ATRION CORP - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

or

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 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

NOTES TO CONDENSED CONSOLIDATED STATEMENT 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

NOTES TO CONDENSED CONSOLIDATED STATEMENT 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

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,” or “us”) have been prepared in accordance with accounting principles generally accepted in the United States (US GAAP) 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 US GAAP 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. Certain prior-year balances have been reclassified in order to conform to the current year presentation. 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 US GAAP 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. 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 8, 2022, 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. At least quarterly, we evaluate our assumptions, judgments, and estimates and make changes as we deem necessary.

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, 2021 ("2021 Form 10-K").

(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):

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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. Potential dilutive securities have been excluded when their inclusion would be anti-dilutive. 

(4) Investments

As of September 30, 2022, 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 investments 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):

We utilize 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. We monitor the credit quality of debt securities classified as held-to-maturity through the use of their respective credit ratings and update them on a quarterly basis with our latest assessment completed on September 30, 2022. During the third quarter of 2022, our allowance for credit losses related to short-term investments decreased by $8 thousand and our allowance for credit losses related to long-term investments decreased by $5 thousand.

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, 2022 aggregated by credit quality indicator (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):

The carrying value of our investments is reviewed quarterly for changes in circumstances or the occurrence of events that suggests an investment may not be fully recoverable. The bonds represent investments in various issuers at September 30, 2022. The unrealized losses for some of these bond investments reflect changes in interest rates following their acquisition. As of September 30, 2022, we had six bond investments in a loss position for more than 12 months.

At September 30, 2022, the length of time until maturity of the commercial paper we owned ranged from less than a month to three months and the length of time to maturity for the bonds ranged from less than a month to 39 months.

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of September 30, 2022, there were expenditures of $2.1 million related to property, plant, and equipment included in our accounts payable and accrued liabilities balance.

(5) Patents and Licenses

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):

Aggregated amortization expense for patents and licenses was $29 thousand in the three-month period ended September 30, 2022 and $30 thousand for the three-month period ended September 30, 2021. For the nine-month period ended September 30, 2022, the amortization expense was $89 thousand as compared to $90 thousand in the nine-month period ended September 30, 2021.

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.

A summary of revenue by geographic area, based on shipping destination, for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands):

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A summary of revenue by product line for the three and nine months ended September 30, 2022 and 2021 is 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. We calculate our credit loss allowance for our trade receivables following a lifetime “expected credit loss” measurement objective. 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.

(7) Recent Accounting Pronouncements

From time to time, new accounting pronouncements applicable to us are issued by the Financial Accounting Standards Board or other standards-setting bodies. We generally adopt these standards 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 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 September 30, 2022, we reported revenues of $44.6 million, up 4 percent, operating income of $9.6 million, up 1 percent, and net income of $8.8 million, up 7 percent from the three months ended September 30, 2021.

Results for the three months ended September 30, 2022

Consolidated net income totaled $8.8 million, or $4.95 per basic and $4.94 per diluted share, in the third quarter of 2022. This is compared with consolidated net income of $8.3 million, or $4.59 per basic and $4.58 per diluted share, in the third quarter of 2021. The income per basic share computations are based on weighted average basic shares outstanding of 1,786 thousand in the 2022 period and 1,803 thousand in the 2021 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,788 thousand in the 2022 period and 1,806 thousand in the 2021 period.

Consolidated revenues of $44.6 million for the third quarter of 2022 were 4 percent higher than revenues of $42.9 million for the third quarter of 2021. Our third quarter 2022 results were favorably impacted by revenue increases in all product lines, including a 4% increase in Cardiovascular revenues, compared to the third quarter of 2021.

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

Cost of goods sold of $27.0 million for the third quarter of 2022 was 8 percent higher than our cost of goods sold of $25.1 million for the third quarter of 2021, due to higher sales volumes and higher manufacturing costs. Our cost of goods sold in the third quarter of 2022 was 60.4 percent of revenue compared to 58.5 percent of revenue in the third quarter of 2021.

Gross profit of $17.7 million in the third quarter of 2022 was down $137 thousand or 1 percent versus the comparable 2021 period. Our gross profit percentage in the third quarter of 2022 was 39.6 percent of revenues compared with 41.5 percent of revenues in the third quarter of 2021. The decrease in gross profit percentage in the 2022 period compared to the 2021 period was related to higher manufacturing costs.

Our third quarter 2022 operating expenses of $8.1 million were $262 thousand lower than the operating expenses for the third quarter of 2021. This decrease was attributable to a $345 thousand decrease in general and administrative expenses, primarily for compensation, and a $142 thousand decrease in R&D expenses, primarily related to outside services. These were partially offset by an increase in selling expenses of $225 thousand primarily related to compensation.

Operating income of $9.6 million in the third quarter of 2022 represented a $125 thousand, or 1.3 percent, increase in operating income over third quarter 2021 operating income. This increase was due to higher sales and lower operating expenses, partially offset by higher cost of goods sold. Operating income was 21.5 percent of revenues for the third quarter of 2022 and 22.1 percent of revenues for the third quarter of 2021.

Interest and dividend income in the third quarter of 2022 was $210 thousand compared with $281 thousand for the same period in the prior year. The decrease was attributable to a dividend that was received on equity investments in the third quarter of 2021 that was not received in the same period of 2022.

Other investment income in the third quarter of 2022 was a $764 thousand gain compared with a loss of $173 thousand in the third quarter of 2021. 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 $1.7 million for third quarter of 2022 compared with $1.3 million for the third quarter of 2021. The effective tax rate for the third quarter of 2022 was 16.5 percent compared with 13.7 percent for the third quarter of 2021. The increase in the third quarter 2022 period effective tax rate was primarily related to the timing of recognition for tax benefits for sales outside the United States under the foreign derived intangible income deduction as well as the R&D tax credit.

Results for the nine months ended September 30, 2022

Consolidated net income totaled $26.7 million, or $14.89 per basic and $14.86 per diluted share, in first nine months of 2022. This is compared with consolidated net income of $24.9 million, or $13.71 per basic and $13.68 per diluted share, in the first nine months of 2021. The income per basic share computations are based on weighted average basic shares outstanding of 1,793 thousand in the 2022 period and 1,818 thousand in the 2021 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,796 thousand in the 2022 period and 1,822 thousand in the 2021 period.

Consolidated revenues of $140.7 million for the first nine months of 2022 were 12.8 percent higher than revenues of $124.7 million for the first nine months of 2021. This increase in revenue was primarily due to increased sales volumes in our Cardiovascular, Fluid Delivery, and Other product lines.

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

Cost of goods sold of $82.9 million for the first nine months of 2022 was $10.2 million higher than in the comparable 2021 period. This increase was mainly due to higher sales volumes. Our cost of goods sold in the first nine months of 2022 was 59.0 percent of revenues compared to 58.3 percent of revenues in the first nine months of 2021.

Gross profit was $57.7 million in the first nine months of 2022 and $52.0 million in the first nine months of 2021. Our gross profit percentage was 41.0 percent of revenues in the first nine months in 2022 and 41.7 percent in 2021. This decrease was driven by higher manufacturing costs.

Operating expenses of $26.8 million for the first nine months of 2022 were $3.1 million higher than the operating expenses for the first nine months of 2021. This increase was attributable to a $1.6 million increase in selling expenses, primarily for compensation, a $1.5 million increase in general and administrative expenses, primarily for compensation, and a $33 thousand increase in R&D expenses, primarily for supplies.

Operating income of $30.9 million for the first nine months of 2022 represented a $2.7 million, or 9.5 percent increase, in operating income from the first nine months of 2021. Operating income was 22.0 percent of revenues for the first nine months of 2022 and 22.6 percent of revenues for the first nine months of 2021.

Interest and dividend income for the first nine months of 2022 was $639 thousand, compared with $680 thousand for the same period in the prior year. The decrease in interest and dividend income was primarily due to lower interest income received on investments.

Other investment income for the first nine months of 2022 was a $216 thousand gain compared to an $852 thousand gain in the first nine months of 2021. 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.

Income tax expense was $5.1 million for the first nine months in 2022 and $4.9 million for the first nine months in 2021. The effective tax rate for the first nine months of 2022 was 16.2 percent, compared with 16.4 percent for the first nine months of 2021. We expect the effective tax rate for 2022 to be approximately 16 percent.

Liquidity and Capital Resources

As of September 30, 2022, 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 September 30, 2022 and we were in compliance with all financial covenants.

At September 30, 2022, we had a total of $58.6 million in cash and cash equivalents, short-term investments, and long-term investments. At December 31, 2021, cash and cash equivalents, short-term investments, and long-term investments totaled $80.7 million.

Cash flows from operating activities of $28.9 million for the nine months ended September 30, 2022 were primarily comprised of net income plus the net effect of non-cash expenses and an increase in inventory. During the first nine months of 2022, we used $25.5 million for the purchase of investments, $25.3 million for the addition of property and equipment, $10.8 million for dividends, and $14.4 million for the purchase of treasury stock. During the same period, maturities and sales of investments generated $42.7 million in cash. For the nine months ended September 30, 2021, cash flows from operating activities of $28.8 million were primarily comprised of net income plus the net effect of non-cash expenses, increases in accounts receivable, and prepaid expenses. During the first nine months of 2021, we used $18.1 million for the purchase of investments and $11.6 million for the addition of property and equipment, $9.9 million for dividends, and $17.0 million for the purchase of treasury stock. During the same period, maturities and sales of investments generated $29.4 million in cash.

At September 30, 2022, we had working capital of $114.8 million, including $27.1 million in cash and cash equivalents and $20.3 million in short-term investments, compared to working capital of $123.2 million at December 31, 2021. The $8.4 million decrease in working capital during the first nine months of 2022 was primarily related to an increase in current liabilities of $4.5 million.

We believe that our $58.6 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 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 impacted the global economy and our business, caused market instability and uncertainty in the labor market, and put pressure on supply chains and healthcare systems.  Even with the public health actions that have been taken to reduce the spread and severity of the virus, the global economy and markets continue to experience disruptions, and the virus may continue to pose future risks with the emergence of new variants.  We will continue to monitor the COVID-19 pandemic as well as resulting legislative and regulatory changes to manage our response and assess and seek to mitigate potential adverse impacts on our business. For additional discussion regarding the COVID-19 pandemic and our related risks, see Part I, Item 1A, “Risk Factors” included in our 2021 Form 10-K.

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 2022, 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, and our access to equity and debt financing. 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 pandemic; the impact of global and regional economic and credit market conditions on healthcare spending; the risk that the COVID-19 pandemic 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

For the quarter ended September 30, 2022, we did not experience any material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in our 2021 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, 2022. 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, 2022 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.

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

ITEM 1A. Risk Factors.

As of the date of this Report, there has been no material change in the risk factors described in our 2021 Form 10-K.

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 month in the three month period ended September 30, 2022.

Item 6. Exhibits.

Exhibit Index