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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the Fiscal Year Ended December 31, 2019

 

 

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

 

_________________________________________

Atrion Corporation

(Exact name of Registrant as specified in its charter)

 

Delaware

 

63-0821819

(State of incorporation or organization)

 

(I.R.S. Employer Identification No.)

One Allentown Parkway, Allen, Texas

 

75002

(Address of principal executive offices)

 

(ZIP code)

Registrant’s telephone number, including area code:  (972) 390-9800

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:

Title of Class

 

Name of Each Exchange on Which Registered

Common Stock, $.10 Par Value

 

NASDAQ

 

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:   None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

Yes            No 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes              No 

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 Regulation S-T 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). 

Yes     No 

The aggregate market value of the voting Common Stock held by nonaffiliates of the Registrant as of, June 30, 2019, the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $1,228,356,621 based on the $852.74 closing price reported for such date on the NASDAQ Global Select Market.

 

Number of shares of Common Stock outstanding at February 14, 2020: 1,854,829

 

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates by reference information from the Company’s definitive proxy statement relating to the 2020 annual meeting of stockholders, to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.

 

 
 
 

ATRION CORPORATION

 

FORM 10-K

 

ANNUAL REPORT TO

THE SECURITIES AND EXCHANGE COMMISSION

FOR THE YEAR ENDED DECEMBER 31, 2019

 

_________________________________________

 

TABLE OF CONTENTS

 

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ATRION CORPORATION

 

FORM 10-K

 

ANNUAL REPORT TO

THE SECURITIES AND EXCHANGE COMMISSION

FOR THE YEAR ENDED DECEMBER 31, 2019

 

PART I

 

ITEM 1.                BUSINESS.

 

General

 

Atrion Corporation and its subsidiaries (“we,” “our,” “us,” “Atrion,” or the “Company”) develop and manufacture products, primarily for medical applications. Our medical products are used in a number of fields including fluid delivery, cardiovascular and ophthalmic applications.

 

Our fluid delivery products accounted for 46 percent of net revenues for each of 2019 and 2018 and 44 percent of net revenues for 2017.  We have developed a wide variety of proprietary valves designed to precisely fill, hold and release controlled amounts of fluids or gasses on demand for use in various intubation, intravenous, catheter and other applications in fields such as anesthesia and oncology.  We make products that deliver fluids as well as promote infection control in hospital and home healthcare environments.

 

Our cardiovascular products accounted for 35 percent of net revenues for 2019 and 33 percent for each of 2018 and 2017. At the core of our cardiovascular products is the MPS2® Myocardial Protection System, or MPS2, a proprietary technology that is the only system used in open-heart surgery that delivers to the heart essential fluids and medications, mixes critical drugs and controls temperature, pressure and other variables. This system indicates improved outcomes offering an integrated, flexible set of choices during surgery without diluting the blood. We also develop and manufacture other cardiovascular products such as cardiac surgery vacuum relief valves; silicone vessel loops for retracting and occluding vessels in minimally invasive surgical procedures; inflation devices for balloon catheter dilation, stent deployment and fluid dispensing; as well as products used in heart bypass surgery to make a precision opening in the heart for attachment of the bypass vessels.

 

Our ophthalmic products accounted for 5 percent, 7 percent and 9 percent of our net revenues for 2019, 2018 and 2017, respectively. We are a leading manufacturer of specialized medical devices that disinfect contact lenses. We also manufacture a proprietary line of balloon catheters used in the treatment of nasolacrimal duct obstruction in children and adults.

 

Our other medical and non-medical products accounted for 14 percent of our net revenues for each of 2019, 2018 and 2017. One of these product lines consists of instrumentation and associated disposables used to measure the activated clotting time of blood. In addition, we manufacture and sell a line of products designed for safe needle and scalpel blade containment. We are also the leading manufacturer of inflation systems and valves used in marine and aviation safety products. We manufacture components used in inflatable survival products and structures. We also produce one-way and two-way pressure relief valves that protect sensitive electronics and other products during transport in medical and non-medical applications.

 

-1-

 

Marketing and Major Customers

 

We market components to other equipment manufacturers for incorporation in their products and sell finished devices to physicians, hospitals, clinics and other treatment centers. We sell our products through a sales force which consists of direct sales personnel, independent sales representatives and distributors.  Our sales managers also work closely with major customers in designing and developing products to meet customer requirements.

 

We offer customer service, training and education and technical support such as field service, spare parts, maintenance and repair for certain of our products. We periodically advertise our products in trade journals, routinely attend and participate in industry trade shows throughout the United States and internationally, and sponsor scientific symposia as a means of disseminating product information. We also have supportive literature on the benefits of our products.

 

Manufacturing

 

Our medical and non-medical products are manufactured at facilities in Florida, Alabama and Texas. The facilities in Alabama and Florida both utilize plastic injection molding and specialized assembly as their primary manufacturing processes. Our other manufacturing processes consist of the assembly of standard and custom component parts, including the assembly of electronic components, and the testing of completed products.

 

We are subject to the Quality System Regulation, or QSR, of the United States Food and Drug Administration, or FDA, which requires manufacturers of medical devices to adhere to certain design testing, quality control, documentation and other quality assurance procedures during the manufacturing process. We devote significant attention to quality assurance. Our quality assurance measures begin with the suppliers which participate in our supplier quality assurance program. These measures continue at the manufacturing level where many components are assembled in a clean room environment designed and maintained to reduce product exposure to particulate matter. Products are tested throughout the manufacturing process for adherence to specifications. Most finished products are then shipped to outside processors for sterilization by radiation or ethylene oxide gas. After sterilization, the products are quarantined and tested before they are shipped to customers.

 

Skilled workers are required for the manufacturing of our products, and we believe that additional workers with these skills are readily available in the areas where our facilities are located.

 

Our medical device operations are EN ISO13485:2016 certified and are subject to FDA jurisdiction.

 

Research and Development

 

A well-targeted research and development, or R&D, program is an essential part of our activities, and we are currently engaged in a number of R&D projects. The objective of this program is to develop new products in our current product lines, improve current products and develop new product lines. The Company expects to continue additional R&D in 2020 in all these fields.

 

Sources and Availability of Raw Materials

 

The principal raw materials that we use in our products are resins. Our ability to operate profitably is dependent, in part, on the availability and pricing of these resins. The resins we use are derived from petroleum and natural gas, and the prices fluctuate substantially as a result of changes in petroleum and natural gas prices, demand and the capacity of the companies that produce these resins to meet market needs. Instability in the world markets for petroleum and natural gas could adversely affect the availability and pricing of these resins.

 

-2-

 

We contract with various suppliers to provide the component parts necessary to assemble our products. Substantially all of these components are available from a number of different suppliers, although certain components are purchased from single sources that manufacture these components using our tooling. We believe that we have satisfactory alternative sources for single-sourced components, although a sudden disruption in supply from one or more of these suppliers could adversely affect our ability to deliver finished products on time. We own the molds used for production of substantially all our components. Consequently, in the event of supply disruption, we should be able to fabricate our own components or contract with another supplier, albeit after a possible delay in the production process.

 

Intellectual Property

 

Our success may depend in part on our ability to protect our intellectual property, and we rely partly on a combination of patent, copyright, trademark, and trade secret laws to protect our intellectual property interests. We own 331 patents and patent applications pending on products that are currently being sold by us or which we intend to sell in the future, 85 of which relate to fluid delivery products, 13 of which relate to cardiovascular products, 77 of which relate to ophthalmology products, and 146 of which relate to other products. We pay royalties to an outside party under a license agreement for one patent. Our patents expire at various times over the next 18 years, with patent protection for one current material product expiring in August 2022. Patent protection for no other material product ends in the current decade. In assessing the importance of patents to our business and the impact of the expirations of our patents, we believe it is appropriate to take into account a number of factors, including the following: We have contractual commitments for certain products that extend beyond the expiration dates of our patents. Additionally, many of our products are components in other medical devices and the cost of those components is generally very small compared to the cost of those medical devices. As a result, the manufacturers of those medical devices and their customers would likely experience an elaborate technical and regulatory process that could add significant costs and delays to substitute alternative components and may not be cost effective, thus making it difficult for our potential competitors to replace our components in those medical devices. We manufacture our own products, and that experience has been and is expected to continue to be beneficial to us beyond the expiration of our patents. During the life of a patent, we frequently invest in automation to increase quality and reduce cost, and we allocate resources to improving and developing enhancements to our products. Our experience has been that these steps increase the likelihood that we will be able to compete effectively after our patents expire if others try to duplicate our products. We have often been able to sell our products for many years beyond their patent expirations and expect that to continue in the future. However, we recognize that our future growth depends, in part, on our success in continuing to expand our patent portfolio as older patents expire. Much of our research and development effort is aimed at developing new products that will eventually take the place of our currently patented products. For these reasons, as well as others, we believe that no single patent expiration would have a material adverse effect on our business as a whole. We also have a number of trademark registrations that are generally for fixed but renewable terms.

 

We have developed technical knowledge which, although non-patentable, we consider to be significant in enabling us to compete. We have entered into agreements with key employees prohibiting them from disclosing any of our trade secrets or other confidential information. In addition, generally these agreements also provide that inventions or discoveries relating to our business by these individuals will be assigned to us and become our sole property. .

 

The medical device industry is characterized by extensive intellectual property litigation, and companies in this industry sometimes use intellectual property litigation to gain a competitive advantage. Intellectual property litigation, regardless of outcome, is often complex and expensive, and the outcome of this litigation is generally difficult to predict.

 

Competition

 

Depending on the product and the nature of the project, we compete on the basis of our ability to provide engineering and design expertise, quality, service, product and price. As such, successful competitors must have technical strength, responsiveness and scale. We believe that our expertise and reputation for quality medical products have allowed us to compete favorably with respect to each such factor and to maintain long-term relationships with our customers.

 

In many of our markets, we compete with numerous other companies in the sale of healthcare products. These markets are dominated by established manufacturers that have broader product lines, greater distribution capabilities, substantially greater capital resources and larger marketing and R&D staffs and facilities than ours. Many of these competitors offer broader product lines within the specific product market and in the general field of medical devices and supplies. Broad product lines give many of our cardiovascular and fluid delivery competitors the ability to negotiate exclusive, long-term medical device supply contracts and, consequently, the ability to offer comprehensive pricing of their competing products. By offering a broader product line in the general field of medical devices and supplies, competitors may also have a significant advantage in marketing competing products to group purchasing organizations, health maintenance organizations, and other managed care organizations that are increasingly seeking to reduce costs through centralization of purchasing functions. Furthermore, innovations in surgical techniques, product design or functions, or medical practices could have the effect of reducing or eliminating market demand for one or more of our products. In addition, our competitors may use price reductions to preserve market share in their product markets.

 

-3-

 

For some customers or prospective customers, we design products for a customer or potential customer prior to entering into long-term development and manufacturing agreements with those customers or prospective customers. Because these products are somewhat limited in number and normally are only a component of the ultimate product sold by our customers, we are dependent on our ability to meet the quality requirements of our customers and must continually be attentive to the need to manufacture such products at competitive prices and in compliance with strict manufacturing standards. Additionally, we are dependent on our customers’ success in the marketing of the ultimate products sold. We also compete in the market for inflation devices used in marine and aviation equipment.

 

Government Regulation

 

Products

 

The manufacture and sale of medical products are subject to comprehensive regulation by numerous United States and foreign regulatory agencies, principally the FDA in the United States. The R&D, manufacturing, promotion, marketing and distribution of medical products in the United States are subject to the provisions of the Federal Food, Drug and Cosmetic Act, or FDCA, and the regulations promulgated thereunder. All manufacturers of medical devices must register with the FDA and list all medical devices manufactured by them. The list must be updated annually. Our medical products subsidiaries and certain of our customers are subject to inspection by the FDA for compliance with such regulations and procedures and our medical products manufacturing facilities are subject to regulation by the FDA. In order for our products to be marketed in countries outside the United States, regulatory approvals must be obtained, and extensive product and quality system regulations must be complied with, in those countries. These regulations, including the requirements for approvals or clearance and the time required for regulatory review, vary significantly from country to country. Some countries have regulatory review processes which are substantially longer than similar processes in the United States. Failure to obtain regulatory approval in a timely manner and to meet all local requirements including language and specific safety standards in any foreign country in which we would like for our products to be sold could prevent our products from being marketed in those countries.

 

The FDA has traditionally pursued a rigorous enforcement program to ensure that regulated entities comply with the FDCA.  A company not in compliance may face a variety of regulatory actions, including warning letters, product detentions, device alerts, mandatory recalls or field corrections, product seizures, total or partial suspension of production, injunctive actions or civil penalties and criminal prosecutions of the company or responsible employees, officers and directors.

 

The FDA promulgates rules, which are available to the public, for the approval of medical devices. The process of obtaining FDA approval for new devices can take several months to several years depending on the type of application required for a particular device. Furthermore, the process of obtaining FDA approval can be expensive and uncertain. Even if granted, FDA approval may include significant limitations on the indicated uses for which a product may be marketed. FDA enforcement policy strictly regulates the promotion of approved medical devices. Product approvals can be withdrawn for failure to comply with regulatory requirements or the occurrence of unforeseen problems following initial marketing. In addition, after a device is placed on the market, numerous FDA and other regulatory requirements continue to apply. These include establishment registration and device listing with the FDA; compliance with medical device reporting regulations requiring that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and compliance with corrections and removal reporting regulations requiring that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health. The FDA and the Federal Trade Commission, or FTC,  also regulate the advertising and promotion of our products to ensure that the claims we make are consistent with our regulatory clearances, that scientific data substantiates the claims and that our advertising is not false or misleading. Generally, we may not promote or advertise our products for uses outside the scope of our intended use statement in our clearances or make unsupported safety and effectiveness claims. Many jurisdictions outside the United States have similar regulations.

 

-4-

 

Certain aviation and marine safety products are subject to regulation by the United States Coast Guard and the Federal Aviation Administration and similar organizations in foreign countries which regulate the safety of marine and aviation equipment.

 

Healthcare Regulations

 

In the United States, healthcare providers, including hospitals and physicians, that purchase medical products for treatment of their patients generally rely on third-party payors, principally Medicare, Medicaid and private health insurance plans, to reimburse all or a part of the costs and fees associated with the procedures performed using these products.

 

Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed healthcare systems that control reimbursement for new products and procedures. In most markets, there are private insurance systems as well as government-managed systems. Market acceptance of our products in international markets depends, in part, on the availability and level of reimbursement.

 

Medicare and Medicaid reimbursement for hospitals is generally based on a fixed amount for a patient based upon that patient’s specific diagnosis. Because of this fixed reimbursement method, hospitals may seek to reduce the costs they incur in treating Medicare and Medicaid patients. Frequently, reimbursement is reduced to reflect the availability of a new procedure or technique, and as a result hospitals are generally willing to implement new cost saving technologies before these downward adjustments take effect. Likewise, because the rate of reimbursement for physicians who perform certain procedures has been and may in the future be reduced, physicians may seek greater cost efficiency in treatment to minimize any negative impact of reduced reimbursement. Third-party payors may challenge the prices charged for medical products and services and may deny reimbursement if they determine that a device was not used in accordance with cost-effective treatment methods as determined by the payor, was experimental or was used for an unapproved application.

 

-5-

 

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively known as the “Affordable Care Act”) were enacted. The Affordable Care Act made changes that have had a significant impact on healthcare providers, medical device and pharmaceutical companies and insurers. To generate revenues to fund the expansion of healthcare coverage, the Affordable Care Act has a number of provisions, including a 2.3 percent excise tax on the sale in the United States of certain medical devices by the manufacturer, producer or importer effective after December 31, 2012. That excise tax was repealed by the Further Consolidated Appropriations Act that was signed into law on December 20, 2019. As a result of the repeal and prior moratorium or delays in imposition of the excise tax, sales of medical devices after December 15, 2015 were not and will not be subject to the excise tax. The Affordable Care Act also established a payment transparency program, sometimes referred to as the Physician Payments Sunshine Act that requires medical device and drug manufacturers, including the Company, to report to the Centers for Medicare & Medicaid Services, or CMS, payments or other transfers of value made to physicians and teaching hospitals. The program is intended to provide patients with enhanced transparency as to the financial relationships that physicians and teaching hospitals have with medical device and drug manufacturers. On January 20, 2017, President Trump signed an Executive Order directing federal agencies to exercise all authority and discretion available to them under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. There have also been judicial and congressional challenges to certain aspects of the Affordable Care Act, as well as efforts by the Trump Administration to modify, repeal, or otherwise invalidate all, or certain provisions of, the Affordable Care Act. Since January 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. In addition, CMS has proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the Affordable Care Act for plans sold through such marketplaces. The Tax Cuts and Jobs Act of 2017, or Tax Act, which was enacted on December 22, 2017, reduced the Affordable Care Act’s shared-responsibility payment to zero, effective January 1, 2019.  Following the enactment of the Tax Act, on December 14, 2018 in a case in the United States District Court for the Northern District of Texas, a federal judge ruled that the individual mandate imposed by the Affordable Care Act is unconstitutional and inseverable from the other provisions of the Affordable Care Act and, therefore, the remaining provisions of the Affordable Care Act are invalid. On December 18, 2019, the United States Court of Appeals for the Fifth Circuit affirmed the ruling of the United States District Court but sent the case back to that court to consider how much, if any, of the Affordable Care Act, other than the individual mandate, should be invalidated. In January 2020, the Supreme Court of the United States declined to expedite its decision whether to review the Fifth Circuit’s decision, thus leaving the future of the Affordable Care Act uncertain.  Although the Trump Administration and CMS have indicated that this ruling will have no immediate effect, we cannot presently determine how this case, as well as other actions to repeal or replace the Affordable Care Act, will affect our business.  Even while the impact of that case is unclear, the Trump Administration is likely to continue shaping the law significantly through regulations that may impact the health insurance marketplaces, essential health benefits requirements, and Medicaid marketplace waivers for state flexibilities. Any regulatory or legislative developments in domestic or foreign markets that eliminate or reduce reimbursement rates for procedures performed with our products could harm our ability to sell our products or cause downward pressure on the prices of our products, either of which would adversely affect our business, financial condition, and results of operations. Further, we anticipate that state legislatures and the private sector will continue to review and assess healthcare reform, including alternative healthcare delivery and payment systems. We cannot predict with certainty what impact the adoption or modification of any such reform measures or market forces may have on our business.

 

We are, directly or indirectly, subject to various federal and state laws governing our relationship with healthcare providers and pertaining to healthcare fraud and abuse, including anti-kickback laws. In particular, the federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual or the furnishing, arranging for or recommending a good or service for which payment may be made in whole or part under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. In implementing the statute, the Office of Inspector General of the United States Department of Health and Human Services, or OIG, has issued a series of regulations, known as the “safe harbors.” These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable element of a safe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG.

 

The Federal False Claims Act, or FCA, imposes civil liability on any person or entity that submits, or causes the submission of, a false or fraudulent claim to the United States government. Damages under the FCA can be significant and consist of the imposition of fines and penalties. The FCA also allows a private individual or entity with knowledge of past or present fraud against the federal government to sue on behalf of the government to recover the civil penalties and treble damages. The United States Department of Justice, on behalf of the government, has previously alleged that the marketing and promotional practices of medical device and drug manufacturers that included the off-label promotion of products or the payment of prohibited kickbacks to doctors violated the FCA resulting in the submission of improper claims to federal and state healthcare entitlement programs such as Medicaid. In certain cases, manufacturers have entered into criminal and civil settlements with the federal government under which they entered into plea agreements, paid substantial monetary amounts and entered into corporate integrity agreements that require, among other things, substantial reporting and remedial actions going forward.

 

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Product Liability and Insurance

 

The design, manufacture and marketing of products of the types we produce entail an inherent risk of product liability claims. A problem with one of our products could result in product liability claims or a recall of, or safety alert or advisory notice relating to, the product. We have product liability insurance in amounts that we believe are adequate.

 

Advisory Board

 

Several physicians and other healthcare professionals serve as our clinical advisors. These clinical advisors have assisted in the identification of the market need for some of our products. Members of our management and scientific and technical staff from time to time consult with these clinical advisors to better understand the technical and clinical requirements of current and future products. We anticipate that these clinical advisors will continue to play a role in our development activities.

 

Certain of the clinical advisors are employed by academic institutions and may have commitments to, or consulting or advisory agreements with, other entities that may limit their availability to advise us. The clinical advisors may also serve as consultants to other medical device companies. Our clinical advisors are not expected to devote more than a small portion of their time in providing services to us.

 

People

 

At January 31, 2020, we had 616 employees. We are proud that many of our employees have tenures with us ranging from 10 to 40 years.

 

Available Information

 

Our website address is www.atrioncorp.com. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements, and amendments to these filings, as soon as reasonably practicable after filing with or furnished to the Securities and Exchange Commission, or SEC. These filings are also available at www.sec.gov. The contents of these websites are not incorporated in this Form 10-K, and any references to our website are intended to be inactive textual references only.

 

ITEM 1A.             RISK FACTORS.

 

In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition and results of operations could be materially adversely affected by any of these risks. Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, may also harm our business operations or adversely affect us.

 

 

Our sales could decline materially if we lose business from one or more of our larger customers or a significant number of our smaller customers.

Our sales are generally made under open short-term purchase orders or purchase contracts.  Customers with purchase orders could reduce their volumes, or cease purchasing our products, with minimal notice.  Customers having purchase contracts may elect not to renew those contracts at expiration or the contracts may be renewed on terms less favorable to us.  The loss of, or material reduction in orders by, one or more of our larger customers or a significant number of our smaller customers could have a material adverse effect on our business, financial condition and results of operations.

 

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Our business is dependent on the price and availability of resins and our ability to pass on resin price increases to our customers.

The principal raw materials that we use in our products are polyethylene, polypropylene and polyvinyl chloride resins. Our ability to operate profitably is dependent, in part, on the availability and pricing of these resins. The resins we use are derived from petroleum and natural gas; therefore, prices fluctuate substantially as a result of changes in petroleum and natural gas prices, demand and the capacity of the companies that produce these products to meet market needs. Instability in the world markets for petroleum and natural gas could adversely affect the prices of these raw materials and their availability.

 

Our ability to maintain profitability depends, in part, upon our ability to pass through to our customers the full amount of any increase in raw material costs. If resin prices increase and we are not able to fully pass on the increases to our customers, our results of operations and our financial condition will be adversely affected.

 

 

Our business is dependent on third-party sterilization for many of our products, and the closure of sterilization facilities that provide sterilization services for us may adversely affect our business.

 

The United States Food and Drug Administration, or FDA, recently issued a caution concerning a nationwide shortage of medical devices due to issues with contract sterilizers. Two significant contract sterilization facilities that service many medical device companies were shut down in 2019 due to environmental concerns—one permanently and one temporarily—and local officials asked a third facility to voluntarily halt operations. The loss of sterilization capacity caused significant delays at this country’s remaining sterilization facilities. If we do not have access to sterilization facilities that have a capacity to process our products requiring sterilization, we may experience delays in, or reduction of, sales and deliveries of those products.

 

 

The loss of a key supplier of raw materials could lead to increased costs and lower profit margins.

The loss of a key supplier could force us to purchase raw materials in the open market, which may be at higher prices, until we could secure another source and such higher prices may not allow us to remain competitive. If we are unable to obtain raw materials in sufficient quantities, we may not be able to manufacture our products. Even if we were able to replace one of our raw material suppliers through another supply arrangement, there is no assurance that the terms that we enter into with such alternate supplier will be as favorable to us as the supply arrangements that we currently have or that such replacement could be timely completed. A disruption or termination in the supply of raw materials could result in our inability to meet the demand for our products, which could adversely affect our revenue generation and result in customer dissatisfaction.

 

 

Political and economic conditions could materially and adversely affect our revenue and results of operations.

Our business may be affected by a number of factors that are beyond our control such as general geopolitical economic and business conditions, conditions in the financial markets, and changes in the overall demand for our products. A severe or prolonged economic downturn could adversely affect our customers’ financial condition and the levels of business activity of our customers. Uncertainty about current global political or economic conditions could cause businesses to postpone spending in response to tighter credit, negative financial news or declines in income or asset values, which could have a material negative effect on the demand for our products. There could be additional effects on our business from these economic developments including the insolvency of key suppliers or their inability to obtain credit, the inability of our customers to pay for or obtain credit to finance purchases of our products and increased pressure to reduce the prices of our products. Turbulence in the United States and international markets and economies could have a material adverse impact on our business, operating results and financial condition. In addition, if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, which could materially adversely affect our business and results of operations.

 

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Product liability claims could adversely affect our financial condition and results of operations.

We may be subject to product liability claims involving claims of personal injury or property damage. Our product liability insurance coverage may not be adequate to cover the cost of defense and the potential award in the event of a claim. A product liability claim, regardless of its merit or outcome, could result in significant legal defense costs. Also, a well-publicized actual or perceived problem with one or more of our products could adversely affect our reputation and reduce the demand for our products.

 

 

Issues with product quality could have an adverse effect upon our business, subject us to regulatory actions and cause a loss of customer confidence in us or our products.

Our success depends upon the quality and reliability of our products. Quality management plays an essential role in determining and meeting customer requirements, preventing defects, improving our products and assuring the safety and efficacy of our products. Our future success depends on our ability to maintain and continuously improve our quality management program. Although we have one quality system that covers the lifecycle of our products, quality and safety issues may occur with respect to any of our products. A quality or safety issue may result in adverse inspection reports, warning letters, product recalls, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, costly litigation, refusal of a government to grant approvals and licenses, restrictions on operations or withdrawal of existing approvals and licenses. An inability to address a quality or safety issue in an effective and timely manner may also cause negative publicity or a loss of customer confidence in us or our current or future products, which may result in the loss of sales and difficulty in successfully launching new products. Additionally, we have made and continue to make significant investments in assets, including inventory and property, plant and equipment, which relate to potential new products or modifications to existing products. Product quality or safety issues and costs associated there with may restrict us from being able to realize the expected returns from these investments and may adversely affect our results of operations and our financial condition.

 

Unaffiliated third party suppliers provide a number of goods and services to our manufacturing and R&D organizations. Third party suppliers are required to comply with our quality standards. Failure of a third party supplier to provide compliant raw materials or supplies could result in delays, service interruptions or other quality related issues that may negatively impact our business results.

 

 

Any losses we incur as a result of our exposure to the credit risk of our customers could harm our results of operations.

We monitor individual customer payment capability in granting credit arrangements, seek to limit credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts. As we have grown our revenue and customer base, our exposure to credit risk has increased. Any material losses as a result of customer defaults could harm, and have an adverse effect on, our business, operating results and financial condition.

 

 

The success of certain of our products depends upon relationships with healthcare professionals.

 

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The research, development, marketing, and sales of many of our new and improved products are dependent upon our maintaining working relationships with healthcare professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding our products.  If we are unable to maintain our relationships with these professionals and do not continue to receive their advice and input, the development and commercialization of our products could suffer, which could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.

 

 

Our success is measured in part by our ability to develop patentable products, to preserve our trade secrets and operate without infringing or violating the proprietary rights of third parties.

Our ability to remain competitive is dependent, in part, upon our ability to protect our intellectual property rights and prevent other companies from using our intellectual property. We seek to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws and confidentiality agreements. However, these measures afford only limited protection and may be challenged, invalidated, or circumvented by third parties. Additionally, these measures may not prevent competitors from duplicating our products or gaining access to our proprietary information and technology. Third parties may copy all or portions of our products or otherwise use our intellectual property without authorization, and we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current employees, despite the existence of nondisclosure and confidentiality agreements and other contractual restrictions, all of which could have an adverse effect on our business, operations, or financial condition. Others may challenge the validity of any patents issued to us, and we could encounter legal and financial difficulties in enforcing our patent rights against infringers. In addition, there can be no assurance that other technologies cannot or will not be developed or that patents will not be obtained by others which would render our patents less valuable or obsolete. Our patents expire at various times over the next 18 years. Once patents expire, some customers may not continue to purchase from us, opting for competitive copies instead. In such event, our sales and profits could decline substantially. During the terms of our patents, third parties may develop similar or superior technology independently or by designing around our patents. Additionally, if we do not develop and launch new products prior to the expiration of patents or before the demand for our existing products declines, our sales and profits could be adversely affected.

 

We have developed technical knowledge which, although non-patentable, we consider to be significant in enabling us to compete. However, the proprietary nature of such knowledge may be difficult to protect. We have entered into agreements with key employees prohibiting them from disclosing any of our trade secrets or other confidential information. In addition, generally these agreement also provide that inventions or discoveries relating to our business by these individuals will be assigned to us and become our sole property. We cannot assure you that the enforceability of these agreements will not be challenged or that our trade secrets will not become known to, or be independently developed by, our competitors.

 

The medical device industry is characterized by extensive intellectual property litigation, and companies in the medical device industry sometimes use intellectual property litigation to gain a competitive advantage. Intellectual property litigation, regardless of outcome, is often complex and expensive, and the outcome of this litigation is generally difficult to predict. An adverse determination in any such proceeding could subject us to significant liabilities to third parties or require us to seek licenses from third parties or pay royalties that may be substantial. Furthermore, there can be no assurance that necessary licenses would be available to us on satisfactory terms or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing or selling certain of our products, which could have a material adverse effect on our business, financial condition and results of operations.

 

 

International patent protection is uncertain.

Patent law outside the United States is uncertain and is currently undergoing review and revision in many countries. Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as United States laws. We may participate in opposition proceedings to determine the validity of our or our competitors’ foreign patents, which could result in substantial costs and diversion of our efforts.

 

 

New lines of business or new or enhanced products and services may subject us to additional risks.

We may implement new lines of business or offer new or enhanced products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business or new or enhanced products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and new or enhanced products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new or enhanced product or service. Furthermore, any new line of business or new or enhanced product or service could have a significant impact on the effectiveness of our system of internal control. Failure to successfully manage these risks in the development and implementation of new lines of business or new or enhanced products or services could have a material adverse effect on our business, results of operations and financial condition.

 

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Some of our competitors have significantly greater resources than we do, and it may be difficult for us to compete against them.

In many of our markets, we compete with numerous other companies that have substantially greater financial resources and engage in substantially more R&D activities than we do. Furthermore, innovations in surgical techniques or medical practices could have the effect of reducing or eliminating market demand for one or more of our products. In addition, the trend of consolidation in the medical device industry and among our customers could result in greater competition and pricing pressure.

 

Some of the markets in which we compete are dominated by established manufacturers that have broader product lines, greater distribution capabilities, substantially larger marketing, R&D staffs and facilities than we do. Many of these competitors offer broader product lines within the specific product market and in the general field of medical devices and supplies. Broad product lines give many of our cardiovascular and fluid delivery competitors the ability to negotiate exclusive, long-term medical device supply contracts and, consequently, the ability to offer comprehensive pricing of their competing products. By offering a broader product line in the general field of medical devices and supplies, competitors may also have a significant advantage in marketing competing products to group purchasing organizations.  In addition, our competitors may use price reductions to preserve market share in their product markets.

 

 

We are subject to healthcare fraud and abuse regulations that could result in significant liability, require us to change our business practices and restrict our operations in the future.

We are subject to various federal, state and local laws targeting fraud and abuse in the healthcare industry, including anti-kickback and false claims laws. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in healthcare programs such as Medicare and Medicaid and health programs outside the United States. These laws and regulations are wide ranging and subject to changing interpretations and applications, which could restrict our sales or marketing practices. A violation of these laws could have a material adverse effect on our business, results of operations, financial condition and cash flow.

 

 

We will be unable to sell our products if we fail to comply with governmental regulations.

To manufacture our products commercially, we must comply with governmental regulations that govern design controls, quality systems and documentation policies and procedures, including continued compliance with QSR. The FDA and equivalent foreign governmental authorities periodically inspect our manufacturing facilities and the manufacturing facilities of our Original Equipment Manufacturer, or OEM, medical device customers. If we or our OEM medical device customers fail to comply with these manufacturing regulations, including meeting reporting obligations to the FDA, or fail any FDA inspections, marketing or distribution of our products may be prevented or delayed, which would negatively impact our business.

 

 

Our products are subject to product recalls even after receiving regulatory clearance or approval, and any such recalls would negatively affect our financial performance and could harm our reputation.

Any of our products may be found to have significant deficiencies or defects in design or manufacture. The FDA and similar governmental authorities in other countries have the authority to require the recall of any such defective products. A government-mandated or voluntary recall could occur as a result of component failures, manufacturing errors or design defects. We do not maintain insurance to cover losses incurred as a result of product recalls. Any product recall would divert managerial and financial resources and negatively affect our financial performance and could harm our reputation with customers and end-users.

 

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We may not receive regulatory approvals for new product candidates or for modifications of existing products or approvals may be delayed.

Regulation by governmental authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of our proposed products and in our ongoing research and product development activities. Any failure to receive the regulatory approvals necessary to commercialize our product candidates, or the subsequent withdrawal of any such approvals, would harm our business. Additionally, modification of our existing products may require regulatory approval. The process of obtaining these approvals and the subsequent compliance with federal and state statutes and regulations require spending substantial time and financial resources. If we fail to obtain or maintain, or encounter delays in obtaining or maintaining, regulatory approvals, the marketing of any products we develop or modify, our ability to receive product revenues, and our liquidity and capital resources could be adversely affected.

 

 

Any major disruption or failure of our information technology systems, or our failure to successfully implement new technology effectively, could adversely affect our business and operations.

We rely on various information technology systems to manage our operations. Over the last several years, we have been and continue to implement modifications and upgrades to our systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality For example, over the next several years, we plan to continue the process of implementing a new enterprise resource planning system across our company. These activities subject us to inherent costs and risks associated with replacing and upgrading these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new or upgraded systems or of integrating new or upgraded systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new or upgraded technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated.

 

 

We face cybersecurity risks and may incur increasing costs in an effort to minimize those risks.

We utilize systems and websites that allow for the secure storage and transmission of proprietary or confidential information regarding our customers, employees, and others, including personal information. As evidenced by the numerous companies that have suffered serious data security breaches, we may be vulnerable to, and unable to anticipate or detect, data security breaches and data loss, including rapidly evolving and increasingly sophisticated cybersecurity attacks. In addition, data security breaches can also occur as a result of a breach by us or our employees or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. In addition to our own databases, we use third-party service providers to store, process and transmit confidential or sensitive information on our behalf. Although we contractually require these service providers to implement and use reasonable security measures, we cannot control third parties and cannot guarantee that a data security breach will not occur in the future either at their location or within their systems. A data security breach may expose us to a risk of loss or misuse of this information, and could result in significant costs to us, which may include, among others, fines and penalties, potential liabilities from governmental or third-party investigations, proceedings or litigation and diversion of management attention. We could also experience delays or interruptions in our ability to function in the normal course of business, including delays in the fulfillment of customer orders or disruptions in the manufacture and shipment of products. In addition, actual or anticipated attacks may cause us to incur costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.

 

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The regulatory environment surrounding information security and privacy is increasingly demanding, with frequent imposition of new and changing requirements. In the United States, various laws and regulations apply to the collection, processing, disclosure and security of certain types of data, including the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the Health Insurance Portability and Accountability Act of 1996, the Gramm Leach Bliley Act and state laws relating to privacy and data security. Several foreign countries and governmental bodies, including the European Union, also have laws and regulations dealing with the handling and processing of personal information obtained from their residents, which in certain cases are more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of various types of data, including data that identifies or may be used to identify an individual, such as names, email addresses and, in some jurisdictions, internet protocol addresses. Such laws and regulations may be modified or subject to new or different interpretations, and new laws and regulations may be enacted in the future. Within the European Union, the General Data Protection Regulation, which became effective in May 2018 and replaced the 1995 European Union Data Protection Directive and superseded applicable European Union member state legislation, imposes significant new requirements on how companies collect, process and transfer personal data, as well as significant fines for noncompliance.  Any failure or perceived failure by us to comply with laws, regulations, policies or regulatory guidance relating to privacy or data security may result in governmental investigations and enforcement actions, litigation, fines and penalties or adverse publicity, and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.

 

 

We sell many of our products to healthcare providers that rely on Medicare, Medicaid and private health insurance plans to reimburse the costs associated with the procedures performed using our products and these third party payors may deny reimbursement for use of our products.

We are dependent, in part, upon the ability of healthcare providers to obtain satisfactory reimbursement from third-party payors for medical procedures in which our products are used. Third-party payors may deny reimbursement if they determine that a prescribed product has not received appropriate regulatory clearances or approvals, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. Failure by hospitals and other users of our products to obtain reimbursement from third-party payors, or adverse changes in government or private third-party payors’ policies toward reimbursement for procedures utilizing our products, could have a material adverse effect on the Company’s business, financial condition and results of operations. Major third-party payors for medical services in the United States and other countries continue to try to contain healthcare costs. The introduction of cost containment incentives, combined with closer scrutiny of healthcare expenditures by both private health insurers and employers, has resulted in increased discounts and contractual adjustments to charges for services performed. Further implementation of legislative or administrative reforms to the United States or international reimbursement systems in a manner that significantly reduces reimbursement for procedures using our products or denies coverage for such procedures may result in hospitals or physicians substituting lower cost products or other therapies for our products which, in turn, would have an adverse effect on our business, financial condition and results of operations. Additionally, uncertainty about whether and how changes may be implemented could also have a negative impact on the demand for our products.

 

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Changes in healthcare legislation and policy may have a material adverse effect on our financial condition and results of operations.

A number of legislative initiatives to contain healthcare costs have been and continue to be introduced in the United States. In March 2010, the Affordable Care Act was enacted, which made changes that have impacted and are expected to significantly impact the pharmaceutical and medical device industries. Among other things the Affordable Care Act contains a number of provisions designed to generate the revenues necessary to fund health insurance coverage expansions. The Affordable Care Act also implemented a number of Medicare payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models, and appropriated funding for comparative effectiveness research. The taxes imposed by the Affordable Care Act and the expansion in the government’s role in the United States healthcare industry may result in decreased profits to us, lower reimbursement by payors for our products, and reduced medical procedure volumes, all of which may have a material adverse impact on our business, financial condition, results of operations, or cash flows. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as efforts by the Trump Administration to modify, repeal or otherwise invalidate all, or certain provisions of, the Affordable Care Act. In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. These changes included aggregate reductions to Medicare payments to providers of up to 2 percent per fiscal year, which will remain in effect through 2027 unless additional Congressional action is taken.  It is unclear what impact new quality and payment programs may have on our business, financial condition, results of operations or cash flows. Individual states in the United States have also become increasingly aggressive in passing legislation and implementing regulations designed to control product pricing, including price or patient reimbursement constraints, and discounts, and require marketing cost disclosure and transparency measures.  We believe that additional state and federal health care reform measures will be adopted in the future that could have a material adverse effect on our industry generally and on our customers. Any changes in, or uncertainty with respect to, future reimbursement rates could impact our customers’ demand for our products, which in turn could have a material adverse effect on our business, financial condition, results of operations, or cash flows.  Further, the federal, state and local governments, Medicare, Medicaid, managed care organizations, and foreign governments have in the past considered, are currently considering, and may in the future consider healthcare policies and proposals intended to curb rising healthcare costs, including those that could significantly affect both private and public reimbursement for healthcare services. Future significant changes in the healthcare systems in the United States or other countries, including changes intended to reduce expenditures along with uncertainty about whether and how changes may be implemented, could have a negative impact on the demand for our products. We are unable to predict whether other healthcare policies, including policies stemming from legislation or regulations affecting our business, may be proposed or enacted in the future; what effect such policies would have on our business; or the effect ongoing uncertainty about these matters will have on our customers’ purchasing decisions.

 

 

Our existing credit agreement contains restrictions that may limit our flexibility in operating our business.

Our existing credit agreement contains, and any future agreements may contain, covenants that could impose significant operating and financial restrictions on us. Although we currently do not have any borrowings under our existing credit agreement, the covenants in those agreements may limit the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.

 

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We have pledged certain of our assets as collateral under our existing credit agreement. If we borrow funds under that credit agreement and default on the terms of such credit agreement and the holder of our indebtedness accelerates the repayment of such indebtedness, there can be no assurance that we will have sufficient assets to repay our indebtedness.

Under our existing credit agreement, we are required to satisfy and maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and there can be no assurance that we will meet those ratios. A failure to comply with the covenants contained in the agreement could result in an event of default under such agreement, which, if not cured or waived, could have a material adverse effect on our business, financial condition, and profitability. In the event of any default under our existing credit agreement, the holder of our indebtedness thereunder:

 

 

Will not be required to lend any additional amounts to us;

 

Could elect to declare all indebtedness outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit, if applicable; or

 

Could require us to apply all of our available cash to repay such indebtedness.

 

If we are unable to repay those amounts, the holder of our indebtedness could proceed against the collateral granted to them to secure that indebtedness. If the indebtedness under our existing credit agreement were to be accelerated, there can be no assurance that our assets at that time would be sufficient to repay such indebtedness in full.

 

 

We may not be able to attract and retain skilled people.

Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities we engage in can be intense, and we may not be able to hire qualified people or to retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

 

 

A portion of our business relies on distribution agreements and relationships with various distributors and any adverse change in those relationships could result in a loss of revenue and harm that business.

We have strategic relationships with, and sell many of our products through, a number of distributors.. To the extent that we rely on distributors, our success will depend on the efforts of others over whom we may have little or no control. Some of our distributors also sell our competitors’ products, and, if they favor our competitors’ products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective sales, which would cause our results to suffer. The success of the arrangements with these distributors depends, in part, on the continued adherence to the terms of our agreements with them. Any disruption in these arrangements may adversely affect our financial condition and results of operations. The actions of distributors in foreign countries may adversely affect our ability to market effectively our products in those countries, particularly if a distributor holds the regulatory authorization in such countries and such actions result in the suspension or revocation of such authorization.  In such cases, re-establishing market access or regulatory authorization may be difficult, expensive or time consuming. Also, we may be named as a defendant in litigation against our distributors related to sales of our products by them.

 

 

Severe weather, natural disasters, acts of war or terrorism or other external events could significantly impact our business.

 

-15-

 

We currently conduct all our development, manufacturing and management at three locations. Severe weather, natural disasters, public health crises, including the occurrence of a contagious disease or illness such as a novel coronavirus, acts of war or terrorism and other adverse external events at any one or more of these locations could have a significant impact on our ability to conduct business. We have the ability to transfer the production of certain products from a facility affected by such events, but doing so would be expensive. Our disaster recovery policies and procedures may not be effective and the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. The insurance we maintain may not be adequate to cover our losses.

 

 

Our sales and operations are subject to the risks of doing business internationally.

A substantial portion of our sales occur outside the United States, and we are increasing our presence in international markets. Sales outside the United States subject us to many risks, such as:

 

 

economic or political instability, natural disasters, public health crises, including the occurrence of a contagious disease or illness such as a novel coronavirus, war and terrorism that disrupt foreign healthcare payment systems or businesses;

 

the imposition of governmental controls;

 

less favorable intellectual property or other applicable laws;

 

protectionist laws and business practices that favor local competitors;

 

the inability to obtain any necessary foreign regulatory or pricing approvals of products in a timely manner;

 

changes in trade policies, tariffs and tax laws;

 

receivables may be more difficult to collect; and

 

longer payment cycles.

 

Our operations and marketing practices are also subject to regulation and scrutiny by the governments of the other countries in which we operate. In addition, the Foreign Corrupt Practices Act, or FCPA, prohibits United States companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad. In certain countries, the healthcare professionals we regularly interact with may meet the definition of a foreign official for purposes of the FCPA. Additionally, we are subject to other United States laws in our international operations. Failure to comply with domestic or foreign laws could result in various adverse consequences, including possible delay in approval or refusal to approve a product, recalls, seizures, withdrawal of an approved product from the market, and the imposition of civil or criminal sanctions.

 

 

We may lose revenues, market share and profits due to exchange rate fluctuations related to our international business.

Fluctuations in exchange rates may affect the prices that our international customers are willing to pay and may put us at a price disadvantage compared to other competitors. Potentially volatile shifts in exchange rates may negatively affect our financial condition and operations. Because payments from our international customers are received primarily in United States dollars,  increases in the value of the United States dollar relative to foreign currencies could make our products less competitive or less affordable, and therefore adversely affect our sales in international markets.

 

 

We may experience fluctuations in our quarterly operating results.

We have historically experienced, and may continue to experience, fluctuations in our quarterly operating results. These fluctuations are due to a number of factors, many of which are outside our control and may result in volatility of our stock price. Future operating results will depend on many factors, including:

 

-16-

 
 

demand for our products;

 

pricing decisions, and those of our competitors, including decisions to increase or decrease prices;

 

regulatory approvals for our products;

 

timing and levels of spending for R&D, sales and marketing;

 

timing and market acceptance of new product introductions by us or our competitors;

 

development or expansion of business infrastructure in new clinical and geographic markets;

 

tax rates in the jurisdictions in which we operate;

 

shipping delays or interruptions;

 

customer credit holds;

 

timing and recognition of certain R&D milestones and license fees; and

 

ability to control our costs;

 

 

Our stock price has been and may continue to be volatile.

Stock price volatility may make it more difficult for our stockholders to sell their common stock when they want to and at prices they find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

 

 

actual or anticipated variations in quarterly results of operations;

 

recommendations by securities analysts;

 

operating and stock price performance of other companies that investors deem comparable to the Company;

 

perceptions in the marketplace regarding the Company and our competitors;

 

new technology used, or services offered, by competitors;

 

trading by funds with high-turnover practices or strategies;

 

significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or our competitors;

 

failure to integrate acquisitions or realize anticipated benefits from acquisitions;

 

our stock repurchase program;

 

changes in government regulations; and

 

economic or political instability, natural disasters, public health crises, acts or threats of terrorism or military conflicts.

 

Additionally, our public float is small which can result in large fluctuations in stock price during periods with increased selling or buying activity. General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.

 

 

We continue to evaluate expansion through acquisitions of, and investments in, other companies or technologies, which may carry significant risks.

If we pursue acquisitions of, or investments in, other companies or technologies, we may:

 

 

Use cash that we may need in the future to operate our business;

 

Incur debt, including on terms that could be unfavorable to us or debt that we might be unable to repay;

 

Structure the transaction in a manner that has unfavorable tax consequences, such as a stock purchase that does not permit a step-up in the tax basis for the assets acquired;

 

Be unable to realize the anticipated benefits, such as increased revenues, cost savings, or synergies from additional sales;

 

-17-

 
 

Be unable to integrate, upgrade, or replace the purchasing, accounting, financial, sales, billing, employee benefits, payroll, and regulatory compliance functions of an acquisition target;

 

Be unable to secure or retain the services of key employees related to the acquisition;

 

Be unable to succeed in the marketplace with the acquisition; or

 

Assume material unknown liabilities associated with the acquired business.

Any of the above risks, should they occur, could materially, adversely affect our revenues, financial condition, profitability, and cash flows, including the inability to recover our investment or cause a write down or write off of such investment, associated goodwill, or assets.

 

 

If we make divestitures, we could encounter difficulties that harm our business.

We may sell a business or product line. Any divestiture may result in significant write-offs, which could have a material adverse effect on our business, financial condition or results of operations. Divestitures could also involve additional risks, including difficulties in separation of operations, services and personnel, the diversion of management’s attention from other operations and the potential loss of key personnel.

 

 

The enactment of tax reform legislation could materially impact our financial position and results of operations.

Legislation or other changes in tax laws could materially affect our financial position and results of operation. For example, the Tax Act was enacted in the United States on December 22, 2017.  Among other changes, the Tax Act reduces the United States corporate statutory tax rate and eliminates, limits or adds certain deductions. The tax and accounting treatment of the changes under the Tax Act are complex, and some of the changes as well as other tax reform legislation may affect both current and future periods.  In the ordinary course of our business, there are many transactions and calculations where tax determinations may be uncertain.  There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge, which could result in additional taxation, penalties and interest payments.

 

 

If we fail to manage our exposure to market risk and credit risk successfully, our financial condition could be adversely impacted.

We have exposure to market risk and credit risk in our investment activities. The fair values of our investments vary from time to time depending on economic and market conditions. Fixed income securities expose us to interest rate risk as well as credit risk. Equity securities expose us to equity price risk. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. These and other factors also affect the equity securities owned by us. The outlook of our investment portfolio depends on the future direction of interest rates, fluctuations in the equity securities market and the amount of cash flows available for investment. Our investments may decline in value in future periods, which could have a material adverse effect on our financial condition.

 

 

Provisions in our governing documents and Delaware law may discourage or prevent a change of control, which could cause our stock price to decline and prevent attempts by our stockholders to replace or remove our current management.

Our certificate of incorporation and bylaws contain provisions that may discourage, delay or prevent a change in the ownership of the Company or a change in our management. We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15 percent or more of our outstanding common stock. Although a delay or prevention of a change of control transaction or of changes in our Board of Directors could be effective in improving stockholder value, they also carry a risk of causing the market price of our common stock to decline.

 

-18-

 

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2.     PROPERTIES.

 

We own three facilities comprising approximately 398,000 square feet, and the 139 acres on which they are situated, in Texas, Alabama and Florida. Administrative, engineering, manufacturing and warehouse operations are conducted at each facility, and our corporate headquarters are located at our Texas facility.  

 

ITEM 3.     LEGAL PROCEEDINGS.

 

We have no pending legal proceedings of the type described in Item 103 of Regulation S-K.

 

Item 4.     Mine Safety disclosures.

 

Not applicable.

 

Information about our Executive Officers

 

Name

Age

Title

Emile A Battat

81

Chairman of the Board of the Company and Chairman of the Board of Halkey-Roberts Corporation, or Halkey-Roberts,  one of our subsidiaries

 

 

 

David A. Battat

50

President and Chief Executive Officer of the Company, President of Halkey-Roberts  and Chairman of the Board of all other subsidiaries

 

 

 

Jeffery Strickland

61

Vice President and Chief Financial Officer, Secretary and Treasurer of the Company and Vice President or Secretary-Treasurer of all subsidiaries

 

Messrs. David Battat and Strickland currently serve as officers of the Company and all subsidiaries. Mr. Emile Battat currently serves as an officer of the Company. The officers of the Company and our subsidiaries are elected annually by the respective Boards of Directors of the Company and our subsidiaries at the first meeting of such Boards of Directors held after the annual meetings of stockholders of such entities. The next meetings of the stockholders of the Company and our subsidiaries are expected to be held in May 2020 and the Boards of Directors of the Company and our subsidiaries are expected to meet promptly thereafter. Accordingly, the terms of office of the current officers of the Company and our subsidiaries are anticipated to expire in May 2020.

 

There are no arrangements or understandings between any officer and any other person pursuant to which the officer was elected. The only family relationship between any of our executive officers or directors is that Mr. David Battat is the son of Mr. Emile Battat.

 

There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officers during the past ten years.

 

 

Brief Account of Business Experience During the Past Five Years

  

-19-

 

 

Mr. Emile Battat has been a director of the Company since 1987 and has served as Chairman of the Board of the Company since January 1998. He has served as Chairman of the Board of Halkey-Roberts since October 1998. He served as Chief Executive Officer of the Company and Chairman of the Board or President of all subsidiaries from October 1998 until May 2011.

 

Mr. David Battat has been President and Chief Executive Officer of the Company and Chairman of the Board of all subsidiaries with the exception of Halkey-Roberts, Atrion Leasing Company, LLC and AlaTenn Pipeline Company, LLC, since May 2011. He has been President of Halkey-Roberts since January 2006. He also serves as President of Atrion Leasing Company, LLC and AlaTenn Pipeline Company, LLC. He served as the Company’s President and Chief Operating Officer from May 2007 until May 2011 and from February 2005 until December 2005 he served as Vice President - Business Development and General Counsel at Halkey-Roberts.

 

Mr. Strickland has served as Vice President and Chief Financial Officer, Secretary and Treasurer of the Company since February 1, 1997 and has served as a Vice President, Secretary or Treasurer of all the Company’s subsidiaries since January 1997. Mr. Strickland was employed by the Company or our subsidiaries in various other positions from September 1983 through January 1997.

 

PART II

 

ITEM 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and issueR purchases of equity securities.

 

Our common stock is traded on the NASDAQ Global Select Market (Symbol ATRI). As of February 14, 2020, we had 109 record holders, and 8,200 beneficial owners, of our common stock. We are currently paying quarterly cash dividends on our common stock and expect to continue paying quarterly cash dividends in the future.

 

During the year ended December 31, 2019, we did not sell any equity securities that were not registered under the Securities Act of 1933 and during the fourth quarter of 2019 we did not purchase any of our common stock.

 

The stock performance graph set forth in our 2019 Annual Report to Stockholders is incorporated by reference herein and is included in Exhibit 13.1 to this Form 10-K.  However, the stock performance graph is not to be deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 under the Securities Exchange Act of 1934. In addition, the stock performance graph shall not be deemed incorporated by reference by any statement that incorporates this Form 10-K by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference.

 

-20-

 

 

 

ITEM 6.     Selected Financial Data 

(in thousands, except per share amounts)

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Operating Results for the Year ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

155,066

 

 

$

152,448

 

 

$

146,595

 

 

$

143,487

 

 

$

145,733

 

Operating income

 

 

40,529

 

 

 

41,707

 

 

 

41,274

 

 

 

39,126

 

 

 

42,510

 

Net income

 

 

36,761

 

 

 

34,255

 

 

 

36,593

 

 

 

27,581

 

 

 

28,925

 

Depreciation and amortization

 

 

10,853

 

 

 

9,123

 

 

 

8,677

 

 

 

8,953

 

 

 

8,823

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per diluted share

 

$

19.73

 

 

$

18.44

 

 

$

19.71

 

 

$

14.85

 

 

$

15.47

 

Cash dividends per common share

 

$

5.80

 

 

$

5.10

 

 

$

4.50

 

 

$

3.90

 

 

$

3.30

 

Average diluted shares outstanding

 

 

1,863

 

 

 

1,858

 

 

 

1,857

 

 

 

1,857

 

 

 

1,870

 

Financial Position at December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

262,031

 

 

$

231,216

 

 

$

203,780

 

 

$

181,942

 

 

$

164,336

 

Long-term debt

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Overview

 

We develop and manufacture products primarily for medical applications.  We market components to other equipment manufacturers for incorporation in their products and sell finished devices to physicians, hospitals, clinics and other treatment centers.  Our medical products primarily serve the fluid delivery, cardiovascular and ophthalmology markets.  Our other medical and non-medical products include valves and inflation devices used in marine and aviation safety products.  In 2019, approximately 36 percent of our sales were outside the United States.

 

Our products are used in a wide variety of applications by numerous customers. We encounter competition in all of our markets and compete primarily on the basis of product quality, price, engineering, customer service and delivery time.

 

Our strategy is to provide a broad selection of products in the areas of our expertise. R&D efforts are focused on improving current products and developing highly-engineered products that meet customer needs and serve niche markets with meaningful sales potential. Proposed new products may be subject to regulatory clearance or approval prior to commercialization and the time period for introducing a new product to the marketplace can be unpredictable. We also focus on controlling costs by investing in modern manufacturing technologies and controlling purchasing processes. We have been successful in consistently generating cash from operations and have used that cash to reduce or eliminate indebtedness, to fund capital expenditures, to make investments, to repurchase stock and to pay dividends.

 

-21-

 

 

Our strategic objective is to further enhance our position in our served markets by:

 

 

Focusing on customer needs;

 

Expanding existing product lines and developing new products;

 

Maintaining a culture of controlling cost; and

 

Preserving and fostering a collaborative, entrepreneurial management structure.

 

For the year ended December 31, 2019, we reported revenues of $155.1 million, operating income of $40.5 million and net income of $36.8 million.

 

Results of Operations

 

Our net income was $36.8 million, or $19.82 per basic and $19.73 per diluted share, in 2019 compared to $34.3 million, or $18.49 per basic and $18.44 per diluted share in 2018. Revenues were $155.1 million in 2019 compared with $152.5 million in 2018. 

 

Annual revenues by product lines were as follows (in thousands):

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Fluid Delivery

 

$

72,117

 

 

 

$

70,606

 

Cardiovascular

 

 

54,799

 

 

 

 

50,904

 

Ophthalmology

 

 

7,124

 

 

 

 

10,473

 

Other

 

 

21,026

 

 

 

 

20,465

 

Total

 

$

155,066

 

 

 

$

152,448

 

 

Consolidated revenues of $155 million in 2019 were 2 percent higher than revenues in 2018. This increase was primarily related to increased volumes in 2019. In the third quarter of 2019, the United States Food and Drug Administration, or FDA, issued a caution concerning a nationwide shortage of medical devices due to issues with contract sterilizers.  Specifically, two significant contract sterilization facilities utilized by many medical device companies were shut down because of environmental concerns - one permanently and one temporarily. This loss of sterilization capacity caused significant delays at the country’s remaining sterilization facilities.  Due to this loss of capacity, we experienced delays in some of our sales during the third and fourth quarters of 2019. The sterilization capacity shortage affecting our products was resolved in early 2020 as we were able to validate the use of a new sterilization facility.  We anticipate most of the sales that were delayed in 2019 will be completed and products shipped by the end of the second quarter of 2020.

 

Our cost of goods sold was $84.4 million in 2019 compared with $80.7 million in 2018.  Increased sales volumes and increased manufacturing overhead expenses partially offset by favorable product sales mix, improved manufacturing efficiencies and the impact of continued cost improvement projects were the primary contributors to the increase in cost of goods sold in 2019 compared to 2018

 

Gross profit in 2019 was $70.7 million compared with $71.8 million in 2018.  Our gross profit was 46 percent of revenues in 2019 compared with 47 percent of revenues in 2018.  The decrease in gross profit percentage in 2019 from 2018 was primarily related to an increase in manufacturing overhead expenses.

 

Operating expenses were $30.2 million in 2019 and $30.1 million in 2018.  R&D expenses decreased $475,000 in 2019 as compared with 2018 primarily as a result of decreased costs in supplies and outside services.  R&D expenses consist primarily of salaries and other related expenses of our R&D personnel as well as costs associated with regulatory matters.  In 2019, selling expenses increased $472,000 compared with 2018 primarily as a result of increased salaries and commissions partially offset by reduced travel costs and outside services.  Selling expenses consist primarily of salaries, commissions and other related expenses for sales and marketing personnel, marketing, advertising and promotional expenses. General and Administrative, or G&A, expenses increased $91,000 in 2019 as compared to 2018 primarily as a result of increased computer hardware and software costs.  G&A expenses consist primarily of salaries and other related expenses of administrative, executive and financial personnel and outside professional fees.

 

-22-

 

Our operating income for 2019 was $40.5 million compared with $41.7 million in 2018.  Operating income was 26 percent of revenues in 2019 and 27 percent of revenues in 2018.  A decrease in 2019 gross profit primarily attributed to increased manufacturing overhead costs and delays in shipments due to third-party sterilization capacity issues adversely affected operating income for 2019 as compared to the previous year.

 

Interest and Dividend income for 2019 was $2.5 million compared with $1.7 million in 2018.  Increased levels of investments, increased interest rates and increased dividends on our equity investments were the primary reasons for the increase in 2019 compared to 2018.

 

Other Investment Income was $0.2 million in 2019 compared to $1.4 million loss in 2018.  The improvement from 2018 to 2019 was primarily related to unrealized gains on equity investments as a result of an increase in market value on the investments.  In 2018, our equity investments had a decline in market value.

 

Income tax expense in 2019 totaled $6.4 million compared with $7.8 million in 2018.  The effective tax rates were 14.8 percent in 2019 and 18.5 percent in 2018.  The lower effective tax rate in 2019 was primarily related to increased tax benefits from foreign-derived intangible income deduction, R&D tax credits, excess tax benefits related to employee stock compensation and lower state income taxes.  We expect our effective tax rate for 2020 to be approximately 18.0 percent.  

 

For information on the Company’s results of operations for the fiscal year ended December 31, 2017 and a comparison of that information to that for the year ended December 31, 2018, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual report on Form 10-K for the year ended December 31, 2018, which was filed with the U.S. Securities and Exchange Commission on February 26, 2019.

 

Liquidity and Capital Resources

 

As of December 31, 2019, we had a $75.0 million revolving credit facility with a money-center bank pursuant to which the lender is obligated to make advances until February 28, 2022.  The credit facility is secured by substantially all of our inventories, equipment and accounts receivable.  Interest under the credit facility is assessed at 30-day, 60-day or 90-day LIBOR, as selected by us, plus 0.875 percent (2.64 percent at December 31, 2019) and is payable monthly. We had no outstanding borrowings under the credit facility at December 31, 2019 or December 31, 2018.  Our ability to borrow funds under the credit facility from time to time is contingent on meeting certain covenants in the loan agreement, the most restrictive of which is the ratio of total debt to earnings before interest, income tax, depreciation and amortization.  At December 31, 2019, we were in compliance with all of these covenants. 

 

At December 31, 2019, we had a total of $100.6 million in cash and cash equivalents, short-term investments and long-term investments, an increase of $11.1 million from December 31, 2018.  The principal contributor to this increase was positive cash flows from operations.

 

Cash flows provided by operations of $42.5 million in 2019 were primarily comprised of net income plus the net effect of non-cash expenses.  At December 31, 2019, we had working capital of $121.1 million, including $45.0 million in cash and cash equivalents and $23.8 million in short-term investments.  The $9.0 million increase in working capital during 2019 was primarily related to increases in short term investments and inventories partially offset by decreases in cash and cash equivalents.  The net increase in short-term investments was primarily in bonds and commercial paper. The increase in inventories was primarily related to delays in shipments to customers due to the sterilization capacity issue from the shutdown of two of our contract sterilization facilities and the replenishment of inventories to levels required for operational effectiveness.  Working capital items consisted primarily of cash, accounts receivable, short-term investments, inventories and other current assets minus accounts payable and other current liabilities.

 

-23-

 

Capital expenditures for property, plant and equipment totaled $20.4 million in 2019, compared with $17.5 million in 2018.  These expenditures were primarily for machinery and equipment.  Purchases of investments totaled $83.7 million in 2019, compared to $28.5 million in 2018.  Proceeds from maturities of investments totaled $59.3 million in 2019 and $40.9 million in 2018.  We expect 2020 capital expenditures, primarily machinery and equipment, to be greater than the average amounts expended during each of the past three years.

 

We paid cash dividends totaling $10.8 million and $9.5 million during 2019 and 2018, respectively.  We expect to fund future dividend payments with cash flows from operations. No treasury stock was purchased in 2019 or 2018.

 

The table below summarizes debt, lease and other contractual obligations outstanding at December 31, 2019:

 

 

 

Payments due by period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual Obligations

 

Total

 

 

2020

 

 

2021 - 2022

 

 

2023-2024

 

 

2025 and thereafter

 

    (in thousands )        

Lease Obligations

 

$

567

 

 

$

299

 

 

$

268

 

 

$

-

 

 

$

-

 

Purchase Obligations

 

$

30,004

 

 

$

29,691

 

 

$

280

 

 

$

33

 

 

$

-

 

Total

 

$

30,571

 

 

$

29,990

 

 

$

548

 

 

$

33

 

 

$

-

 

 

We believe our cash, cash equivalents, short-term investments and long-term investments, cash flows from operations and available borrowings of up to $75.0 million under our credit facility will be sufficient to fund our cash requirements for at least the foreseeable future. We believe our strong financial position would allow us to access equity or debt financing should that be necessary. Additionally, we expect our cash and cash equivalents and investments, as a whole, to continue increasing in 2020.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet financing arrangements.

 

Impact of Inflation

 

We experience the effects of inflation primarily in the prices we pay for labor, materials and services. Over the last three years, we have experienced the effects of moderate inflation in these costs. At times, we have been able to offset a portion of these increased costs by increasing the sales prices of our products. However, competitive pressures have not allowed for full recovery of these cost increases.

 

New Accounting Pronouncements

 

In January 2016, the FASB issued ASU 2016-01 Financial Instruments – Overall Recognition and Measurement of Financial Assets and Financial Liabilities . The main objective of this update is to enhance the reporting model for financial instruments in order to provide users of financial statements with more decision-useful information. Changes to the previous guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments.

 

The primary impact of this change for us relates to our available-for-sale equity investments and resulted in unrecognized gains and losses from our investments being reflected in our Consolidated Statement of Income beginning in 2018.  We adopted ASU 2016-01 as of January 1, 2018, applying the update by means of a cumulative-effect adjustment to our consolidated balance sheets by reclassifying the balance of our Accumulated Other Comprehensive Loss in the stockholders’ equity section of the consolidated balance sheets to Retained Earnings. The balance reclassified of $1,215,000 was a result of prior-period unrealized losses from our equity investments.

 

-24-

 

 

In 2019, we recorded a net unrealized gain of $135,000 as a result of a net increase in market value of our equity investments during the year.  In 2018 we recorded a loss on our equity investments of $1,399,000 as a result of a decrease in the market value of these investments during the year. These gains and losses are reflected in other investment income (loss) in our Consolidated Statements of Income.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The ASU is effective for public entities for fiscal years beginning after December 15, 2019. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses , which provided additional implementation guidance on the previously issued ASU. Management has reviewed the guidance, performed an assessment of this guidance and expects the outcome of adoption of this standard to be immaterial to the financial statements.

 

From time to time new accounting pronouncements applicable to us are issued by the FASB, or other standards setting bodies, which we will adopt as of the specified effective date.  Unless otherwise discussed, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In the preparation of these financial statements, we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We believe the following discussion addresses our most critical accounting policies and estimates, which are those that are most important to the portrayal of our financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different assumptions and conditions.

 

From time to time we accrue legal costs associated with certain litigation. In making determinations of likely outcomes of litigation matters, we consider the evaluation of legal counsel knowledgeable about each matter, case law and other case-specific issues. We believe these accruals are adequate to cover the legal fees and expenses associated with litigating these matters. However, the time and cost required to litigate these matters as well as the outcomes of the proceedings may vary significantly from what we have projected.

 

We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the failure of customers to make required payments.  On an ongoing basis, the collectability of accounts receivable is assessed based upon historical collection trends, current economic factors and the assessment of the collectability of specific accounts.  We evaluate the collectability of specific accounts and determine when to grant credit to our customers using a combination of factors, including the age of the outstanding balances, evaluation of customers’ current and past financial condition, recent payment history, current economic environment, and discussions with our personnel and with the customers directly. Accounts are written off when we determine the receivable will not be collected. If circumstances change, our estimates of the collectability of amounts could be changed by a material amount.

 

-25-

 

 

We are required to estimate our provision for income taxes and uncertain tax positions in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheet. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is more likely than not, do not establish a valuation allowance. In the event that actual results differ from these estimates, the provision for income taxes could be materially impacted.

 

We assess the impairment of our long-lived identifiable assets, excluding goodwill which is tested for impairment as explained below, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. This review is based upon projections of anticipated future cash flows. Although we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows or changes in our business plan could materially affect our evaluations. No such changes are anticipated at this time.

 

We assess goodwill for impairment pursuant to Accounting Standards Codification, or ASC 350, Intangibles—Goodwill and Other, which requires that goodwill be assessed on an annual basis, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, by applying a qualitative assessment on goodwill impairment to determine whether it is necessary to perform the two-step goodwill impairment test.

 

We assess the total carrying value for each of our investments on a quarterly basis for changes in circumstances or the occurrence of events that suggest our investment may not be recoverable. If an investment is considered impaired, we must determine whether the impairment is other than temporary. If it is determined to be other than temporary, the impairment must be recognized in our financial statements.

 

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Inventories are carried as standard cost, which approximates actual cost, and includes material, labor and allocated overhead. Standard costs are reviewed at least quarterly by management, or more often in the event circumstances indicate a change in cost has occurred. Adjustments to the cost basis of our inventory are made for excess and obsolete items based on usage, orders and technological obsolescence.

 

During 2019, 2018 and 2017, none of our critical accounting estimates required significant adjustments. We did not note any material events or changes in circumstances indicating that the carrying value of long-lived assets were not recoverable.

 

Quantitative and Qualitative Disclosures About Market Risks

 

Foreign Exchange Risk

 

We are not exposed to material fluctuations in currency exchange rates that would result in realized gains or losses being reflected in the consolidated statements of income because the payments from our international customers are received primarily in United States dollars.

 

However, fluctuations in exchange rates may affect the prices that our international customers are willing to pay and may put us at a price disadvantage compared to other competitors. Increases in the value of the United States dollar relative to foreign currencies could make our products less competitive or less affordable and therefore adversely affect our sales in international markets.

 

Market Risk and Credit Risk

 

Our cash deposits are held in accounts with financial institutions that we believe are creditworthy. Certain of these accounts at times may exceed federally-insured limits. We have not experienced any credit losses in such accounts and do not believe we are exposed to any significant credit risk on these funds.

 

-26-

 

 

We have investments in money market funds, bonds and commercial paper. As a result, we are exposed to potential loss from market risks that may occur as a result of changes in interest rates, changes in credit quality of the issuer and otherwise. These securities have a higher degree of, and a greater exposure to, credit or default risk and may be less liquid in times of economic weakness or market disruptions as compared with cash deposits. We have also invested a portion of our available funds in equity securities and mutual funds. The value of these securities fluctuates due to changes in the equity and credit markets along with other factors. In times of economic weakness, the market value and liquidity of these assets may decline and may negatively impact our financial condition.

 

Forward-looking Statements 

Statements in this Management’s Discussion and Analysis and elsewhere in this Form 10-K that are forward looking are based upon current expectations, and actual results or future events may differ materially. Therefore, the inclusion of such forward-looking information should not be regarded as a representation by us that our objectives or plans will be achieved. Such statements include, but are not limited to, our R&D program in 2020, the completion of sales by the end of the second quarter of 2020 that were delayed due to a shortage in third-party sterilization capacity, our effective tax rate for 2020, our 2020 capital expenditures, funding future dividend payments with cash flows from operations, availability of equity and debt financing, our ability to meet our cash requirements for the foreseeable future, the impact on our consolidated financial statement of recently issued accounting standards when we adopt those standards, and increases in 2020 in cash, cash equivalents and investments. Words such as “expects,” “believes,” “anticipates,” “intends,” “should,” “plans,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements contained herein involve numerous risks and uncertainties, and there are a number of factors that could cause actual results or future events to differ materially, including, but not limited to, the following: changing economic, market and business conditions; acts of war or terrorism; the effects of governmental regulation; the impact of competition and new technologies; slower-than-anticipated introduction of new products or implementation of marketing strategies; implementation of new manufacturing processes or implementation of new information systems; our ability to protect our intellectual property; changes in the prices of raw materials; changes in product mix; intellectual property and product  liability claims and product recalls; the ability to attract and retain qualified personnel and the loss of any significant customers. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic review which may cause us to alter our marketing, capital expenditures or other budgets, which in turn may affect our results of operations and financial condition.  The forward-looking statements in this Form 10-K 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 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

See Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

-27-

 

 

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Atrion Corporation

 

Opinion on the consolidated financial statements

 

We have audited the accompanying consolidated balance sheets of Atrion Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 2, 2020 expressed an unqualified opinion.

 

Basis for opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

-28-

 

 

Critical audit matters

 

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

 

/s/ GRANT THORNTON LLP

 

We have served as the Company’s auditor since 2002.

 

Dallas, Texas

March 2, 2020

 

-29-

 

 

ATRION CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

For the year ended December 31, 2019, 2018 and 2017

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

155,066

 

 

$

152,448

 

 

$

146,595

 

Cost of Goods Sold

 

 

84,378

 

 

 

80,670

 

 

 

75,841

 

Gross Profit

 

 

70,688

 

 

 

71,778

 

 

 

70,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

8,813

 

 

 

8,341

 

 

 

7,251

 

General and administrative

 

 

16,308

 

 

 

16,217

 

 

 

16,430

 

Research and development

 

 

5,038

 

 

 

5,513

 

 

 

5,799

 

 

 

 

30,159

 

 

 

30,071

 

 

 

29,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

40,529

 

 

 

41,707

 

 

 

41,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and Dividend Income

 

 

2,487

 

 

 

1,667

 

 

 

1,061

 

Other Investment Income (Loss)

 

 

152

 

 

 

(1,380

)

 

 

4

 

Other Income (Expense), net

 

 

--

 

 

 

42

 

 

 

1

 

Income before Provision for Income Taxes

 

 

43,168

 

 

 

42,036

 

 

 

42,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for Income Taxes

 

 

(6,407

)

 

 

(7,781

)

 

 

(5,747

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

36,761

 

 

$

34,255

 

 

$

36,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Per Basic Share

 

$

19.82

 

 

$

18.49

 

 

$

19.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Basic Shares Outstanding

 

 

1,855

 

 

 

1,853

 

 

 

1,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Per Diluted Share

 

$

19.73

 

 

$

18.44

 

 

$

19.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Diluted Shares Outstanding

 

 

1,863

 

 

 

1,858

 

 

 

1,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends Per Common Share

 

$

5.80

 

 

$

5.10

 

 

$

4.50

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

-30-

 

 

ATRION CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the year ended December 31, 2019, 2018 and 2017

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

36,761

 

 

$

34,255

 

 

$

36,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Loss on investments, net of tax benefits of $68 in 2017

 

 

--

 

 

 

--

 

 

 

(741

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

$

36,761

 

 

$

34,255

 

 

$

35,852

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

-31-

 

 

ATRION CORPORATION

CONSOLIDATED BALANCE SHEETS

As of December 31, 2019 and 2018

 

Assets:

 

2019

 

 

2018

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,048

 

 

$

58,753

 

Short-term investments

 

 

23,766

 

 

 

9,684

 

Accounts receivable, net of allowance for doubtful accounts of $36 and $21 in 2019 and 2018, respectively

 

 

18,886

 

 

 

17,014

 

Inventories

 

 

42,093

 

 

 

33,572

 

Prepaid expenses and other current assets

 

 

2,545

 

 

 

3,242

 

Total Current Assets

 

 

132,338

 

 

 

122,265

 

 

 

 

 

 

 

 

 

 

Long-term investments

 

 

31,772

 

 

 

21,048

 

 

 

 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

200,990

 

 

 

181,582

 

Less: accumulated depreciation

 

 

116,384

 

 

 

106,689

 

 

 

 

84,606

 

 

 

74,893

 

 

 

 

 

 

 

 

 

 

Other Assets and Deferred Charges:

 

 

 

 

 

 

 

 

Patents and licenses, net of accumulated amortization of $12,301 and $12,181 in 2019 and 2018, respectively

 

 

1,539

 

 

 

1,659

 

Goodwill

 

 

9,730

 

 

 

9,730

 

Other

 

 

2,046

 

 

 

1,621

 

 

 

 

13,315

 

 

 

13,010

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

262,031

 

 

$

231,216

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

-32-

 

 

ATRION CORPORATION

Consolidated BALANCE SHEETs

As of December 31, 2019 and 2018

 

Liabilities and Stockholders’ Equity:

 

2019

 

 

2018

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,707

 

 

$

5,082

 

Accrued liabilities

 

 

5,148

 

 

 

4,519

 

Accrued income and other taxes

 

 

419

 

 

 

619

 

Total Current Liabilities

 

 

11,274

 

 

 

10,220

 

 

 

 

 

 

 

 

 

 

Line of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Liabilities and Deferred Credits:

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

8,496

 

 

 

6,687

 

Other

 

 

4,391

 

 

 

3,542

 

 

 

 

12,887

 

 

 

10,229

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

24,161

 

 

 

20,449

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, par value $.10 per share, authorized 10,000 shares, issued 3,420 shares

 

 

342

 

 

 

342

 

Additional paid-in capital

 

 

52,043

 

 

 

50,391

 

Accumulated other comprehensive loss

 

 

 

 

 

 

Retained earnings

 

 

317,745

 

 

 

291,761

 

Treasury shares, 1,565 shares in 2019 and 1,567 shares in 2018, at cost

 

 

(132,260

)

 

 

(131,727

)

Total Stockholders’ Equity

 

 

237,870

 

 

 

210,767

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

262,031

 

 

$

231,216

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

-33-

 

ATRION CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the year ended December 31, 2019, 2018 and 2017

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

36,761

 

 

$

34,255

 

 

$

36,593

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,853

 

 

 

9,123

 

 

 

8,677

 

Deferred income taxes

 

 

1,809

 

 

 

(625

)

 

 

(1,374

)

Stock-based compensation

 

 

1,682

 

 

 

1,659

 

 

 

1,602

 

Net change in unrealized gains and losses on investments

 

 

(135

)

 

 

1,399

 

 

 

--

 

Net change in accrued interest, premiums, and discounts on investments

 

 

 

(281

)

 

 

 

47

 

 

 

 

(195

)

Other

 

 

(6

)

 

 

(18

)

 

 

49

 

 

 

 

50,683

 

 

 

45,840

 

 

 

45,352

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,872

)

 

 

62

 

 

 

88

 

Inventories

 

 

(8,521

)

 

 

(4,218

)

 

 

(339

)

Prepaid expenses and other current assets

 

 

697

 

 

 

(43

)

 

 

(18

)

Other non-current assets

 

 

(425

)

 

 

(87

)

 

 

75

 

Accounts payable and accrued liabilities

 

 

1,254

 

 

 

725

 

 

 

213

 

Accrued income and other taxes

 

 

(200

)

 

 

(127

)

 

 

336

 

Other non-current liabilities

 

 

849

 

 

 

1,084

 

 

 

1,330

 

 

 

 

42,465

 

 

 

43,236

 

 

 

47,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment additions

 

 

(20,446

)

 

 

(17,507

)

 

 

(9,677

)

Purchase of investments

 

 

(83,721

)

 

 

(28,472

)

 

 

(69,193

)

Proceeds from maturities of investments

 

 

59,331

 

 

 

40,898

 

 

 

58,000

 

 

 

 

(44,836

)

 

 

(5,081

)

 

 

(20,870

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

Shares tendered for employees’ withholding taxes on stock-based compensation

 

 

 

(579

)

 

 

 

(90

)

 

 

 

(7,735

)

Dividends paid

 

 

(10,755

)

 

 

(9,448

)

 

 

(8,318

)

 

 

 

(11,334

)

 

 

(9,538

)

 

 

(16,053

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(13,705

)

 

 

28,617

 

 

 

10,114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

 

58,753

 

 

 

30,136

 

 

 

20,022

 

Cash and cash equivalents, end of year

 

$

45,048

 

 

$

58,753

 

 

$

30,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes, net of refunds

 

$

4,178

 

 

$

9,858

 

 

$

4,959

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash effect of stock option exercises

 

$

--

 

 

$

--

 

 

$

10,237

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

-34-

 

ATRION CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the year ended December 31, 2019, 2018 and 2017

(In thousands)

 

 

 

Common Stock

 

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Outstanding

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Retained Earnings

 

 

Total

 

Balances, January 1, 2017

 

 

1,824 

 

 

$

342

 

 

 

1,596 

 

 

$

(114,274

)

 

$

37,448

 

 

$

(474

)

 

$

239,946

 

 

$

162,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36,593

 

 

 

36,593 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(741

)

 

 

 

 

 

 

(741

)

Stock-based compensation transactions

 

 

61 

 

 

 

 

 

 

 

(61

)

 

 

583 

 

 

 

11,282

 

 

 

 

 

 

 

 

 

 

 

11,865 

 

Shares surrendered in stock transactions

 

 

(33

)

 

 

 

 

 

 

33 

 

 

 

(17,972

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,972

)

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,345

)

 

 

(8,345

)

Balances, December 31, 2017

 

 

1,852 

 

 

 

342

 

 

 

1,568 

 

 

 

(131,663

)

 

 

48,730

 

 

 

(1,215

)

 

 

268,194

 

 

 

184,388

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34,255

 

 

 

34,255 

 

Reclass from adopting ASU 2016-01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,215

 

 

 

(1,215

)

 

 

--

 

Stock-based compensation transactions

 

 

 

 

 

 

 

 

 

(1

)

 

 

26 

 

 

 

1,661

 

 

 

 

 

 

 

 

 

 

 

1,687 

 

Shares surrendered in stock transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(90

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(90

)

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,473

)

 

 

(9,473

)

Balances, December 31, 2018

 

 

1,853 

 

 

 

342

 

 

 

1,567 

 

 

 

(131,727

)

 

 

50,391

 

 

 

0

 

 

 

291,761

 

 

 

210,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36,761

 

 

 

36,761 

 

Stock-based compensation transactions

 

 

 

 

 

 

 

 

 

(3

)

 

 

46 

 

 

 

1,652

 

 

 

 

 

 

 

 

 

 

 

1,698 

 

Shares surrendered in stock transactions

 

 

(1

)

 

 

 

 

 

 

 

 

 

(579

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(579

)

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,777

)

 

 

(10,777

)

Balances, December 31, 2019

 

 

1,855 

 

 

$

342

 

 

 

1,565 

 

 

$

(132,260

)

 

$

52,043

 

 

$

0

 

 

$

317,745

 

 

$

237,870

 

 

The accompanying notes are an integral part of this consolidated financial statement.

 

-35-

 

Atrion Corporation

Notes to Consolidated Financial Statements

 

(1)

Summary of Significant Accounting Policies

 

Atrion Corporation and its subsidiaries (“we,” “our,” “us,” “Atrion” or the “Company”) develop and manufacture products primarily for medical applications. We market our products throughout the United States and internationally. Our customers include physicians, hospitals, distributors and other manufacturers. Atrion Corporation’s principal subsidiaries through which these operations are conducted are Atrion Medical Products, Inc., Halkey-Roberts Corporation and Quest Medical, Inc.

 

 

Principles of Consolidation

The consolidated financial statements include the accounts of Atrion Corporation and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain prior-year balances have been reclassified in order to conform to the current year presentation.

 

 

 

Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

 

 

 

 

Cash and Cash Equivalents and Investments

Cash and cash equivalents include cash on hand and cash deposits in the bank as well as money market funds and debt securities with maturities at the time of purchase of 90 days or less. Cash deposits in the bank include amounts in operating accounts, savings accounts and money market accounts.

 

 

Our investments consist of corporate and government bonds, commercial paper, mutual funds and equity securities. We classify our investment securities in one of three categories: held-to-maturity, available-for-sale, or trading. Securities that we have the positive intent and ability to hold to maturity are reported at amortized cost and classified as held-to-maturity securities.

 

We report our available-for-sale and trading securities at fair value with changes in fair value recognized in other investment income (loss) in the Consolidated Statement of Income. Prior to our adoption of ASU 2016-01, Financial Instruments-Overall, Subtopic 825-10: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) in January 2018, unrealized gains and losses for our available-for-sale securities were reported in stockholders’ equity as accumulated other comprehensive income.

 

We consider as current assets those investments which will mature in the next 12 months including interest receivable on long-term bonds. The remaining investments are considered non-current assets including our investment in equity securities which we intend to hold longer than 12 months. We periodically evaluate our investments for impairment.

 

 -36-

 

Atrion Corporation

Notes to Consolidated Financial Statements – (continued)

 

 

The components of the Company’s cash and cash equivalents and our short and long-term investments as of December 31, 2019 and 2018 are as follows (in thousands):

 

 

 

2019

 

 

2018

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash deposits

 

$

38,942

 

 

$

41,774

 

Money market funds

 

 

3,460

 

 

 

13,861

 

Commercial paper

 

 

2,646

 

 

 

3,118

 

Total cash and cash equivalents

 

$

45,048

 

 

$

58,753

 

Short-term investments:

 

 

 

 

 

 

 

 

Commercial paper (held-to-maturity)

 

$

6,778

 

 

$

1,275

 

Bonds (held-to-maturity)

 

 

16,988

 

 

 

8,409

 

Total short-term investments

 

$

23,766

 

 

$

9,684

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

Mutual funds (available for sale)

 

$

1,105

 

 

$

674

 

Bonds (held-to-maturity)

 

 

27,845

 

 

 

17,513

 

Equity securities (available for sale)

 

 

2,822

 

 

 

2,861

 

Total long-term investments

 

$

31,772

 

 

$

21,048

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents and short and long-term investments

 

$

100,586

 

 

$

89,485

 

Account Receivables

Accounts receivable are recorded at the original sales price to the customer. We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the failure of customers to make required payments. The allowance for doubtful accounts is updated periodically to reflect our estimate of collectability. Accounts are written off when we determine the receivable will not be collected.

 

Inventories

 

Inventories are stated at the lower of cost (including materials, direct labor and applicable overhead) or net realizable value. Cost is determined by using the first-in, first-out method. The following table details the major components of inventory (in thousands):

 

 

 

December 31,

 

 

2019

 

 

2018

 

Raw materials

 

$

18,157

 

 

$

14,994

 

Work in process

 

 

8,525

 

 

 

7,214

 

Finished goods

 

 

15,411

 

 

 

11,364

 

Total inventories

 

$

42,093

 

 

$

33,572

 

 -37-

 

Atrion Corporation

Notes to Consolidated Financial Statements – (continued)

 

 

Accounts Payable

We reflect disbursements as trade accounts payable until such time as payments are presented to our bank for payment. At December 31, 2019 and 2018, disbursements totaling approximately $1,236,000 and $388,000, respectively, had not been presented for payment to our bank.

 

 

 

Income Taxes

We account for income taxes utilizing Accounting Standards Codification (ASC 740), Income Taxes, or ASC 740. ASC 740 requires the asset and liability method for the recording of deferred income taxes, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statement and the tax basis of assets and liabilities, as measured at current enacted tax rates. When appropriate, we evaluate the need for a valuation allowance to reduce deferred tax assets.

 

ASC 740 also requires the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attributes of income tax positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain tax position taken or expected to be taken on an income tax return must be recognized in the financial statements at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more-likely-than-not of being sustained.

 

Our uncertain tax positions are recorded within “Other non-current liabilities” in the accompanying consolidated balance sheets. We classify interest expense on underpayments of income taxes and accrued penalties related to unrecognized tax benefits in the income tax provision.

 

We account for excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee stock compensation as required by ASU 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), within income tax expense. An excess tax benefit is the realized tax benefit related to the amount of deductible compensation cost reported on an employer’s tax return for equity instruments in excess of the compensation cost for those instruments recognized for financial reporting purposes.

 

During the years ended December 31, 2019 and 2018, we made quarterly payments in excess of federal income taxes due of approximately $4,000 and $1,180,000, respectively. These amounts were recorded in prepaid expenses and other current assets on our consolidated balance sheets.

 

 

 

Property, Plant and Equipment

 

Property, plant and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Additions and improvements are capitalized, including all material, labor and engineering costs to design, install or improve the asset. Expenditures for repairs and maintenance are charged to expense as incurred. The following table represents a summary of property, plant and equipment at original cost (in thousands):

 

 

    December 31,   Useful
    2019   2018   Lives
Land   $ 5,511     $ 5,511    
Buildings     34,582       32,719     30-40 yrs
Machinery and equipment     160,897       143,352     3-15 yrs
Total property, plant and equipment   $ 200,990     $ 181,582    
 

 

 

 

Depreciation expense of $10,733,000, $ and $8,526,000 was recorded for the years ended December 31, 2019, 2018 and 2017, respectively. Depreciation expense is recorded in either cost of goods sold or operating expenses based on the associated assets’ usage.9,003,000

 

 

 -38-

 

Atrion Corporation

Notes to Consolidated Financial Statements – (continued)

 

 

Patents and Licenses

Costs for patents and licenses acquired are determined at acquisition date. Patents and licenses are amortized over the useful lives of the individual patents and licenses, which are from 7 to 20 years. Patents and licenses are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

 

 

 

Goodwill

Goodwill represents the excess of cost over the fair value of tangible and identifiable intangible net assets acquired. Annual impairment testing for goodwill is performed in the fourth quarter of each year using a qualitative assessment on goodwill impairment to determine whether it is more likely than not that the carrying value of our reporting units exceeds their fair value. If necessary, a two-step goodwill impairment analysis is performed. Goodwill is also reviewed whenever events or changes in circumstances indicate a change in value may have occurred. We have identified three reporting units where goodwill was recorded for purposes of testing goodwill impairment annually: (1) Atrion Medical Products, Inc., (2) Halkey-Roberts Corporation and (3) Quest Medical, Inc. The total carrying amount of goodwill in each of the years ended December 31, 2019 and 2018 was $9,730,000. Our evaluation of goodwill during each year resulted in no impairment losses.

 

 

 

Current Accrued Liabilities

 

The items comprising current accrued liabilities are as follows (in thousands):

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Accrued payroll and related expenses

 

$

4,233

 

 

$

3,608

 

Accrued vacation

 

 

311

 

 

 

291

 

Other accrued liabilities

 

 

604

 

 

 

620

 

Total accrued liabilities

 

$

5,148

 

 

$

4,519

 

 

Revenues

We recognize revenue when obligations under the terms of a contract with our customer are satisfied. This occurs with the transfer of control of our products to customers when products are shipped. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services. Sales and other taxes we may collect concurrent with revenue-producing activities are excluded from revenue.

 

We believe that our medical device business will benefit in the long term from an aging world population along with an increase in life expectancy. In the near term however, demand for our products fluctuates based on our customers’ requirements which are driven in large part by their customers’ or patients’ needs for medical care which does not always follow broad economic trends. This affects the nature, amount, timing and uncertainty of our revenue. Also, changes in the value of the United States dollar relative to foreign currencies could make our products more or less affordable and therefore affect our sales in international markets.

 

 -39-

 

Atrion CorporationNotes to Consolidated Financial Statements – (continued)

 

 

A summary of revenues by geographic area, based on shipping destination, for 2019, 2018 and 2017 is as follows (in thousands):

 

 

 

Year ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

United States

 

$

98,496

 

&#