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(2,226)
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Balances, March 31,
2018
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1,836
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$342
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1,584
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$(131,658)
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$49,044
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$0
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$273,240
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$190,968
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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 market. Cost is determined by
using the first-in, first-out method. The following table details
the major components of inventories (in thousands):
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Raw
materials
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$13,715
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$13,545
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Work in
process
|
7,127
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6,647
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Finished
goods
|
9,065
|
9,162
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Total
inventories
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$29,907
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$29,354
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The
following is the computation for basic and diluted income per
share:
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Three months
Ended March 31,
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(in thousands,
except per share amounts)
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Net
income
|
$8,487
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$9,950
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Weighted average
basic shares outstanding
|
1,852
|
1,835
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Add: Effect of
dilutive securities
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4
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20
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Weighted average
diluted shares outstanding
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1,856
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1,855
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Earnings
per share:
|
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Basic
|
$4.58
|
$5.42
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Diluted
|
$4.57
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$5.36
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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
1,200 and 1,027 shares of
common stock for the quarters ended March 31, 2018 and 2017,
respectively, were excluded from the computation of weighted
average diluted shares outstanding because their effect would have
been anti-dilutive.
As of
March 31, 2018, we held investments in certificates of deposit,
commercial paper, bonds 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):
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As
of March 31, 2018:
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Short-term
Investments
|
|
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|
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Certificates of
deposit
|
2
|
4,036
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$--
|
$(10)
|
$4,026
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Commercial
paper
|
2
|
20,912
|
$--
|
$(40)
|
$20,872
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Bonds
|
2
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9,847
|
$--
|
$(23)
|
$9,824
|
|
|
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Long-term
Investments
|
|
|
|
|
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Bonds
|
2
|
20,251
|
$--
|
$(215)
|
$20,036
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Mutual
funds
|
1
|
352
|
$--
|
$(8)
|
$344
|
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Equity
investments
|
2
|
5,675
|
$--
|
$(2,317)
|
$3,358
|
|
|
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As
of December 31, 2017:
|
|
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|
|
|
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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
|
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Mutual
funds
|
1
|
219
|
$3
|
$--
|
$222
|
|
|
|
|
|
|
|
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Long-term
Investments
|
|
|
|
|
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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
March 31, 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
certificates of deposit have maturities from 1.7 months to 8.2
months. The commercial paper securities have maturities from 1.3
months to 6.4 months. The bonds have maturities from 1.1 months to
55.5 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
|
$12,092
|
15.67
|
$13,840
|
$12,062
|
Aggregate
amortization expense for patents and licenses was $30,000 and
$62,000 for the three months ended March 31, 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 first quarter of 2018 was $2.4 million compared
to income tax expense of $1.5 million for the same period in the
prior year. The effective tax rate for the first quarter of 2018
was 22.2 percent, compared with 13.3 percent for the first 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% to 21% 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 3 percentage points. The benefit we received
from the lower tax rate under the Tax Cuts and Jobs Act was not as
large as the excess tax benefits we received in the first quarter
of 2017 of $2.3 million from the exercise of stock
options.
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. ASC
606 permits the use of either the retrospective or cumulative
effect transition method. We conducted and completed a
comprehensive review of contracts and their associated business
terms and conditions and performed detailed analysis on the impact
of this standard to our current contracts. Based on our evaluation,
we adopted the new standard on January 1, 2018, using the full
retrospective method. Because accounting for revenue under
contracts 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.
Our
medical device business benefits 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’ need for medical care which does not always follow
broad economic trends. This affects the nature, amount, timing and
uncertainty of our revenue. 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.
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A
summary of revenues by geographic area, based on shipping
destination, for the first quarter of 2018 and 2017 is as follows
(in thousands):
|
|
|
|
|
United
States
|
$24,607
|
$23,105
|
|
Germany
|
2,671
|
3,037
|
|
Other countries
less than 5% of revenues
|
12,123
|
12,362
|
|
Total
|
$39,401
|
$38,504
|
A
summary of revenues by product line for first quarter of 2018, and
2017 is as follows (in thousands):
|
|
|
|
|
Fluid
Delivery
|
$18,800
|
$18,005
|
|
Cardiovascular
|
13,210
|
11,464
|
|
Ophthalmology
|
2,785
|
3,673
|
|
Other
|
4,606
|
5,362
|
|
Total
|
$39,401
|
$38,504
|
Our
Fluid Delivery products include proprietary valves that promote
infection control and needle safety. Our Cardiovascular products
include the MPS2 Myocardial Protection System, which delivers
essential fluids and medications, mixes critical drugs and controls
temperature, pressure and other variables during open-heart
surgery. Our Ophthalmic products include devices to disinfect
contact lenses and a proprietary line of balloon catheters used in
the treatment of nasolacrimal duct obstructions. Various other
medical and non-medical products make up the Other product line,
including inflation systems and valves used in marine and aviation
safety products.
More
than ninety-eight percent (98%) of our total revenue in the periods
presented herein is pursuant to shipments made under a purchase
order, which under the new ASC 606 guidance we concluded would be
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 over time, and presented as receivables 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 thirty (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 and yet very low
due to our focus on quality control. A one-year warranty is
provided with certain equipment sales but this activity and our
accruals for these obligations are very small.
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We
expense sales commissions when incurred because the amortization
period would have been one year or less. These costs are recorded
within selling expense.
Atrion
has contracts in place with customers for equipment leases,
equipment financing, and equipment and other services. These
contracts represent less than 4% of our total revenue in all
periods presented herein. A portion of these contracts representing
less than 3% of our revenues include multiple performance
obligations. For such arrangements, we allocate revenue to each
performance obligation based on relative standalone selling price
for each performance obligation which is capable of being distinct
and accounted for as a separate performance obligation. 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 1% 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.
After a
thorough and extensive analysis of all of our customer agreements
and revenue generating transactions, we determined that there is no
material change in the transaction price and amounts allocated to
performance obligations, or the timing of satisfaction of
performance obligations under ASC 606 compared to our accounting
for these items in previous periods. In addition, we expect the
impact of the adoption of ASC 606 to be immaterial on an ongoing
basis.
We do
not disclose the value of unsatisfied performance obligations for
contracts for which we recognize revenue at the amount to 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 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). Atrion elected to early adopt this new
standard as of January 1, 2018, using the modified retrospective
approach as required.
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As a
lessee, Atrion has 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 balance of our right of use
assets totaled $38,000 at March 31, 2018 and is included in our
Property, Plant and Equipment on our Balance Sheet. An equal amount
was recorded as a lease liability at March 31, 2018, which
represents the present value of future obligations under these
respective leases. The monthly expense of $1,500 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 rental agreements
containing a lease component (embedded lease) and non-lease
components. Lease revenues from all of these agreements represented
less than 1% of our total revenue in the first quarter of 2018 and
in all of 2017.
The
fixed monthly rentals and embedded lease arrangements are accounted
for as operating leases. Fixed monthly rentals pay a flat fee each
month. For our embedded lease agreements we have chosen under ASC
842 to continue to use a variable basis (based on consumables sold
in the period) to allocate and recognize revenue as we have in
prior periods because it most closely represents the way in which
benefit of the asset is derived.
The
lease assets from our sales type leases are recorded on our books
in our accounts receivables and as of March 31, 2018 the balance
totaled $536,000. Our equipment being leased as operating leases to
our customers is included in our Property Plant and Equipment on
our balance sheet. As of March 31, 2018, the cost of this property
and related accumulated depreciation was $7.76 million and $5.43
million, respectively. After a thorough and extensive analysis of
our lessor agreements with customers we determined that our
accounting treatment and revenue recognition under ASC 842 compared
to our prior accounting treatment is essentially the same, and due
to the small amount of revenue from our lessor activity, all other
lessor disclosures under ASC 842 have been omitted.
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 first quarter of 2018 we recorded an unrealized loss on our
equity investment of $778,000 as a result of a drop in the market
value of this investment during the quarter. This loss is 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.
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 amendments do not require an accounting change for
securities held at a discount; the discount continues to be
amortized to maturity. The amendment is effective for annual
periods beginning after December 15, 2018, including interim
periods within those annual periods. We elected to early adopt this
amendment 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. Research and development 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 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 March 31, 2018, we reported revenues of $39.4
million, operating income of $11.4 million and net income of $8.5
million, up 2 percent, up less than 1 percent and down 15 percent,
respectively, from the three months ended March 31,
2017.
Results
for the three months ended March 31, 2018
Consolidated net
income totaled $8.5 million, or $4.58 per basic and $4.57 per
diluted share, in the first quarter of 2018. This is compared with
consolidated net income of $10.0 million, or $5.42 per basic and
$5.36 per diluted share, in the first quarter of 2017. The income
per basic share computations are based on weighted average basic
shares outstanding of 1,852,000 in the 2018 period and 1,835,000 in
the 2017 period. The income per diluted share computations are
based on weighted average diluted shares outstanding of 1,856,000
in the 2018 period and 1,855,000 in the 2017 period.
Consolidated
revenues of $39.4 million for the first quarter of 2018 were 2
percent higher than revenues of $38.5 million for the first quarter
of 2017.
Revenues
by product line were as follows (in thousands):
|
|
Three Months ended March 31,
|
|
|
|
|
|
|
|
|
|
Fluid
Delivery
|
$18,800
|
$18,005
|
|
Cardiovascular
|
13,210
|
11,464
|
|
Ophthalmology
|
2,785
|
3,673
|
|
Other
|
4,606
|
5,362
|
|
Total
|
$39,401
|
$38,504
|
Cost of
goods sold of $20.5 million for the first quarter of 2018 was 3
percent higher than cost of goods sold of $19.9 million for the
first quarter of 2017 primarily due to an unfavorable product sales
mix partially offset by improved manufacturing efficiencies and the
impact of continued cost improvement projects. Our cost of goods
sold in the first quarter of 2018 was 51.9 percent of revenues
compared with 51.6 percent of revenues in the first quarter of
2017.
Gross
profit of $19.0 million in the first quarter of 2018 was $320,000,
or 2 percent, higher than in the comparable 2017 period. Our gross
profit percentage in the first quarter of 2018 was 48.1 percent of
revenues compared with 48.4 percent of revenues in the first
quarter of 2017. The decrease in gross profit percentage in the
2018 period compared to the 2017 period was primarily related to
the unfavorable product sales mix partially offset by improved
manufacturing efficiencies and cost improvement projects mentioned
above.
Our
first quarter 2018 operating expenses of $7.6 million were $281,000
higher than the operating expenses for the first quarter of 2017.
This increase was attributable to a $212,000 increase in General
and Administrative, or G&A, expenses and a $270,000 increase in
Selling expenses partially offset by a $201,000 decrease in
Research and Development, or R&D, expenses. The increase in
G&A expenses for the first quarter of 2018 was principally
attributable to increased outside services. The increase in Selling
expenses was principally attributable to increased commissions,
compensation, outside services, trade shows and travel costs. The
decrease in R&D expenses was primarily related to decreased
outside services partially offset by increased compensation and
supply costs.
Operating income in
the first quarter of 2018 increased $39,000 to $11.4 million, a
less than 1 percent increase compared to our operating income in
the quarter ended March 31, 2017. Operating income was 29 percent
of revenues for the both the first quarter of 2018 and the first
quarter of 2017.
Interest and
dividend income in the first quarter of 2018 was $330,000, compared
with $148,000 for the same period in the prior year. Increased
levels of investment and increased interest rates were the primary
reasons for the increase.
Other
investment loss in the first quarter of 2018 was $789,000 compared
with other investment income of $1,000 in the first quarter of
2017. We adopted ASU 2016-01 as of January 1, 2018 (see Note 7).
For the first quarter of 2018 we recorded an unrealized loss on an
equity investment of $778,000 as a result of a drop in the market
value of this investment during the quarter.
Income
tax expense for the first quarter of 2018 was $2.4 million compared
to income tax expense of $1.5 million for the same period in the
prior year. The effective tax rate for the first quarter of 2018
was 22.2 percent, compared with 13.3 percent for the first quarter
of 2017. The Tax Cuts and Jobs Act, reduced the corporate federal
income tax rate in the United States from 35% to 21% effective for
us on January 1, 2018. Our effective tax rate for the first quarter
of 2017 was favorably impacted by excess tax benefits of $2.3
million related to stock compensation. We expect the effective tax
rate for the remainder of 2018 to be approximately 22.0
percent.
Liquidity
and Capital Resources
As of
March 31, 2018, we had a $75.0 million revolving credit facility
with a money center bank pursuant to which the lender is obligated
to make advances until February 28, 2022. This credit facility,
entered into on February 28, 2017, replaced a $40.0 million
revolving credit facility with the same bank which was in place for
several years prior to that date. We had no outstanding borrowings
under our credit facility at March 31, 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 March 31,
2018, we were in compliance with all financial covenants. We
believe the bank providing the credit facility is highly-rated and
that the entire $75.0 million under the credit facility is
currently available to us.
At
March 31, 2018, we had a total of $78.9 million in cash and cash
equivalents, short-term investments and long-term investments, an
increase of $4.2 million from December 31, 2017. The principal
contributor to this increase was operating results.
Cash
flows from operating activities of $10.4 million for the three
months ended March 31, 2018 were primarily comprised of net income
plus the net effect of non-cash expenses, increases to accrued
income and other taxes partially offset by increases to accounts
receivable. During the first three months of 2018, we expended $3.3
million for the addition of property and equipment, $25.5 million
for the purchase of investments and $2.2 million for dividends.
During the same period,
maturities of investments generated $10.7 million in
cash.
At
March 31, 2018, we had working capital of $96.4 million, including
$20.2 million in cash and cash equivalents and $34.8 million in
short-term investments. The $9.2 million decrease in working
capital during the first three months of 2018 was primarily related
to decreases in short-term investments and increases in accrued
income and other taxes. This decrease was partially offset by
increases in accounts receivable. The net decrease in cash and
short-term investments was primarily related to a shift in the
investments mix to an increase in long-term investments. The
increase in accounts receivable was primarily related to increased
revenues for the first quarter of 2018 as compared to the fourth
quarter of 2017. The increase in accrued income and other taxes is
primarily related to accrued federal and state income taxes
relating to operating results.
We
believe that our $78.9 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, 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 March 31, 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 March 31, 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 March 31, 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
|
|
|
Atrion
Corporation Short-Term Incentive Compensation Plan (As last amended
on March 12, 2018)
|
|
|
|
|
|
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)
|
|
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Date: May 9, 2018 |
By:
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/s/
David
A. Battat
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David
A. Battat
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President
and Chief
Executive Officer
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Date: May 9, 2018
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By:
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/s/
Jeffery
Strickland
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Jeffery
Strickland |
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Vice
President and
Chief
Financial Officer
(Principal Accounting and Financial Officer)
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Exhibit Index
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Exhibit
Number
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Description
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Atrion
Corporation Short-Term Incentive Compensation Plan (As last amended
on March 12, 2018)
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Sarbanes-Oxley Act
Section 302 Certification of Chief Executive Officer
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Sarbanes-Oxley Act
Section 302 Certification of Chief Financial Officer
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Certification
Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section
906 of The Sarbanes – Oxley Act Of 2002
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Certification
Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section
906 of The Sarbanes – Oxley Act Of 2002
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101.INS
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XBRL
Instance Document
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101.SCH
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XBRL
Taxonomy Extension Schema Document
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase Document
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101.DEF
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XBRL
Taxonomy Extension Definition Linkbase Document
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101.LAB
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XBRL
Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase Document
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