ATRION CORP - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 001-32982

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

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.

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.

ATRION CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited) 

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

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 August 6, 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 its 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 (CARES 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 and is evaluating its ability to take advantage of other provisions of the CARES Act and its amendments.

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):

(3) Income per share

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

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 eight and zero shares of common stock for the quarters ended June 30, 2020 and 2019, respectively, and an average of 12 and zero shares of common stock for the six months ended June 30, 2020 and 2019, respectively, were excluded from the computation of weighted average diluted shares outstanding because their effect would have been anti-dilutive.

(4) Investments

As of June 30, 2020, 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 sheet. The money market accounts, equity securities and mutual funds are recorded at fair value in the accompanying consolidated balance sheet. 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.

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

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

Newly 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 June 30, 2020.

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 June 30, 2020, aggregated by credit quality indicator (in thousands):

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

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):

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The above bonds represent investments in various issuers at June 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 57 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):

Aggregate amortization expense for patents and licenses was $30,000 in each of the three months ended June 30, 2020 and 2019 and $60,000 in each of the six months ended June 30, 2020 and 2019.

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

(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.

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 June 30, 2020 and 2019 are as follows (in thousands):

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

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.

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.

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:

For the three months ended June 30, 2020, we reported revenues of $38.0 million, operating income of $10.0 million and net income of $8.6 million, down 5 percent, down 8 percent and down 11 percent, respectively, from the three months ended June 30, 2019.

Results for the three months ended June 30, 2020

Consolidated net income totaled $8.6 million, or $4.69 per basic and $4.68 per diluted share, in the second quarter of 2020. This is compared with consolidated net income of $9.7 million, or $5.21 per basic and $5.18 per diluted share, in the second quarter of 2019. The income per basic share computations are based on weighted average basic shares outstanding of 1,835,000 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 1,839,000 in the 2020 period and 1,864,000 in the 2019 period.

Consolidated revenues of $38.0 million for the second quarter of 2020 were 5 percent lower than revenues of $40.1 million for the second quarter of 2019. This decrease was primarily attributable to decrease in volumes of our Cardiovascular and Ophthalmology products partially offset by increased volumes of our Fluid Delivery products.

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

Cost of goods sold of $20.5 million for the second quarter of 2020 was 4.7 percent lower than cost of goods sold of $21.5 million for the second quarter of 2019 primarily due to lower sales volumes. Our cost of goods sold in the second quarter of 2020 was 54.0 percent of revenues compared with 53.6 percent of revenues in the second quarter of 2019.

Gross profit of $17.5 million in the second quarter of 2020 was $1.1 million or 6.0 percent lower than in the comparable 2019 period. Our gross profit percentage in the second quarter of 2020 was 46.0 percent of revenues compared with 46.4 percent of revenues in the second 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 with lower sales volumes.

Our second quarter 2020 operating expenses of $7.4 million were $203,000 lower than the operating expenses for the second quarter of 2019. This decrease was attributable to a $132,000 decrease in Research and Development, or R&D, expenses and a $395,000 decrease in Selling expenses. General and Administrative, or G&A, expenses partially offset these declines with a $324,000 increase. The decrease in R&D expenses was primarily related to company mandated travel restrictions due to COVID-19 and rescheduled international registrations. The decrease in Selling expenses was primarily related to Company-mandated travel restrictions and cancelled conferences due to COVID-19. The increase in G&A expenses was mainly due to increased software maintenance and salary expenses.

Operating income in the second quarter of 2020 decreased $920,000 to $10.0 million, an 8 percent decrease compared to our operating income in the quarter ended June 30, 2019. Operating income was 26 percent of revenues for the second quarter of 2020 and 27 percent the second quarter of 2019.

Interest and dividend income in the second quarter of 2020 was $367,000 compared with $581,000 for the same period in the prior year. The decline in interest and dividend income was largely due to lower interest rates in 2020 versus 2019.

Other investment income in the second quarter of 2020 was $354,000 compared with investment income of $161,000 in the second quarter of 2019. These amounts were attributable to unrealized gains on equity investments resulting from changes in the market values of the investments in each respective quarter.

Income tax expense was $2.2 million for the second quarter of 2020 compared with $2.0 million for the second quarter of 2019. The effective tax rate for the second quarter of 2020 was 20.1 percent compared with 17.5 percent for the second quarter of 2019. The increase in the 2020 period’s effective tax rate was primarily related to decreased tax benefits from stock compensation.

Results for the six months ended June 30, 2020

Consolidated net income totaled $17.5 million, or $9.49 per basic and $9.47 per diluted share, in first six months of 2020. This is compared with consolidated net income of $19.1 million, or $10.30 per basic and $10.25 per diluted share, in the first six months of 2019. The income per basic share computations are based on weighted average basic shares outstanding of 1,844,000 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 1,849,000 in the 2020 period and 1,863,000 in the 2019 period.

Consolidated revenues of $81.6 million for the first six months of 2020 approximated revenues of $81.7 million for the first six 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):

Cost of goods sold of $44.2 million for the first six months of 2020 was $154,000 lower than in the comparable 2019 period. A favorable product sales mix and continued cost improvement projects more than offset increased manufacturing costs in the first six months of 2020. Our cost of goods sold in the first six months of both 2020 and 2019 was 54.4 percent of revenues.

Gross profit was $37.3 million in the first six months of both 2020 and 2019. Our gross profit percentage was 45.8 percent of revenues in the first six months in 2020 and 45.6 percent in 2019. Favorable product sales mix and continued cost improvements offset increased manufacturing costs as mentioned above.

Operating expenses of $15.5 million for the first six months 2020 were $286,000 higher than the operating expenses for the first six months of 2019. This increase was comprised of a $457,000 increase in R&D expenses, $538,000 increase in G&A expenses and a $709,000 decrease in Selling expenses. The increase in R&D expenses was primarily related to increased outside services and compensation. The increase in G&A expenses for the first six 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 six months of 2020 decreased $244,000 to $21.8 million, a 1 percent decrease from our operating income in the six months ended June 30, 2019. Operating income for the first six months in 2020 and 2019 was 27 percent of revenues.

Interest and dividend income for the first six months of 2020 was $858,000, compared with $1.2 million for the same period in the prior year. The decline in interest and dividend income was largely due to lower interest rates in 2020 versus 2019.

Other investment loss for the first six months of 2020 was $673,000 compared with an investment income of $372,000 in the first six months of 2019. These amounts were attributable to unrealized losses and gains on equity investments resulting from changes in the market values of the investments in each respective quarter. COVID-19 significantly impacted certain equity market valuations in 2020, also impacting our investments.

Income tax expense was $4.4 million for the first six months of both 2020 and 2019. The effective tax rate for the first six months of 2020 was 20.2 percent, compared with 18.8 percent for the first six months of 2019. The increase in the 2020 period effective tax rate was primarily related to decreased tax benefits from stock compensation. We expect the effective tax rate for the remainder of 2020 to be approximately 20 percent.

Liquidity and Capital Resources

As of June 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 June 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 June 30, 2020, we were in compliance with all financial covenants.

At June 30, 2020, we had a total of $87.5 million in cash and cash equivalents, short-term investments and long-term investments, a decrease of $13.1 million from December 31, 2019. The principal contributor to this decrease was stock buybacks of $17.0 million.

Cash flows from operating activities of $19.4 million for the six months ended June 30, 2020 were primarily comprised of net income plus the net effect of non-cash expenses and increases in accrued income and other taxes partially offset by increases in accounts receivable and inventories. During the first six months of 2020, we expended $30.4 million for the purchase of investments, $8.8 million for the addition of property and equipment, $17.0 million in stock buybacks and $5.7 million for dividends. During the same period, maturities and sales of investments generated $20.7 million in cash.

At June, 30, 2020, we had working capital of $86.7 million, including $24.1 million in cash and cash equivalents and $6.6 million in short-term investments. The $34.4 million decrease in working capital during the first six months of 2020 was primarily related to decreases of cash and cash equivalents of $20.1 million and short term investments of $17.2 million.

We believe that our $87.5 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 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 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 have 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 have implemented additional health and safety measures in our facilities. In addition, many of our customers have implemented similar measures in their facilities, which has delayed, and may continue to delay, the timing of some orders and deliveries.

Although such disruptions did not have a material adverse impact on our financial results for the first six months of fiscal 2020, for the three months ended June 30, 2020, our revenues were down 5 percent, our operating income was down 8 percent and net income was down 11 percent from the three months ended June 30, 2019 and results for the third and fourth quarters of 2020 and for an indeterminate period thereafter could 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.

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 financial results, 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 could lead to material delays and cancellations of, or reduced demand for, procedures in which our products are utilized; curtailed or delayed capital spending by hospitals and other healthcare providers; disruption to our supply chain; closures of our facilities; delays in training; delays in gathering clinical evidence; diversion of management and other resources to respond to the COVID-19 outbreak; the impact of global and regional economic and credit market conditions on healthcare spending; the risk that the COVID-19 virus 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 June 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 June 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 June 30, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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 March 31, 2020 include a discussion of our risk factors. There have been no material changes in the risk factors described in those reports, except as discussed below.

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

COVID-19, which has spread throughout the United States and the world, has resulted in the implementation 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 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 have 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 have implemented additional health and safety measures in our facilities. In addition, many of our customers have implemented similar measures in their facilities, which has delayed, and may continue to delay, the timing of some orders and deliveries.

Although such disruptions did not have a material adverse impact on our financial results for the first six months of fiscal 2020, for the three months ended June 30, 2020, our revenues were down 5 percent, our operating income was down 8 percent and net income was down 11 percent from the three months ended June 30, 2019 and results in the third and fourth quarters of 2020 and for an indeterminate period thereafter could 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth information with respect to our purchases of our common stock during each of the three months in the period ended June 30, 2020.

ITEM 6. Exhibits.

Exhibit Index