UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the Quarterly Period Ended September 30, 2020

 

or

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the Transition Period from ________ to ________

 

Commission File Number 001-32982

 

Atrion Corporation

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

63-0821819

(State or Other Jurisdiction of Incorporation or Organization)

 

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

 

 

 

One Allentown Parkway, Allen, TX 75002

(Address of Principal Executive Offices) (Zip Code)

 

(972) 390-9800

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock, Par Value $0.10 per share

ATRI

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes     ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Registration S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes     ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Smaller reporting company

Non-accelerated filer

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     ☒ No

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Title of Each Class

 

Number of Shares Outstanding at October 30, 2020

Common stock, Par Value $0.10 per share

 

1,828,953

 

 

 

 

ATRION CORPORATION AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

PART I. Financial Information

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

2

 

 

Condensed Consolidated Statements of Income

(Unaudited) For the Three and Nine Months Ended September 30, 2020 and 2019

 

3

 

 

Condensed Consolidated Balance Sheets (Unaudited)

September 30, 2020 and December 31, 2019

 

4

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, 2020 and 2019

 

5

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

 

6

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

8

 

 

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

20

 

 

 

 

Item 4.

Controls and Procedures

 

20

 

 

 

 

 

PART II. Other Information

 

21

 

 

 

 

 

 

Item 1.

Legal Proceedings

21

 

 

 

 

 

 

Item 1A.

Risk Factors

21

 

 

 

 

 

 

Item 6.

Exhibits

22

 

 

 

 

 

 

SIGNATURES

 

23

 

 

 
2

Table of Contents

  

PART I

 

FINANCIAL INFORMATION

  

Item 1.   Financial Statements.

 

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 (Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(in thousands, except per share amounts)

 

Revenues

 

$33,785

 

 

$38,883

 

 

$115,348

 

 

$120,600

 

Cost of goods sold

 

 

18,887

 

 

 

20,992

 

 

 

63,114

 

 

 

65,414

 

Gross profit

 

 

14,898

 

 

 

17,891

 

 

 

52,234

 

 

 

55,186

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

1,888

 

 

 

2,092

 

 

 

5,660

 

 

 

6,574

 

General and administrative

 

 

4,039

 

 

 

3,990

 

 

 

13,066

 

 

 

12,480

 

Research and development

 

 

1,388

 

 

 

1,359

 

 

 

4,165

 

 

 

3,678

 

 Total Operating Expense

 

 

7,315

 

 

 

7,441

 

 

 

22,891

 

 

 

22,732

 

Operating income

 

 

7,583

 

 

 

10,450

 

 

 

29,343

 

 

 

32,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

 

303

 

 

 

733

 

 

 

1,161

 

 

 

1,896

 

Other investment income (losses)

 

 

678

 

 

 

(106)

 

 

5

 

 

 

265

 

 Total Non Operating Income Expenses

 

 

981

 

 

 

627

 

 

 

1,166

 

 

 

2,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

8,564

 

 

 

11,077

 

 

 

30,509

 

 

 

34,615

 

Provision for income taxes

 

 

(1,321)

 

 

(1,482)

 

 

(5,764)

 

 

(5,918)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$7,243

 

 

$9,595

 

 

$24,745

 

 

$28,697

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per basic share

 

$3.96

 

 

$5.17

 

 

$13.46

 

 

$15.48

 

Weighted average basic shares outstanding

 

 

1,829

 

 

 

1,855

 

 

 

1,839

 

 

 

1,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per diluted share

 

$3.95

 

 

$5.15

 

 

$13.42

 

 

$15.40

 

Weighted average diluted shares outstanding

 

 

1,834

 

 

 

1,862

 

 

 

1,844

 

 

 

1,863

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$1.75

 

 

$1.55

 

 

$4.85

 

 

$4.25

 

 

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

 

 
3

Table of Contents

 

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

Assets

 

September 30,
2020

 

 

December 31,

2019

 

 

 

(in thousands)

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$23,996

 

 

$45,048

 

Short-term investments

 

 

18,779

 

 

 

23,766

 

Accounts receivable

 

 

17,747

 

 

 

18,886

 

Inventories

 

 

48,622

 

 

 

42,093

 

Prepaid expenses and other current assets

 

 

4,013

 

 

 

2,545

 

 Total current assets

 

 

113,157

 

 

 

132,338

 

 

 

 

 

 

 

 

 

 

Long-term investments

 

 

45,381

 

 

 

31,772

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

213,203

 

 

 

200,990

 

Less accumulated depreciation and amortization

 

 

122,150

 

 

 

116,384

 

 Property, plant and equipment net

 

 

91,053

 

 

 

84,606

 

 

 

 

 

 

 

 

 

 

Other assets and deferred charges:

 

 

 

 

 

 

 

 

Patents

 

 

1,450

 

 

 

1,539

 

Goodwill

 

 

9,730

 

 

 

9,730

 

Other

 

 

2,261

 

 

 

2,046

 

 Total other assets

 

 

13,441

 

 

 

13,315

 

 

 

 

 

 

 

 

 

 

Total assets

 

$263,032

 

 

$262,031

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$11,694

 

 

$10,855

 

Accrued income and other taxes

 

 

1,005

 

 

 

419

 

 Total current liabilities

 

 

12,699

 

 

 

11,274

 

 

 

 

 

 

 

 

 

 

Line of credit

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Other non-current liabilities

 

 

12,215

 

 

 

12,887

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.10 per share; authorized 10,000 shares, issued 3,420 shares

 

 

342

 

 

 

342

 

Paid-in capital

 

 

53,581

 

 

 

52,043

 

Retained earnings

 

 

333,523

 

 

 

317,745

 

Treasury shares,1,591 at September 30, 2020 and 1,565 at December 31, 2019, at cost

 

 

(149,328)

 

 

(132,260)

Total stockholders’ equity

 

 

238,118

 

 

 

237,870

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$263,032

 

 

$262,031

 

      

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

 

 
4

Table of Contents

 

ATRION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$24,745

 

 

$28,697

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,517

 

 

 

7,961

 

Deferred income taxes

 

 

1,315

 

 

 

1,922

 

Stock-based compensation

 

 

1,540

 

 

 

1,306

 

Net change in unrealized gains and losses on investments

 

 

256

 

 

 

(257)

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

 

 

25

 

 

 

367

 

Other

 

 

22

 

 

 

(6)

 

 

 

36,420

 

 

 

39,990

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,136

 

 

 

(1,756)

Inventories

 

 

(6,529)

 

 

(4,742)

Prepaid expenses

 

 

(1,468)

 

 

581

 

Other non-current assets

 

 

(258)

 

 

17

 

Accounts payable and accrued liabilities

 

 

839

 

 

 

277

 

Accrued income and other taxes

 

 

586

 

 

 

884

 

Other non-current liabilities

 

 

(1,977)

 

 

914

 

 

 

 

28,749

 

 

 

36,165

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Property, plant and equipment additions

 

 

(14,899)

 

 

(15,239)

Purchase of investments

 

 

(40,025)

 

 

(54,539)

Proceeds from sale of investments

 

 

899

 

 

 

--

 

Proceeds from maturities of investments

 

 

30,223

 

 

 

46,992

 

 

 

 

(23,802)

 

 

(22,786)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(17,037)

 

 

--

 

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

 

 

(55)

 

 

(579)

Dividends paid

 

 

(8,907)

 

 

(7,880)

 

 

 

(25,999)

 

 

(8,459)

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(21,052)

 

 

4,920

 

Cash and cash equivalents at beginning of period

 

 

45,048

 

 

 

58,753

 

Cash and cash equivalents at end of period

 

$23,996

 

 

$63,673

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Income taxes

 

$4,518

 

 

$2,630

 

 

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

 

 
5

Table of Contents

 

ATRION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

For the Three Months ended September 30, 2020 and 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

 

 

 

 

 

 

 

 

Shares Outstanding

 

 


Amount

 

 

Shares

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Total

 

Balances, June 30, 2019

 

 

1,855

 

 

$342

 

 

 

1,565

 

 

$(132,260)

 

$51,332

 

 

$305,846

 

 

$225,260

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,595

 

 

 

9,595

 

Stock-based compensation transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

328

 

 

 

 

 

 

 

328

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,878)

 

 

(2,878)

Balances, September 30, 2019

 

 

1,855

 

 

$342

 

 

 

1,565

 

 

$(132,260)

 

$51,660

 

 

$312,563

 

 

$232,305

 

Balances, June 30, 2020

 

 

1,829

 

 

$342

 

 

 

1,591

 

 

$(149,329)

 

$53,020

 

 

$329,494

 

 

$233,527

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,243

 

 

 

7,243

 

Stock-based compensation transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

561

 

 

 

 

 

 

 

562

 

Shares surrendered in stock transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

-

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,214)

 

 

(3,214)

Balances, September 30, 2020

 

 

1,829

 

 

$342

 

 

 

1,591

 

 

$(149,328)

 

$53,581

 

 

$333,523

 

 

$238,118

 

 

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

  

 
6

Table of Contents

 

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED Consolidated Statements of CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

For the Nine Months ended September 30, 2020 and 2019

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

 

 

 

 

 

 

 

 

Shares Outstanding

 

 


Amount

 

 

Shares

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained Earnings

 

 

Total

 

Balances, December 31 , 2018

 

 

1,853

 

 

$342

 

 

 

1,567

 

 

$(131,727)

 

$50,391

 

 

$291,761

 

 

$210,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,697

 

 

 

28,697

 

Stock-based compensation transactions

 

 

3

 

 

 

 

 

 

 

(3)

 

 

46

 

 

 

1,269

 

 

 

 

 

 

 

1,315

 

Shares surrendered in stock transactions

 

 

(1)

 

 

 

 

 

 

1

 

 

 

(579)

 

 

 

 

 

 

 

 

 

 

(579)

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,895)

 

 

(7,895)

Balances, September 30, 2019

 

 

1,855

 

 

$342

 

 

 

1,565

 

 

$(132,260)

 

$51,660

 

 

$312,563

 

 

$232,305

 

Balances, December 31, 2019

 

 

1,855

 

 

$342

 

 

 

1,565

 

 

$(132,260)

 

$52,043

 

 

$317,745

 

 

$237,870

 

Cumulative change in accounting principal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36)

 

 

(36)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Balances, January 1, 2020

 

 

1,855 

 

 

 

 342 

 

 

 

 1,565 

 

 

 

(132,260 

)

 

 

 52,043 

 

 

 

  317,709 

 

 

 

 237,834 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,745

 

 

 

24,745

 

Stock-based compensation transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

 

 

1,538

 

 

 

 

 

 

 

1,562

 

Shares surrendered in stock transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(55)

 

 

 

 

 

 

 

 

 

 

(55)

Purchase of treasury stock

 

 

(26)

 

 

 

 

 

 

26

 

 

 

(17,037)

 

 

 

 

 

 

 

 

 

 

(17,037)

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,931)

 

 

(8,931)

Balances, September 30, 2020

 

 

1,829

 

 

$342

 

 

 

1,591

 

 

$(149,328)

 

$53,581

 

 

$333,523

 

 

$238,118

 

 

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

 

 
7

Table of Contents

 

ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1) Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Atrion Corporation and its subsidiaries (collectively referred to herein as “Atrion” the “Company,” “we,” “our,” and “us”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these statements include all normal and recurring adjustments necessary to present a fair statement of our consolidated results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. Preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that can have a significant impact on our revenue, operating income, and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheets. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. At least quarterly, we evaluate our assumptions, judgments, and estimates, and make changes as deemed necessary.

 

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of November 9, 2020, the date of issuance of this Quarterly Report on Form 10-Q. However, these estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 ("2019 Form 10-K").

 

The Coronavirus Aid, Relief, and Economic Security Act, which became law on March 27, 2020, includes a provision that permits an employer to defer the payment of the employer’s portion of payroll taxes that otherwise would be due between March 27, 2020 and December 31, 2020. The Company has elected to take advantage of such deferral provision.

 

 

 

8

Table of Contents

  

ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(2) Inventories

 

Inventories are stated at the lower of cost or net realizable value. Cost is determined by using the first-in, first-out method. The following table details the major components of inventories (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Raw materials

 

$19,994

 

 

$18,157

 

Work in process

 

 

10,724

 

 

 

8,525

 

Finished goods

 

 

17,904

 

 

 

15,411

 

Total inventories

 

$48,622

 

 

$42,093

 

 

(3) Income per share

 

The following is the computation for basic and diluted income per share:

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(in thousands, except per share amounts)

 

Net income

 

$7,243

 

 

$9,595

 

 

$24,745

 

 

$28,697

 

Weighted average basic shares outstanding

 

 

1,829

 

 

 

1,855

 

 

 

1,839

 

 

 

1,854

 

Add:Effect of dilutive securities

 

 

5

 

 

 

7

 

 

 

5

 

 

 

9

 

Weighted average diluted shares outstanding

 

 

1,834

 

 

 

1,862

 

 

 

1,844

 

 

 

1,863

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$3.96

 

 

$5.17

 

 

$13.46

 

 

$15.48

 

Diluted

 

$3.95

 

 

$5.15

 

 

$13.42

 

 

$15.40

 

 

Incremental shares from stock options and restricted stock units were included in the calculation of weighted average diluted shares outstanding using the treasury stock method. Dilutive securities representing two and zero shares of common stock for the quarters ended September 30, 2020 and 2019, respectively, and an average of six and zero shares of common stock for the nine months ended September 30, 2020 and 2019, respectively, were excluded from the computation of weighted average diluted shares outstanding because their effect would have been anti-dilutive.

 

 

 
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ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4) Investments

 

As of September 30, 2020 and December 31, 2019, we held investments in commercial paper, bonds, money market accounts, mutual funds and equity securities. The commercial paper and bonds are considered held-to-maturity and are recorded at amortized cost in the accompanying consolidated balance sheets. The money market accounts, equity securities and mutual funds are recorded at fair value in the accompanying consolidated balance sheets. The fair values of these investments were estimated using recently executed transactions and market price quotations. We consider as current assets those investments which will mature in the next 12 months including interest receivable on the long-term bonds. The remaining investments are considered non-current assets including our investment in equity securities we intend to hold longer than 12 months.

 

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

 

 

 

September 30,

2020

 

 

December 31,

2019

 

Cash and cash equivalents:

 

 

 

 

 

 

Cash deposits

 

$19,573

 

 

$38,942

 

Money market funds

 

 

3,673

 

 

 

3,460

 

Commercial paper

 

 

750

 

 

 

2,646

 

Total cash and cash equivalents

 

$23,996

 

 

$45,048

 

Short-term investments:

 

 

 

 

 

 

 

 

Commercial paper (held-to-maturity)

 

$4,469

 

 

$6,778

 

Bonds (held-to-maturity)

 

 

14,330

 

 

 

16,988

 

Allowance for credit losses

 

 

(20)

 

 

-

 

Total short-term investments

 

$18,779

 

 

$23,766

 

Long-term investments:

 

 

 

 

 

 

 

 

Mutual funds (available for sale)

 

$499

 

 

$1,105

 

Bonds (held-to-maturity)

 

 

42,177

 

 

 

27,845

 

Allowance for credit losses

 

 

(57)

 

 

-

 

Equity securities (available for sale)

 

 

2,762

 

 

 

2,822

 

Total long-term investments

 

$45,381

 

 

$31,772

 

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

 

$88,156

 

 

$100,586

 

 

Recently adopted Topic 326 utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for held-to-maturity securities at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. Our credit loss calculations for held-to-maturity securities are based upon historical default and recovery rates of bonds rated with the same rating as our portfolio. We also apply an adjustment factor to these credit loss calculations based upon our assessment of the expected impact from current economic conditions on our investments, including the impact of COVID-19. We monitor the credit quality of debt securities classified as held-to-maturity through the use of their respective credit rating and update them on a quarterly basis with our latest assessment completed on September 30, 2020.

 

 

 
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ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the amortized cost of our held-to-maturity bonds at September 30, 2020, aggregated by credit quality indicator (in thousands):

 

Held-to-Maturity Bonds

Credit Quality Indicators

 

Asset Backed

Bonds

 

 

Fed Govt. Bonds/Notes

 

 

Municipal

Bonds

 

 

Corporate

Bonds

 

 

Totals

 

AAA/AA/A

 

$1,891

 

 

$3,265

 

 

$759

 

 

$31,490

 

 

$37,405

 

BBB/BB

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19,102

 

 

 

19,102

 

TOTAL

 

$1,891

 

 

$3,265

 

 

$759

 

 

$50,592

 

 

$56,507

 

 

The following table presents information regarding our allowance for credit losses on our short-term and long-term investments for the nine months ended September 30, 2020 (in thousands):

 

 

 

Short- Term Securities

 

 

Long- Term Securities

 

 

Total

 

Beginning balance, December 31, 2019

 

$-

 

 

$-

 

 

$-

 

Allowance recognized upon adoption of Topic 326

 

 

9

 

 

 

33

 

 

 

42

 

Provision for credit loss expense

 

 

11

 

 

 

24

 

 

 

35

 

Ending balance, September 30, 2020

 

$20

 

 

$57

 

 

$77

 

 

Our investments are required to be measured for disclosure purposes at fair value on a recurring basis. Our investments are considered Level 1 or Level 2 as detailed in the table below. The fair values of these investments were estimated using recently executed transactions and market price quotations. The amortized cost and fair value of our investments, and the related gross unrealized gains and losses, were as follows as of the dates shown below (in thousands):

 

 

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

Level

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

As of September 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market

 

 

1

 

 

 

3,673

 

 

$-

 

 

$-

 

 

$3,673

 

Commercial paper

 

 

2

 

 

 

5,219

 

 

$4

 

 

$-

 

 

$5,223

 

Bonds

 

 

2

 

 

 

56,506

 

 

$544

 

 

$(60)

 

$56,990

 

Mutual funds

 

 

1

 

 

 

566

 

 

$-

 

 

$(67)

 

$499

 

Equity investments

 

 

2

 

 

 

5,675

 

 

$-

 

 

$(2,913)

 

$2,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market

 

 

1

 

 

 

3,460

 

 

$-

 

 

$-

 

 

$3,460

 

Commercial paper

 

 

2

 

 

 

9,424

 

 

$2

 

 

$-

 

 

$9,426

 

Bonds

 

 

2

 

 

 

44,833

 

 

$138

 

 

$(19)

 

$44,952

 

Mutual funds

 

 

1

 

 

 

1,052

 

 

$53

 

 

$-

 

 

$1,105

 

Equity investments

 

 

2

 

 

 

5,675

 

 

$-

 

 

$(2,853)

 

$2,822

 

 

 
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ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  

The bonds represent investments in various issuers at September 30, 2020.

 

The unrealized losses for these bond investments relate to the impact of COVID-19 on the bond market which resulted in a lower market price for those securities. None of these bond investments has been in a loss position for more than 12 months.

 

The commercial paper has maturities from less than a month to five months. The bonds have maturities from less than a month to 54 months.

 

(5) Patents and Licenses

 

Purchased patents and license fees paid for the use of other entities’ patents are amortized over the useful life of the patent or license. The following tables provide information regarding patents and licenses (dollars in thousands):

 

September 30, 2020

 

 

December 31, 2019

 

Weighted Average
Original Life
(years)

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Weighted Average
Original Life
(years)

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

15.67

 

 

$13,840

 

 

$12,390

 

 

 

15.67

 

 

$13,840

 

 

$12,301

 

 

Aggregate amortization expense for patents and licenses was $30,000 in each of the three months ended September 30, 2020 and 2019 and $90,000 in each of the nine months ended September 30, 2020 and 2019.

 

Estimated future amortization expense for each of the years set forth below ending December 31 is as follows (in thousands):

 

2021

 

$119

 

2022

 

$117

 

2023

 

$113

 

2024

 

$113

 

2025

 

$112

 

   

(6) Revenues

 

We recognize revenue when performance 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.

 

 

 
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ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A summary of revenues by geographic area, based on shipping destination, for the three and six months ended September 30, 2020 and 2019 are as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

United States

 

$19,925

 

 

$24,644

 

 

$65,648

 

 

$76,640

 

Germany

 

 

2,485

 

 

 

2,168

 

 

 

8,640

 

 

 

6,427

 

Other countries less than 5% of revenues

 

 

11,375

 

 

 

12,071

 

 

 

41,060

 

 

 

37,533

 

Total

 

$33,785

 

 

$38,883

 

 

$115,348

 

 

$120,600

 

 

A summary of revenues by product line for the three and nine months ended September 30, 2020 and 2019 are as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Fluid Delivery

 

$16,512

 

 

$17,888

 

 

$60,620

 

 

$54,334

 

Cardiovascular

 

 

11,297

 

 

 

14,565

 

 

 

36,963

 

 

 

44,564

 

Ophthalmology

 

 

1,171

 

 

 

1,556

 

 

 

2,970

 

 

 

5,656

 

Other

 

 

4,805

 

 

 

4,874

 

 

 

14,795

 

 

 

16,046

 

Total

 

$33,785

 

 

$38,883

 

 

$115,348

 

 

$120,600

 

 

More than 99 percent of our total revenue in the periods presented herein is pursuant to shipments initiated by a purchase order (our “contract”) and recognized at a single point in time when the performance obligation of the product being shipped is satisfied, rather than recognized over time, and is presented as a receivable on the balance sheet. Payment is typically due within 30 days.

 

We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the failure of customers to make required payments. Effective January 1, 2020, we adopted the new credit loss accounting methodology as discussed in footnote 7 to calculate our credit loss allowance for our trade receivables. An account is written off when we determine the receivable will not be collected. Historically, bad debt has been immaterial.

 

We have elected to recognize the cost of shipping as an expense in cost of sales when control over the product has transferred to the customer.

 

We do not make any material accruals for product returns and warranty obligations because our returns and warranty obligations have been very low due to our focus on quality control.

 

We do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount for which we have the right to invoice. We believe that the complexity added to our disclosures by the inclusion of a large amount of insignificant detail in attempting to disclose information about immaterial contracts would potentially obscure more useful and important information.

 

 

 
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Table of Contents

 

ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(7) Recent Accounting Pronouncements

 

ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU introduces a new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to the original ASU.

 

The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and trade and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized.

 

On January 1, 2020, we adopted the guidance prospectively with a cumulative adjustment to retained earnings. Atrion has not restated comparative information for 2019 and, therefore, the comparative information for 2019 is reported under the old model and is not comparable to the information presented for 2020.

 

At adoption, we recognized an incremental allowance for credit losses on our allowance for credit losses related to our held-to-maturity debt securities of approximately $42,000 and our trade accounts receivable of approximately $4,000. Additionally, we recorded an approximately $36,000 decrease in retained earnings associated with the increased estimated credit losses on our trade accounts receivable and investments.

 

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.

 

 

 
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Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

We develop and manufacture products primarily for medical applications. We market components to other equipment manufacturers for incorporation in their products and sell finished devices to physicians, hospitals, clinics and other treatment centers. Our medical products primarily serve the fluid delivery, cardiovascular and ophthalmology markets. Our other medical and non-medical products include instrumentation and disposables used in valves and inflation devices used in marine and aviation safety products.

 

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

 

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

 

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

 

 

·

Focusing on customer needs;

 

·

Expanding existing product lines and developing new products;

 

·

Manufacturing products to exacting quality standards; and

 

·

Preserving and fostering a collaborative, respectful and entrepreneurial culture.

 

For the three months ended September 30, 2020, we reported revenues of $33.8 million, operating income of $7.6 million and net income of $7.2 million, down 13 percent, 27 percent and 25 percent, respectively, from the three months ended September 30, 2019.

 

Results for the three months ended September 30, 2020

 

Consolidated net income totaled $7.2 million, or $3.96 per basic and $3.95 per diluted share, in the third quarter of 2020. This is compared with consolidated net income of $9.6 million, or $5.17 per basic and $5.15 per diluted share, in the third quarter of 2019. The income per basic share computations are based on weighted average basic shares outstanding of 1,829,000 in the 2020 period and 1,855,000 in the 2019 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,834,000 in the 2020 period and 1,862,000 in the 2019 period.

 

Consolidated revenues of $33.8 million for the third quarter of 2020 were 13 percent lower than revenues of $38.9 million for the third quarter of 2019. This decrease was primarily attributable to a decrease in volumes of our Cardiovascular, Fluid Delivery and Ophthalmology products.

 

 
15

Table of Contents

 

Revenues by product line were as follows (in thousands):

 

 

 

Three Months ended
September 30,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Fluid Delivery

 

$16,512

 

 

$17,888

 

Cardiovascular

 

 

11,297

 

 

 

14,565

 

Ophthalmology

 

 

1,171

 

 

 

1,556

 

Other

 

 

4,805

 

 

 

4,874

 

Total

 

$33,785

 

 

$38,883

 

 

Cost of goods sold of $18.9 million for the third quarter of 2020 was 10.0 percent lower than cost of goods sold of $21.0 million for the third quarter of 2019 primarily due to lower sales volumes. Our cost of goods sold in the third quarter of 2020 was 55.9 percent of revenues compared to 54.0 percent of revenues in the third quarter of 2019.

 

Gross profit of $14.9 million in the third quarter of 2020 was $3.0 million or 16.7 percent lower than in the comparable 2019 period. Our gross profit percentage in the third quarter of 2020 was 44.0 percent of revenues compared with 46.0 percent of revenues in the third quarter of 2019. The decrease in gross profit percentage in the 2020 period compared to the 2019 period was primarily related to increased manufacturing costs coupled with lower sales volumes.

 

Our third quarter 2020 operating expenses of $7.3 million were $126,000 lower than the operating expenses for the third quarter of 2019. This decrease was attributable to a $204,000 decrease in Selling expenses, primarily resulting from lower travel and conference expenses due to COVID-19, partially offset by increases in General and Administrative, or G&A, expenses of $49,000 and Research and Development, or R&D, expenses of $29,000. The increase in G&A expenses was mainly due to increased software maintenance and salary expenses and the R&D expense increase was primarily due to higher salary expenses.

 

Operating income in the third quarter of 2020 decreased by $2.8 million to $7.6 million due to the lower sales and gross profit discussed above, a 27 percent decrease compared to our operating income for the third quarter of 2019. Operating income was 22 percent of revenues for the third quarter of 2020 and 27 percent of revenues for the third quarter of 2019.

 

Interest and dividend income in the third quarter of 2020 was $303,000 compared with $733,000 for the same period in the prior year. The decline in interest and dividend income was largely due to lower interest rates in the 2020 period as compared to the 2019 period.

 

Other investment income in the third quarter of 2020 was $678,000 compared with an Other investment loss of $106,000 in the third quarter of 2019. These amounts were attributable to unrealized gains or losses on equity investments resulting from changes in the market values of the investments in each respective quarter.

 

 
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Table of Contents

 

Income tax expense was $1.3 million for the third quarter of 2020 compared with $1.5 million for the third quarter of 2019. The effective tax rate for the third quarter of 2020 was 15.4 percent compared with 13.4 percent for the third quarter of 2019. The increase in the 2020 period’s effective tax rate was primarily related to decreased tax benefits booked for sales outside the United States under the foreign derived intangible income (“FDII”) deduction.

 

Results for the nine months ended September 30, 2020

 

Consolidated net income totaled $24.7 million, or $13.46 per basic and $13.42 per diluted share, in the first nine months of 2020. This is compared with consolidated net income of $28.7 million, or $15.48 per basic and $15.40 per diluted share, in the first nine months of 2019. The income per basic share computations are based on weighted average basic shares outstanding of 1,839,000 in the 2020 period and 1,854,000 in the 2019 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,844,000 in the 2020 period and 1,863,000 in the 2019 period.

 

Consolidated revenues of $115.3 million for the first nine months of 2020 compared with revenues of $120.6 million for the first nine months of 2019. Higher sales in Fluid Delivery were offset by lower Cardiovascular, Ophthalmology and Other sales.

 

Revenues by product line were as follows (in thousands):

 

 

 

Nine Months ended
September 30,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Fluid Delivery

 

$60,620

 

 

$54,334

 

Cardiovascular

 

 

36,963

 

 

 

44,564

 

Ophthalmology

 

 

2,970

 

 

 

5,656

 

Other

 

 

14,795

 

 

 

16,046

 

Total

 

$115,348

 

 

$120,600

 

 

Cost of goods sold of $63.1 million for the first nine months of 2020 was $2.3 million lower than in the comparable 2019 period. This reduction was due to lower sales volumes, favorable product sales mix, and continued cost improvement projects, partially offset by increased manufacturing costs. Our cost of goods sold for the first nine months of 2020 was 54.7 percent of revenues compared to 54.2 percent of revenues for the first nine months of 2019.

 

Gross profit was $52.2 million in the first nine months of 2020 and $55.2 million in the comparable 2019 period. Our gross profit percentage was 45.3 percent of revenues in the first nine months in 2020 and 45.8 percent in the first nine months in 2019. This decrease in gross profit percentage was due to increased manufacturing costs coupled with lower sales volumes in the 2020 period. This reduction was softened by a favorable product sales mix and continued cost improvements in the current year period as mentioned above.

 

 
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Table of Contents

 

Operating expenses of $22.9 million for the first nine months 2020 were $159,000 higher than the operating expenses for the first nine months of 2019. This increase was attributable to a $487,000 increase in R&D expenses and a $586,000 increase in G&A expenses largely offset by a $914,000 decrease in Selling expenses. The increase in R&D expenses was primarily related to increases in outside services and compensation. The increase in G&A expenses for the first nine months of 2020 was principally attributable to increased compensation, software maintenance, and outside services. The decrease in Selling expenses was principally attributable to Company-mandated travel restrictions and cancelled conferences due to COVID-19.

 

Operating income in the first nine months of 2020 decreased by $3.1 million to $29.3 million, a 10 percent decrease from our operating income in the first nine months of 2019. Operating income was 25 percent of revenues for the first nine months of 2020 and 27 percent of revenues in the comparable 2019 period.

 

Interest and dividend income for the first nine months of 2020 was $1.2 million compared with $1.9 million for the same period in the prior year. The decline in interest and dividend income was largely due to lower interest rates in the 2020 period as compared to the 2019 period.

 

Other investment income was $5,000 for the first nine months of 2020 compared with Other investment income of $265,000 in the first nine months of 2019. These amounts were attributable to gains on equity investments resulting from changes in the market values of the investments in each respective period.

 

Income tax expense was $5.8 million for the first nine months of 2020 and $5.9 million in the comparable 2019 period. The effective tax rate for the first nine months of 2020 was 18.9 percent compared with 17.1 percent for the first nine months of 2019. The increase in the effective tax rate in the 2020 period was primarily related to decreased tax benefits booked for sales outside the United States under the FDII deduction and from lower stock compensation deductions. We expect the effective tax rate for the fourth quarter of 2020 to be approximately 15 percent.

 

Liquidity and Capital Resources

 

As of September 30, 2020, we had a $75.0 million revolving credit facility with a money center bank pursuant to which the lender is obligated to make advances until February 28, 2022.We had no outstanding borrowings under our credit facility at September 30, 2020. Our ability to borrow funds under the credit agreement from time to time is contingent on meeting certain covenants in the loan agreement, the most restrictive of which is the ratio of total debt to earnings before interest, income tax, depreciation and amortization. At September 30, 2020, we were in compliance with all financial covenants.

 

At September 30, 2020, we had a total of $88.2 million in cash and cash equivalents, short-term investments and long-term investments, a decrease of $12.4 million from December 31, 2019. The principal contributor to this decrease was stock buybacks of $17.0 million.

 

 
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Table of Contents

 

Cash flows from operating activities of $28.7 million for the nine months ended September 30, 2020 were primarily comprised of net income plus the net effect of non-cash expenses and decreases in accounts receivable and other taxes partially offset by increases in inventories and prepaid expenses. During the first nine months of 2020, we expended $40.0 million for the purchase of investments, $14.9 million for the addition of property and equipment, $17.0 million in stock buybacks and $8.9 million for dividends. During the same period, maturities and sales of investments generated $30.2 million in cash.

 

At September 30, 2020, we had working capital of $100.5 million, including $24.0 million in cash and cash equivalents and $18.8 million in short-term investments compared to working capital of $121.1 million at December 31, 2019. The $20.6 million decrease in working capital during the first nine months of 2020 was primarily related to decreases of cash and cash equivalents of $21.1 million and short term investments of $4.9 million partially offset by increased inventories of $6.5 million.

 

We believe that our $88.2 million in cash, cash equivalents, short-term investments and long-term investments, along with cash flows from operations and available borrowings of up to $75.0 million under our credit facility, will be sufficient to fund our cash requirements for at least the foreseeable future, including the costs associated with the planned expansion of one of our manufacturing facilities. We believe that our strong financial position would allow us to access equity or debt financing should that be necessary. Additionally, we believe that our cash and cash equivalents, short-term investments and long-term investments, as a whole, will increase during the remainder of 2020.

 

COVID-19 Impact

 

COVID-19, which has spread throughout the United States and the world, has resulted in the implementation and continuation of numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. Although we are unable to predict accurately the full impact that COVID-19 will have on our results of operations, financial condition, liquidity, and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has disrupted and may continue to disrupt our business and operations, as well as those of many of our key customers, suppliers, and other counterparties. In response to the COVID-19 pandemic, various national, state, and local governments where we, our customers, and our suppliers operate issued decrees prohibiting certain businesses from continuing to operate or restricting certain of their operations. To help protect the health and well-being of our employees and communities, some of our employees have been working remotely, and we implemented and are continuing additional health and safety measures in our facilities. In addition, many of our customers implemented and are continuing similar measures in their facilities, which have delayed, and may continue to delay, the timing of some orders and deliveries.

 

These disruptions had a material adverse impact on our financial results for the first nine months of 2020 and for the three months ended September 30, 2020. For the first nine months of 2020, our revenues were down 4 percent, our operating income was down 10 percent and our net income was down 14 percent from the nine months ended September 30, 2019. For the third quarter 2020, our revenues were down 13 percent, our operating income was down 27 percent and our net income was down 25 percent from the three months ended September 30, 2019. Results for the fourth quarter of 2020, and for an indeterminate period thereafter, may be affected by the impact of the global pandemic. OEM customers and end users of our products may experience financial distress, mass illness, supply chain disruptions, and government prohibitions that could impact purchases of products from us. Illnesses, government prohibitions and restrictions, and supply chain disruptions could also impact our ability to fulfill orders. Additionally, we may be unable to collect receivables from those customers significantly impacted by COVID-19. A decrease in orders in a given period could negatively affect our revenues in future periods, particularly if experienced on a sustained basis.

 

We will continue to evaluate the nature and extent of the impact of COVID-19 to our business.

 

 
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Forward-Looking Statements

 

Statements in this Management’s Discussion and Analysis and elsewhere in this Quarterly Report on Form 10-Q that are forward looking are based upon current expectations, and actual results or future events may differ materially. Therefore, the inclusion of such forward-looking information should not be regarded as a representation by us that our objectives or plans will be achieved. Such statements include, but are not limited to, our effective tax rate for the remainder of 2020, our ability to fund our cash requirements for the foreseeable future with our current assets, long-term investments, cash flow and borrowings under the credit facility, our access to equity and debt financing, the impact of the COVID-19 pandemic on our business and operations, and our financial results, and the increase in cash, cash equivalents, and investments during the remainder of 2020. Words such as “expects,” “believes,” “anticipates,” “intends,” “should,” “plans,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements contained herein involve numerous risks and uncertainties, and there are a number of factors that could cause actual results or future events to differ materially, including, but not limited to, the following: the risk that the COVID-19 pandemic leads to material delays and cancellations of, or reduced demand for, procedures in which our products are utilized; curtailed or delayed capital spending by hospitals and other healthcare providers; disruption to our supply chain; closures of our facilities; delays in training; delays in gathering clinical evidence; diversion of management and other resources to respond to the COVID-19 outbreak; the impact of global and regional economic and credit market conditions on healthcare spending; the risk that the COVID-19 virus disrupts local economies and causes economies in our key markets to enter prolonged recessions; changing economic, market and business conditions; acts of war or terrorism; the effects of governmental regulation; the impact of competition and new technologies; slower-than-anticipated introduction of new products or implementation of marketing strategies; implementation of new manufacturing processes or implementation of new information systems; our ability to protect our intellectual property; changes in the prices of raw materials; changes in product mix; intellectual property and product liability claims and product recalls; the ability to attract and retain qualified personnel; and the loss of, or any material reduction in sales to, any significant customers. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic review which may cause us to alter our marketing, capital expenditures or other budgets, which in turn may affect our results of operations and financial condition. The forward-looking statements in this Quarterly Report on Form 10-Q are made as of the date hereof, and we do not undertake any obligation, and disclaim any duty, to supplement, update or revise such statements, whether as a result of subsequent events, changed expectations or otherwise, except as required by applicable law.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

For the quarter ended September 30, 2020, we did not experience any material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in our 2019 Form 10-K.

 

Item 4. Controls and Procedures.

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2020. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting for the quarter ended September 30, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 
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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, we may be involved in claims or litigation that arise in the normal course of business. We are not currently a party to any legal proceedings, which, if decided adversely, would have a material adverse effect on our business, financial condition, or results of operations.

 

Item 1A. Risk Factors.

 

Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A. of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 include discussions of our risk factors. There have been no material changes in the risk factors described in those reports, except with respect to the risk factor regarding COVID-19 included in Part II, Item 1A entitled “Risk Factors, “of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 which is supplemented below.

 

The ongoing COVID-19 pandemic has adversely affected our consolidated results of operations and may continue to do so.

 

The disruptions resulting from COVID-19 pandemic had a material adverse impact on our financial results for the first nine months of fiscal 2020 and for the three months ended September 30, 2020. For the first nine months of 2020, our revenues were down 4 percent, our operating income was down 10 percent and our net income was down 14 percent from the nine months ended September 30, 2019. For the third quarter of 2020, our revenues were down 13 percent, our operating income was down 27 percent and our net income was down 25 percent from the three months ended September 30, 2019.Our results for the fourth quarter of 2020, and for an indeterminate period thereafter, may be affected by the impact of the global pandemic.

 

 
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Item 6. Exhibits.

Exhibit Index

 

Exhibit Number

 

Description

 

 

 

31.1

 

Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer

 

 

 

31.2

 

Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer

 

 

 

32.1

 

Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes – Oxley Act Of 2002

 

 

 

32.2

 

Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes – Oxley Act Of 2002

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Atrion Corporation

 

(Registrant)

 

    
Date:November 9, 2020 By:

/s/ David A. Battat

 

 

David A. Battat

 
  

President and

 
  Chief Executive Officer 

 

 

 

 

 

 

 

 

 

 

 

 

Date:November 9, 2020

By:

/s/ Jeffery Strickland

 

 

 

Jeffery Strickland

 

 

 

Vice President and

 

 

 

Chief Financial Officer

 

 

 

(Principal Accounting and Financial Officer)

 

 

 
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