UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended June 30, 2006
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from ______ to ______
Commission File Number 0-10763
Atrion Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0821819
------------------------------------ ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Allentown Parkway, Allen, Texas 75002
-----------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(972) 390-9800
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check 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. [X] Yes [ ] No
Indicate by check whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding at
Title of Each Class July 26, 2006
--------------------------------------- -------------------------------------
Common stock, Par Value $0.10 per share 1,857,156
ATRION CORPORATION AND SUBSIDIARIES
-----------------------------------
TABLE OF CONTENTS
-----------------
PART I. Financial Information 2
Item 1. Financial Statements
Consolidated Statements of Income (Unaudited)
For the Three and Six Months Ended
June 30, 2006 and 2005 3
Consolidated Balance Sheets
June 30, 2006 (Unaudited) and December 31, 2005 4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended
June 30, 2006 and 2005 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II. Other Information 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on 8-K 16
SIGNATURES 17
Exhibits 18
1
PART I
FINANCIAL INFORMATION
2
Item 1. Financial Statements
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2006 2005 2006 2005
(in thousands, except per share amounts)
Revenues $ 20,849 $ 18,102 $ 40,351 $ 36,747
Cost of goods sold 12,076 10,896 24,230 21,920
----------- ----------- ----------- -----------
Gross profit 8,773 7,206 16,121 14,827
----------- ----------- ----------- -----------
Operating expenses:
Selling 1,600 1,448 3,215 2,853
General and administrative 2,348 2,002 4,352 4,220
Research and development 700 625 1,376 1,205
----------- ----------- ----------- -----------
4,648 4,075 8,943 8,278
----------- ----------- ----------- -----------
Operating income 4,125 3,131 7,178 6,549
----------- ----------- ----------- -----------
Other income:
Interest income 11 9 20 25
Interest expense -- (21) -- (42)
Other income (expense), net (21) -- (21) 8
----------- ----------- ----------- -----------
(10) (12) (1) (9)
----------- ----------- ----------- -----------
Income from continuing operations before provision
for income taxes 4,115 3,119 7,177 6,540
Provision for income taxes (1,295) (1,012) (2,251) (2,138)
----------- ----------- ----------- -----------
Income from continuing operations 2,820 2,107 4,926 4,402
Gain on disposal of discontinued operations, net
of income taxes 165 165 165 165
----------- ----------- ----------- -----------
Net income $ 2,985 $ 2,272 $ 5,091 $ 4,567
=========== =========== =========== ===========
Income per basic share:
Income from continuing operations $ 1.53 $ 1.18 $ 2.68 $ 2.51
Gain on disposal of discontinued operations 0.09 0.09 0.09 0.09
----------- ----------- ----------- -----------
$ 1.62 $ 1.27 $ 2.77 $ 2.60
=========== =========== =========== ===========
Weighted average basic shares outstanding 1,845 1,789 1,840 1,756
=========== =========== =========== ===========
Income per diluted share:
Income from continuing operations $ 1.45 $ 1.09 $ 2.53 $ 2.32
Gain on disposal of discontinued operations 0.08 0.09 0.08 0.09
----------- ----------- ----------- -----------
$ 1.53 $ 1.18 $ 2.61 $ 2.41
=========== =========== =========== ===========
Weighted average diluted shares outstanding 1,949 1,925 1,947 1,895
=========== =========== =========== ===========
Dividends per common share $ 0.17 $ 0.14 $ 0.34 $ 0.28
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
3
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2006 2005
Assets (unaudited)
------ ---------------- ----------------
Current assets:
Cash and cash equivalents $ 185 $ 525
Accounts receivable 9,911 8,291
Inventories 17,694 17,705
Prepaid expenses 1,441 832
Other 620 620
------------- -------------
29,851 27,973
------------- -------------
Property, plant and equipment 76,726 63,041
Less accumulated depreciation and amortization 29,739 27,787
------------- -------------
46,987 35,254
------------- -------------
Other assets and deferred charges:
Patents 2,418 2,331
Goodwill 9,730 9,730
Other 3,005 3,182
------------- -------------
15,153 15,243
------------- -------------
$ 91,991 $ 78,470
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 7,156 $ 7,128
Accrued income and other taxes 1,538 1,098
------------- -------------
8,694 8,226
------------- -------------
Line of credit 11,001 2,529
Other non-current liabilities 5,909 5,820
Stockholders' equity:
Common shares, par value $0.10 per share; authorized
10,000 shares, issued 3,420 shares 342 342
Paid-in capital 13,764 12,508
Retained earnings 86,782 82,318
Treasury shares,1,563 at June 30, 2006 and 1,586
at December 31, 2005, at cost (34,501) (33,273)
------------- -------------
Total stockholders' equity 66,387 61,895
------------- -------------
$ 91,991 $ 78,470
============= =============
The accompanying notes are an integral part of these statements.
4
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
------------------------------------
2006 2005
---------------- ----------------
(In thousands)
Cash flows from operating activities:
Net income $ 5,091 $ 4,567
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on disposal of discontinued operations (165) (165)
Depreciation and amortization 2,341 2,149
Deferred income taxes 105 273
Tax benefit related to stock options -- 1,051
Other 52 11
------------- -------------
7,424 7,886
Changes in operating assets and liabilities:
Accounts receivable (1,620) (534)
Inventories 11 (3,442)
Prepaid expenses (608) (316)
Other non-current assets (73) (762)
Accounts payable and current liabilities 28 3
Accrued income and other taxes 440 (914)
Other non-current liabilities (16) (9)
------------- -------------
Net cash provided by continuing operations 5,586 1,912
Net cash provided by discontinued operations 165 165
------------- -------------
5,751 2,077
------------- -------------
Cash flows from investing activities:
Property, plant and equipment additions (13,939) (7,522)
Deposit on land purchase -- 3,750
Property, plant and equipment sales -- 6
------------- -------------
(13,939) (3,766)
------------- -------------
Cash flows from financing activities:
Net change in line of credit 8,472 357
Exercise of stock options 948 1,938
Purchase of treasury stock (1,594) --
Tax benefit related to stock options 649 --
Dividends paid (627) (496)
------------- -------------
7,848 1,799
------------- -------------
Net change in cash and cash equivalents (340) 110
Cash and cash equivalents at beginning of period 525 255
------------- -------------
Cash and cash equivalents at end of period $ 185 $ 365
============= =============
Cash paid for:
Interest (net of capitalization) $ -- $ 43
Income taxes $ 1,195 $ 1,754
The accompanying notes are an integral part of these statements.
5
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
In the opinion of management, all adjustments necessary for a fair
presentation of results of operations for the periods presented have been
included in the accompanying unaudited consolidated financial statements of
Atrion Corporation and its subsidiaries (the "Company"). Such adjustments
consist of normal recurring items. The accompanying financial statements
have been prepared in accordance with the instructions to Form 10-Q and
include the information and notes required by such instructions.
Accordingly, the consolidated financial statements and notes thereto should
be read in conjunction with the financial statements and notes included in
the Company's 2005 Annual Report on Form 10-K.
(2) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by using the first-in, first-out method. The following table details the
major components of inventories (in thousands):
June 30, December 31,
2006 2005
---------------------------------------------------------------------------
Raw materials $ 6,919 $ 6,898
Work in process 4,599 4,291
Finished goods 6,176 6,516
---------------------------------------------------------------------------
Total inventories $ 17,694 $ 17,705
===========================================================================
(3) Income per share
The following is the computation for basic and diluted income per share:
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
-------------- -------------- -------------- --------------
(in thousands, except per share amounts)
Income from continuing operations $ 2,820 $ 2,107 $ 4,926 $ 4,402
============================= =============================
Weighted average basic shares outstanding 1,845 1,789 1,840 1,756
Add: Effect of dilutive securities (options) 104 136 107 139
----------------------------- -----------------------------
Weighted average diluted shares outstanding 1,949 1,925 1,947 1,895
============================= =============================
Earnings per share from continuing operations:
Basic $ 1.53 $ 1.18 $ 2.68 $ 2.51
============================= =============================
Diluted $ 1.45 $ 1.09 $ 2.53 $ 2.32
============================= =============================
There were no outstanding options to purchase shares of common stock that
were not included in the diluted income per share calculations because
their effect would be anti-dilutive for the three-month and six-month
periods ended June 30, 2006 and 2005.
6
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Stock-Based Compensation
At June 30, 2006, the Company had three stock-based employee compensation
plans. Prior to January 1, 2006, the Company accounted for those plans
under the recognition and measurement provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. No stock-based employee compensation cost was
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on
the date of grant.
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
123R, "Accounting for Stock-based Compensation" ("SFAS No. 123R") using the
modified-prospective transition method and the disclosures that follow are
based on applying SFAS No. 123R. Under this transition method, compensation
expense recognized during the three and six months ended June 30, 2006,
included compensation expense for all share-based awards granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". In accordance with the
modified-prospective transition method, results for the prior periods have
not been restated. The Company recorded compensation expense in the amount
of approximately $10,000 for the three-month period and $24,000 for the
six-month period ended June 30, 2006.
The Company's 1997 Stock Incentive Plan provides for the grant to key
employees of incentive and nonqualified stock options, stock appreciation
rights, restricted stock and performance shares. In addition, under the
1997 Stock Incentive Plan, outside directors (directors who are not
employees of the Company or any subsidiary) received automatic annual
grants of nonqualified stock options to purchase 2,000 shares of common
stock. The 1997 Stock Incentive Plan was amended in 2005 to provide that no
additional stock options may be granted to outside directors thereunder.
Under the 1997 Stock Incentive Plan, 624,425 shares, in the aggregate, of
common stock were reserved for grants. The purchase price of shares issued
on the exercise of incentive options must be at least equal to the fair
market value of such shares on the date of grant. The purchase price for
shares issued on the exercise of nonqualified options and restricted and
performance shares is fixed by the Compensation Committee of the Board of
Directors. The options granted become exercisable as determined by the
Compensation Committee and expire no later than 10 years after the date of
grant.
During 1998, the Company's stockholders approved the adoption of the
Company's 1998 Outside Directors Stock Option Plan which, as amended,
provided for the automatic grant on February 1, 1998 and February 1, 1999
of nonqualified stock options to the Company's outside directors. Although
no additional options may be granted under the 1998 Outside Directors Stock
Option Plan, all outstanding options under this plan continue to be
governed by the terms and conditions of the plan and the existing option
agreements for those grants.
During 2006, the Company's stockholders approved the adoption of the
Company's 2006 Equity Incentive Plan which provides for the grant to key
employees and consultants of incentive and nonqualified stock options,
restricted stock, restricted stock units, deferred stock units, stock
appreciation rights and performance shares. Under the 2006 Equity Incentive
Plan, 100,000 shares, in the aggregate, of common stock were reserved for
awards. The purchase price of shares issued on the exercise of options must
be at least equal to the fair market value of such shares on the date of
grant. The purchase price for restricted and performance shares is fixed by
the Compensation Committee of the Board of Directors. The options granted
become exercisable and expire as determined by the Compensation Committee
except that incentive options expire no later than 10 years after the date
of grant.
7
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Option transactions for the three and six months ended June 30, 2006 are as
follows:
Three months ended Six months ended
June 30, 2006 June 30, 2006
Weighted Weighted
Shares Average Shares Average
Exercise Price Exercise Price
----------------------------- -----------------------------
Options outstanding at the beginning of 191,301 $ 26.14 225,100 $ 24.86
the period
Granted - $ - - $ -
Expired - $ - - $ -
Exercised (15,250) $ 31.92 (49,049) $ 22.04
------------ ------------
Options outstanding at the end of the
period 176,051 $ 25.64 176,051 $ 25.64
============ ============
Exercisable options at June 30, 2006 176,051 $ 25.64
The Company estimates the fair value of stock options granted using the
Black-Scholes option-pricing formula and a single option award approach.
This fair value is then amortized on a straight-line basis over the
requisite service periods of the awards, which is generally the vesting
period. The Company's expected life represents the period that the
Company's stock-based awards are expected to be outstanding and was
determined based on historical experience of similar awards, giving
consideration to the contractual terms of the stock-based awards, vesting
schedules and expectations of future employee behavior. Stock-based
payments made prior to January 1, 2006 were accounted for using the
intrinsic value method under APB 25. The fair value of stock-based payments
made subsequent to January 1, 2006 would be valued using the Black-Scholes
valuation method with a volatility factor based on the Company's historical
stock trading history. The Company bases the risk-free interest rate using
the Black-Scholes valuation method on the implied yield currently available
on U. S. Treasury securities with an equivalent term. The Company bases the
dividend yield used in the Black-Scholes valuation method on the Company's
stock dividend history.
The total intrinsic value of options exercised during the three and six
months ended June 30, 2006 was $0. The total intrinsic values of options
outstanding and options currently exercisable at June 30, 2006 were $0 and
$0, respectively. The weighted-average remaining contractual life for
options outstanding and options currently exercisable at June 30, 2006 was
2.82 and 2.82 years, respectively.
As of June 30, 2006 there was no unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the plans.
The total fair value of options vested during the three months ended June
30, 2006 was $0. At June 30, 2006 there were no nonvested stock options.
8
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has a policy of utilizing existing treasury shares to satisfy
stock option exercises.
The following table illustrates the effect on net income and income per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123R to stock-based employee compensation in the 2005 periods (in
thousands, except per share amounts):
Three Months Six Months
ended June 30, ended June 30,
2005 2005
----------------- -----------------
Net income, as reported $ 2,272 $ 4,567
Deduct: Total stock-based employee compensation
expense determined under fair value-based methods
for all awards, net of tax effects 10 111
----------------- -----------------
Pro forma net income $ 2,262 $ 4,456
================= =================
Income per share:
Basic - as reported $ 1.27 $ 2.60
================= =================
Basic - pro forma $ 1.26 $ 2.54
================= =================
Diluted - as reported $ 1.18 $ 2.41
================= =================
Diluted - pro forma $ 1.18 $ 2.35
================= =================
(5) Pension Benefits
The components of net periodic pension cost are as follows for the three
and six months ended June 30, 2006 and June 30, 2005 (in thousands):
Three Months ended Six Months ended
June 30, June 30,
----------------------------- -----------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Service cost $ 69 $ 67 $ 138 $ 134
Interest cost 83 80 166 160
Expected return on assets (111) (114) (222) (228)
Prior service cost amortization (9) (9) (18) (18)
Actuarial loss 29 27 58 54
Transition amount amortization - (11) - (22)
-------------- -------------- -------------- --------------
Net periodic pension cost $ 61 $ 40 $ 122 $ 80
============== ============== ============== ==============
In 2006, the Company expects to contribute approximately $250,000 to its
pension plan to satisfy minimum funding requirements for the year. As of
June 30, 2006, contributions of $250,000 have been made to this plan.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company designs, develops, manufactures, sells and distributes products
and components, primarily for the medical and healthcare industry. The
Company markets components to other equipment manufacturers for
incorporation in their products and sells finished devices to physicians,
hospitals, clinics and other treatment centers. The Company's medical
products primarily serve the fluid delivery, cardiovascular, and
ophthalmology markets. The Company's other medical and non-medical products
include obstetrics products, instrumentation and disposables used in
dialysis, contract manufacturing and valves and inflation devices used in
marine and aviation safety products.
The Company's products are used in a wide variety of applications by
numerous customers. The Company encounters competition in all of its
markets and competes primarily on the basis of product quality, price,
engineering, customer service and delivery time.
The Company's strategy is to provide a broad selection of products in the
areas of its expertise. Research and development efforts are focused on
improving current products and developing highly-engineered products that
meet customer needs and have the potential for broad market applications
and significant sales. 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. The
Company also focuses on controlling costs by investing in modern
manufacturing technologies and controlling purchasing processes. The
Company has been successful in consistently generating cash from operations
and has used that cash to reduce indebtedness, to fund capital
expenditures, to repurchase stock and, starting in 2003, to pay dividends.
The Company's strategic objective is to further enhance its position in its
served markets by:
o Focusing on customer needs;
o Expanding existing product lines and developing new products;
o Maintaining a culture of controlling cost; and
o Preserving and fostering a collaborative, entrepreneurial
management structure.
For the three months ended June 30, 2006, the Company reported revenues of
$20.8 million, operating income of $4.1 million and net income of $3.0
million, up 15 percent, 32 percent and 31 percent, respectively, from the
three months ended June 30, 2005. For the six months ended June 30, 2006,
the Company reported revenues of $40.4 million, operating income of $7.2
million and net income of $5.1 million, up 10 percent, 10 percent and 11
percent, respectively, from the six months ended June 30, 2005.
10
Results for the three months ended June 30, 2006
Consolidated net income totaled $3.0 million, or $1.62 per basic and $1.53
per diluted share, in the second quarter of 2006. This is compared with
consolidated net income of $2.3 million, or $1.27 per basic and $1.18 per
diluted share, in the second quarter of 2005. The income per basic share
computations are based on weighted average basic shares outstanding of
1,844,857 in the 2006 period and 1,789,220 in the 2005 period. The income
per diluted share computations are based on weighted average diluted shares
outstanding of 1,949,319 in the 2006 period and 1,925,320 in the 2005
period.
Consolidated revenues of $20.8 million for the second quarter of 2006 were
15 percent higher than revenues of $18.1 million for the second quarter of
2005. This 15 percent increase in revenues was primarily attributable to an
approximate 36 percent increase in the revenues from the Company's fluid
delivery products, an approximate 29 percent increase in the revenues from
the Company's cardiovascular products and an approximate 5 percent increase
in the revenues from the Company's other products. These increases, which
were generally attributable to higher sales volumes, were partially offset
by an approximate 12 percent decrease in the revenues from the Company's
ophthalmic products.
Revenues by product line are as follows (in thousands):
Three Months ended
June 30,
------------------------------
2006 2005
------------ ------------
Fluid Delivery $ 6,623 $ 4,887
Cardiovascular 5,716 4,439
Ophthalmology 3,572 4,079
Other 4,938 4,697
------------ ------------
Total $ 20,849 $ 18,102
============ ============
Cost of goods sold of $12.1 million for the second quarter of 2006 was 11
percent higher than in the comparable 2005 period. Increased sales volume
was the primary contributor to the increase in cost of goods sold for the
second quarter of 2006.
Gross profit of $8.8 million in the second quarter of 2006 was $1.6
million, or 22 percent, higher than in the comparable 2005 period. The
Company's gross profit percentage in the second quarter of 2006 was 42.1
percent of revenues compared with 39.8 percent of revenues in the second
quarter of 2005. The increase in gross profit percentage in the 2006 period
compared to the 2005 period was primarily related to improved manufacturing
efficiencies.
The Company's second quarter 2006 operating expenses of $4.6 million were
$573,000 higher than the operating expenses for the second quarter of 2005,
resulting primarily from a $346,000 increase in General and Administrative
(G&A) expenses, a $152,000 increase in selling (Selling) expenses, and a
$75,000 increase in Research and Development (R&D) expenses. The increase
in G&A for the second quarter of 2006 was primarily related to increased
compensation costs and increased outside services. The increase in Selling
expenses for the second quarter of 2006 was principally attributable to
increased compensation costs and advertising and promotion costs. The
increase in R&D costs was primarily related to prototype expenses, new
product testing costs, and process enhancements. Operating income in the
second quarter of 2006 increased $994,000, or 32 percent, to $4.1 million
from $3.1 million in the second quarter of 2005. Operating income was 19.8
percent of revenues in the second quarter of 2006 compared to 17.3 percent
of revenues in the second quarter of 2005. The change in operating income
for the second quarter of 2006 as compared with the second quarter of 2005
was primarily attributable to the previously mentioned increased gross
profit offset by the increased operating expenses.
11
Interest charges of $174,000 for the second quarter of 2006 were
capitalized as part of the construction costs for a new facility for a
subsidiary, Halkey-Roberts Corporation ("Halkey-Roberts") because all of
the debt was obtained in conjunction with the construction. Income tax
expense for the second quarter of 2006 was $1.3 million compared to income
tax expense of $1.0 million for the same period in the prior year. The
effective tax rate for the second quarter of 2006 was 31.5 percent compared
with 32.4 percent for the second quarter of 2005.
The Company recorded a gain on the disposal of discontinued operations
relating to the 1997 sale of its natural gas operations of $165,000 after
tax, or $0.09 per basic and $0.08 per diluted share, for the second quarter
of 2006 and $165,000 after tax, or $0.09 per basic and $0.09 per diluted
share, for the second quarter of 2005, resulting from the receipt of
contingent deferred payments in each year. No additional payments are due
in future periods under the terms of the 1997 agreement pursuant to which
the Company sold its natural gas operations.
Results for the six months ended June 30, 2006
Consolidated net income totaled $5.1 million, or $2.77 per basic and $2.61
per diluted share, for the six months ended June 30, 2006. This is compared
with consolidated net income of $4.6 million, or $2.60 per basic and $2.41
per diluted share, for the six months ended June 30, 2005. The income per
basic share computations are based on weighted average basic shares
outstanding of 1,840,119 in the 2006 period and 1,756,392 in the 2005
period. The income per diluted share computations are based on weighted
average diluted shares outstanding of 1,946,983 in the 2006 period and
1,895,008 in the 2005 period.
Consolidated revenues of $40.4 million for the six months ended June 30,
2006 were 10 percent higher than revenues of $36.7 million for the six
months ended June 30, 2005. This 10 percent increase in revenues was
primarily attributable to an approximate 30 percent increase in the
revenues from the Company's fluid delivery products and an approximate 26
percent increase in the revenues from the Company's cardiovascular
products. These increases, which were generally attributable to higher
sales volumes, were partially offset by an approximate 18 percent decrease
in the revenues from the Company's ophthalmic products and an approximate 3
percent decrease in the revenues from the Company's other products.
Revenues by product line are as follows (in thousands):
Six Months ended
June 30,
------------------------------
2006 2005
------------ ------------
Fluid Delivery $ 13,059 $ 10,050
Cardiovascular 11,440 9,101
Ophthalmology 6,384 7,807
Other 9,468 9,789
------------ ------------
Total $ 40,351 $ 36,747
============ ============
12
Cost of goods sold of $24.2 million for the six months ended June 30, 2006
was 11 percent higher than in the comparable 2005 period. Increased sales
volume, increased manufacturing overhead costs, and a temporary production
curtailment due to reduced orders from certain ophthalmic and related
kitting business customers were the primary contributors to the increase in
cost of goods sold for the six months ended June 30, 2006.
Gross profit of $16.1 million for the six months ended June 30, 2006 was
$1.3 million, or 9 percent, higher than in the comparable 2005 period. The
Company's gross profit percentage for the six months ended June 30, 2006
was 40.0 percent of revenues compared with 40.3 percent of revenues for the
six months ended June 30, 2005. The decrease in gross profit percentage in
the 2006 period compared to the 2005 period was primarily related to the
previously mentioned manufacturing cost increases and temporary production
curtailment.
The Company's second quarter 2006 operating expenses of $8.9 million were
$665,000 higher than the operating expenses for the six months ended June
30, 2005, resulting primarily from a $362,000 increase in Selling expenses,
a $171,000 increase in R&D expenses and a $132,000 increase in G&A
expenses. The increase in Selling expenses for the six months ended June
30, 2006 was principally attributable to increased compensation costs,
advertising and promotion costs and travel-related expenses. The increase
in R&D costs was primarily related to prototype expenses, new product
testing costs, and process enhancements. The increase in G&A for the six
months ended June 30, 2006 was primarily related to increased compensation
costs and increased outside services partially offset by a decrease in
insurance costs. Operating income for the six months ended June 30, 2006
increased $629,000, or 10 percent, to $7.2 million from $6.5 million in the
six months ended June 30, 2005. Operating income was 17.8 percent of
revenues for the six months ended June 30, 2006 compared to 17.8 percent of
revenues for the six months ended June 30, 2005.
Interest charges of $214,000 for the six months ended June 30, 2006 were
capitalized as part of the construction costs for the new Halkey-Roberts
facility because all of the debt was obtained in conjunction with the
construction. Income tax expense for the six months ended June 30, 2006
was $2.3 million compared to income tax expense of $2.1 million for the
same period in the prior year. The effective tax rate for the six months
ended June 30, 2006 was 31.4 percent compared with 32.7 percent for the six
months ended June 30, 2005.
The Company recorded a gain on the disposal of discontinued operations
relating to the 1997 sale of its natural gas operations of $165,000 after
tax, or $0.09 per basic and $0.08 per diluted share, for the first six
months of 2006 and $165,000 after tax, or $0.09 per basic and $0.09 per
diluted share, for the first six months of 2005, resulting from the receipt
of contingent deferred payments in each year. No additional payments are
due in future periods under the terms of the 1997 agreement pursuant to
which the Company sold its natural gas operations.
13
Liquidity and Capital Resources
At June 30, 2006, the Company had cash and cash equivalents of $185,000
compared with $525,000 at December 31, 2005. The Company had outstanding
borrowings of $11.0 million under its $25.0 million revolving credit
facility ("Credit Facility") at June 30, 2006 and $2.5 million at December
31, 2005. The increase in the outstanding balance under the Credit Facility
in the first six months of 2006 was primarily attributable to borrowings to
fund the construction of the new Halkey-Roberts facility. The Credit
Facility, which expires November 12, 2009, and may be extended under
certain circumstances, contains various restrictive covenants, none of
which is expected to impact the Company's liquidity or capital resources.
At June 30, 2006, the Company was in compliance with all financial
covenants.
As of June 30, 2006, the Company had working capital of $21.2 million,
including $185,000 in cash and cash equivalents. The $1.4 million increase
in working capital during the first six months of 2006 was primarily
related to an increase in accounts receivable partially offset by an
increase in accrued income and other taxes. The increase in accounts
receivable during the first six months of 2006 was primarily related to the
increase in revenues for the second quarter of 2006 as compared to the
fourth quarter of 2005. Cash flows from continuing operations generated
$5.6 million for the six months ended June 30, 2006 as compared to $1.9
million for the six months ended June 30, 2005. The 2005 period was heavily
impacted by a $3.4 million increase in inventories. During the first six
months of 2006, the Company expended $13.9 million for the purchase of
property and equipment. Of this amount, $11.5 million was expended for the
construction of the new Halkey-Roberts facility. The Company received net
proceeds of $948,000 from the exercise of employee stock options during the
first six months of 2006. During the first six months of 2006, the Company
repurchased 24,000 shares of its common stock for approximately $1.6
million and paid dividends totaling $627,000 to its stockholders.
The Company believes that its existing cash and cash equivalents, cash
flows from operations, borrowings available under the Company's credit
facility, supplemented, if necessary, with equity or debt financing, which
the Company believes would be available, will be sufficient to fund the
Company's cash requirements for the foreseeable future.
Forward-Looking Statements
The statements in this Management's Discussion and Analysis that are
forward-looking are based upon current expectations, and actual results may
differ materially. Therefore, the inclusion of such forward-looking
information should not be regarded as a representation by the Company that
the objectives or plans of the Company would be achieved. Such statements
include, but are not limited to, the Company's expectations regarding
future liquidity and capital resources. Words such as "anticipates,"
"believes," "expects," "estimated" and variations of such words and similar
expressions are intended to identify such forward-looking statements.
Forward-looking statements contained herein involve numerous risks and
uncertainties, and there are a number of factors that could cause actual
results or future events to differ materially, including, but not limited
to, the following: changing economic, market and business conditions; acts
of war or terrorism; the effects of governmental regulation; the impact of
competition and new technologies; slower-than-anticipated introduction of
new products or implementation of marketing strategies; implementation of
new manufacturing processes or implementation of new information systems;
the Company's ability to protect its 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; the loss of, or any material reduction in sales
to, any significant customers; and problems in the relocation of the
Halkey-Roberts operations. 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 the Company to alter its marketing, capital
expenditures or other budgets, which in turn may affect the Company's
results of operations and financial condition.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For the quarter ended June 30, 2006, the Company did not experience any
material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's 2005 Annual Report on
Form 10-K.
Item 4. Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and its Chief Financial Officer, evaluated the Company's
disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of June 30, 2006. Based upon this evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that
the Company's disclosure controls and procedures are effective. There were
no changes in our internal control over financial reporting for the quarter
ended June 30, 2006 that have materially affected or are reasonably likely
to materially affect our internal control over financial reporting.
15
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2006 Annual Meeting of Stockholders on May 22,
2006 at its offices in Allen, Texas. At such meeting, the Company's
stockholders ratified the appointment of Grant Thornton LLP as
independent accountants with 1,445,843 shares voted for ratification,
3,145 voted against, 400 abstentions and 981 broker non-votes and
approved the Atrion Corporation 2006 Equity Incentive Plan with
1,037,385 shares voted for approval, 126,278 against, 6,800
abstentions and 279,906 broker non-votes. The voting with respect to
the nominee for election as director was as follows:
Nominee Votes For Votes Withheld
------- --------- --------------
Hugh J. Morgan, Jr. 1,381,119 68,269
The terms of the following directors continued after the meeting:
Emile A. Battat, Ronald N. Spaulding, Roger F. Stebbing, and John P.
Stupp, Jr.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Atrion Corporation 2006 Equity Incentive Plan (1)
31.1 Sarbanes-Oxley Act Section 302 Certification of Chief
Executive Officer
31.2 Sarbanes-Oxley Act Section 302 Certification of Chief
Financial Officer
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 of The Sarbanes - Oxley
Act Of 2002
32.2 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 of The Sarbanes - Oxley
Act Of 2002
(b) Reports on Form 8-K
On May 8, 2006, the Company filed a report on Form 8-K with the
SEC regarding the public dissemination of a press release
announcing its financial results for the first quarter ended
March 31, 2006 (Item 12).
Notes:
(1) Incorporated by reference to Schedule 14A filed April 6, 2006.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Atrion Corporation
------------------
(Registrant)
Date: August 8, 2006 /s/ Emile A. Battat
-----------------------------
Emile A. Battat
Chairman, President and
Chief Executive Officer
Date: August 8, 2006 /s/ Jeffery Strickland
-----------------------------
Jeffery Strickland
Vice President and
Chief Financial Officer
17