ATRION CORP - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 001-32982

One Allentown Parkway, Allen, Texas 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:

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

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 (Unaudited)

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

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

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 these statements

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 these statements.

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)

ATRION CORPORATION AND SUBSIDIARIES

Notes to condensed Consolidated Financial Statements

(Unaudited) 

ATRION CORPORATION AND SUBSIDIARIES

Notes to condensed Consolidated Financial Statements

(Unaudited)

ATRION CORPORATION AND SUBSIDIARIES

Notes to condensed Consolidated Financial Statements

(Unaudited)

ATRION CORPORATION AND SUBSIDIARIES

Notes to condensed Consolidated Financial Statements

(Unaudited)

ATRION CORPORATION AND SUBSIDIARIES

Notes to condensed Consolidated Financial Statements

(Unaudited) 

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 product quality, price, engineering, customer service and delivery time.

Our business strategy is to provide hospitals, physicians and other healthcare providers with the tools they need to improve the lives of the patients they serve. To do so, we provide a broad selection of products in the areas of our expertise. We have diverse product lines serving primarily the fluid delivery, cardiovascular and ophthalmic markets, and this diversity has served us well as we encounter changing market conditions. Research and development, or R&D, efforts are focused on improving current products and developing highly-engineered products that meet customer needs and serve niche markets with meaningful sales potential. Proposed new products may be subject to regulatory clearance or approval prior to commercialization and the time period for introducing a new product to the marketplace can be unpredictable. We also focus on controlling costs by investing in modern manufacturing technologies and controlling purchasing processes. We have been successful in consistently generating cash from operations and have used that cash to reduce or eliminate indebtedness, to fund capital expenditures, to make investments, to repurchase stock and to pay dividends.

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

For the three months ended June 30, 2021, we reported revenues of $42.7 million, up 12 percent, operating income of $9.8 million, down 2 percent and net income of $8.9 million, up 4 percent from the three months ended June 30, 2020.

Results for the three months ended June 30, 2021

Consolidated net income totaled $8.9 million, or $4.89 per basic and $4.88 per diluted share, in the second quarter of 2021. This is compared with consolidated net income of $8.6 million, or $4.69 per basic and $4.68 per diluted share, in the second quarter of 2020. The income per basic share computations are based on weighted average basic shares outstanding of 1,826 thousand in the 2021 period and 1,835 thousand in the 2020 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,828 thousand in the 2021 period and 1,839 thousand in the 2020 period.

Consolidated revenues of $42.7 million for the second quarter of 2021 were 12.4 percent higher than revenues of $38.0 million for the second quarter of 2020. This increase was primarily due to sales volumes of our Cardiovascular products. Sales volumes in our Other product line also increased. The COVID-19 pandemic had a negative impact on our sales in the second quarter of 2020 as patients deferred elective procedures.

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

Cost of goods sold of $24.8 million for the second quarter of 2021 was 21.1 percent higher than our cost of goods sold of $20.5 million for the second quarter of 2020 primarily due to higher sales volumes, sales mix and higher manufacturing costs. Our cost of goods sold in the second quarter of 2021 was 58.2 percent of revenues compared to 54.0 percent of revenues in the second quarter of 2020.

Gross profit of $17.9 million in the second quarter of 2021 was $0.4 million or 2.3 percent higher than in the comparable 2020 period. Our gross profit percentage in the second quarter of 2021 was 41.8 percent of revenues compared with 46.0 percent of revenues in the second quarter of 2020. The decrease in gross profit percentage in the 2021 period compared to the 2020 period was primarily related to a 2021 product sales mix with lower margins, inefficiencies in our manufacturing operations in 2021 and higher manufacturing costs.

Our second quarter 2021 operating expenses of $8.1 million were $649 thousand higher than the operating expenses for the second quarter of 2020. This increase was attributable to a $353 thousand increase in R&D expenses primarily for outside services related to ongoing projects and increased salaries. Selling expenses increased $171 thousand primarily for travel and commissions related to higher sales. General and Administrative expenses were $125 thousand higher primarily in compensation.

Operating income in the second quarter of 2021 decreased by $251 thousand to $9.8 million due to higher operating expenses discussed above. Operating income was 22.9 percent of revenues for the second quarter of 2021 and 26.5 percent of revenues for the second quarter of 2020.

Interest and dividend income in the second quarter of 2021 was $183 thousand compared with $367 thousand for the same period in the prior year. The decline in interest and dividend income was largely due to lower interest rates in the 2021 period as compared to the 2020 period.

Other investment income in the second quarter of 2021 was $963 thousand compared with Other investment income of $354 thousand in the second quarter of 2020. These amounts were attributable to unrealized gains and losses on equity investments resulting from changes in the market values of the investments in each quarter.

Income tax expense was $2.0 million for the second quarter of 2021 compared with $2.2 million for the second quarter of 2020. The effective tax rate for the second quarter of 2021 was 18.4 percent compared with 20.1 percent for the second quarter of 2020. The decrease in the 2021 period’s effective tax rate compared to the prior-year period was primarily related to lower state income taxes.

Results for the six months ended June 30, 2021

Consolidated net income totaled $16.7 million, or $9.12 per basic and $9.10 per diluted share, in first six months of 2021. This is compared with consolidated net income of $17.5 million, or $9.49 per basic and $9.47 per diluted share, in the first six months of 2020. The income per basic share computations are based on weighted average basic shares outstanding of 1,826 thousand in the 2021 period and 1,844 thousand in the 2020 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,830 thousand in the 2021 period and 1,849 thousand in the 2020 period.

Consolidated revenues of $81.9 million for the first six months of 2021 were slightly higher than revenues of $81.6 million for the first six months of 2020. Increased sales in Other and Ophthalmic products were offset by lower Fluid Delivery sales.

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

Cost of goods sold of $47.7 million for the first six months of 2021 was $3.4 million higher than in the comparable 2020 period. This increase is due to an unfavorable product sales mix and higher manufacturing costs in the first six months of 2021. Our cost of goods sold in the first six months of 2021 and 2020 was 58.2 percent and 54.2 percent of revenues, respectively.

Gross profit was $34.2 million in the first six months of 2021 and $37.3 million in the first six months of 2020. Our gross profit percentage was 41.8 percent of revenues in the first six months in 2021 and 45.8 percent in 2020. This decrease was driven by unfavorable product sales mix and increased manufacturing costs.

Operating expenses of $15.5 million for the first six months 2021 were $97 thousand lower than the operating expenses for the first six months of 2020. This decrease was primarily in general and administrative expense as a result of lower compensation.

Operating income in the first six months of 2021 decreased $3.0 million to $18.7 million, a 13.9 percent decrease from our operating income in the six months ended June 30, 2020. Operating income for the first six months in 2021 and 2020 was 22.9 percent and 26.7 percent of revenues respectively.

Interest and dividend income for the first six months of 2021 was $399 thousand, compared with $858 thousand for the same period in the prior year. The decline in interest and dividend income was largely due to lower interest rates in the 2021 period versus the 2020 period.

Other investment income for the first six months of 2021 was $1.0 million compared to a $673 thousand loss in the first six months of 2020. These amounts were attributable to unrealized gains and losses on equity investments resulting from changes in the market values of our investments in each time period. The impact of COVID-19 on equity markets in the 2020 period also impacted our investments.

Income tax expense was $3.6 million for the first six months in 2021 and $4.4 million the first six months in 2020. The effective tax rate for the first six months of 2021 was 17.6 percent, compared with 20.2 percent for the first six months of 2020. The decrease in the 2021 period effective tax rate was primarily related to a decrease in state income taxes. We expect the effective tax rate for 2021 to be approximately 17 percent.

Liquidity and Capital Resources

As of June 30, 2021, 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, 2024. The credit facility is secured by substantially all of our inventories, equipment and accounts receivable. Interest under the credit facility is assessed at 30-day, 60-day or 90-day LIBOR, as selected by us, plus 1.0 percent and is payable monthly. We had no outstanding borrowings under the credit facility at June 30, 2021 and we were in compliance with all financial covenants.

At June 30, 2021, we had a total of $80.0 million in cash and cash equivalents, short-term investments and long-term investments. At December 31, 2020, cash and cash equivalents, short-term investments and long-term investments were $87.9 million.

Cash flows from operating activities of $16.0 million for the six months ended June 30, 2021 were primarily comprised of net income plus the net effect of non-cash expenses, increases in accounts receivable, and decreases in accounts payable and prepaid expenses. During the first six months of 2021, we used $16.1 million for the purchase of investments, $7.3 million for the addition of property and equipment, $10.5 million for the purchase of treasury stock and $6.4 million for dividends. During the same period, maturities and sales of investments generated $19.4 million in cash.

At June 30, 2021, we had working capital of $113.2 million, including $17.0 million in cash and cash equivalents and $30.5 million in short-term investments compared to working capital of $98.7 million at December 31, 2020. The $14.5 million increase in working capital during the six months of 2021 was primarily related to an increase in short term investments $11.2 million and an increase in accounts receivable of $6.2 million.

We believe that our $80.0 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.

COVID-19 Impact

The COVID-19 pandemic has resulted in travel and other restrictions to reduce the spread of the disease, including governmental orders across the globe, which, among other things, directed individuals to shelter at their places of residence, directed businesses and governmental agencies to cease non-essential operations at physical locations, prohibited certain non-essential gatherings, maintain social distancing, and order cessation of non-essential travel. As a result of these developments, we implemented work-from-home policies for certain of our employees. 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. The effects of shelter-in-place and social distancing orders, government-imposed quarantines, and work-from-home policies may continue negatively impacting productivity, disrupting our business, and delaying our development timelines beyond the delays we have already experienced and disclosed, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. Such restrictions and limitations may also continue negatively impacting our access to regulatory authorities (which are affected, among other things, by applicable travel restrictions and may be delayed in responding to inquiries, reviewing filings, and conducting inspections); our ability to perform regularly scheduled quality checks and maintenance; and our ability to obtain services from third-party specialty vendors and other providers or to access their expertise as fully and timely as needed. The COVID-19 pandemic has resulted and may continue resulting in the loss of some of our key personnel, either temporarily or permanently. In addition, our sales and marketing efforts have been negatively impacted and may be further negatively impacted by postponement or cancellation of face-to-face meetings and restrictions on access by non-essential personnel to hospitals or clinics to the extent such measures slow down adoption or further commercialization of our marketed products. The demand for our products has been and may continue to be adversely impacted by the restrictions and limitations adopted in response to the COVID-19 pandemic, particularly to the extent they affect the patients’ ability or willingness to undergo elective surgeries. As a result, some of our inventory may become obsolete and may need to be written off, impacting our operating results. These and similar, and perhaps more severe, disruptions in our operations may materially adversely impact our business, operating results, and financial condition.

The global COVID-19 pandemic continues to evolve as progress in fighting the pandemic is being made in the United States and some other countries with greater percentages of the populations being vaccinated. However, the ultimate impact of the pandemic remains highly uncertain and subject to change. Accordingly, we do not yet know the full impact that the pandemic will have on our business, healthcare systems, or the global economy.

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 income tax rate for 2021, our ability to fund our cash requirements for the foreseeable future with our current assets, long-term investments, cash flow and borrowings under the credit facility, our access to equity and debt financing, and the impact of the COVID-19 pandemic on our business and operations, and our financial results. 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 further 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 further 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.

For the quarter ended June 30, 2021, we did not experience any material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in our 2020 Form 10-K.

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, 2021. 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, 2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

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

As of the date of this Report, there has been no material change in the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as supplemented by the risk factor described in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021.

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, 2021.