Blueprint
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
☑
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2018
☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from __to __
Commission
File Number 001-32982
_______________________
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Atrion Corporation
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(Exact
name of Registrant as specified in its charter)
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Delaware
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63-0821819
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(State
of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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One Allentown Parkway,Allen, Texas
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75002
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(Address
of principal executive offices)
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(ZIP
code)
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Registrant’s
telephone number, including area code: (972) 390-9800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE
ACT:
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Title of Class
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Name of Each Exchange on Which Registered
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Common
Stock, $.10 Par Value
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NASDAQ
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SECURITIES REGISTERED UNDER SECTION 12(g) OF
THE EXCHANGE ACT : None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐
No ☑
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
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
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files).Yes ☑ No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
☑
Indicate
by check whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (check
one):
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Large accelerated
filer ☑
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Accelerated filer
☐
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Non-accelerated
filer ☐
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Smaller reporting
company ☐
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Indicate by check mark
whether the Registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes ☐ No
☑
The
aggregate market value of the voting Common Stock held by
nonaffiliates of the Registrant as of, June 30, 2018, the last
business day of the Registrant’s most recently completed
second fiscal quarter was approximately $859,267,472 based on the
$599.40 closing price reported for such date on the NASDAQ Global
Select Market.
Number
of shares of Common Stock outstanding at February 15, 2019:
1,852,756
DOCUMENTS INCORPORATED BY REFERENCE
Part
III of this Form 10-K incorporates by reference information from
the Company's definitive proxy statement relating to the 2019
annual meeting of stockholders, to be filed with the Commission not
later than 120 days after the end of the fiscal year covered by
this report.
ATRION
CORPORATION
FORM
10-K
ANNUAL
REPORT TO
THE
SECURITIES AND EXCHANGE COMMISSION
FOR
THE YEAR ENDED DECEMBER 31, 2018
________
TABLE
OF CONTENTS
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ITEM
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PAGE
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PART I
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1
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1
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7
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19
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19
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19
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19
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EXECUTIVE OFFICERS OF THE COMPANY
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PART II
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20
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20
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21
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CONDITION AND RESULTS OF OPERATIONS
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21
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MARKET RISK
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28
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29
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ACCOUNTING AND FINANCIAL DISCLOSURE
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55
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55
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57
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PART III
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58
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58
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58
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58
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59
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59
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PART IV
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60
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60
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63
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ATRION CORPORATION
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2018
PART I
General
Atrion
Corporation and its subsidiaries (”we,”
“our,” “us,” “Atrion,” or the
“Company”) develop and manufacture products, primarily
for medical applications. Our medical products are used in a number
of fields including fluid delivery, cardiovascular and ophthalmic
applications.
Our
fluid delivery products accounted for 46 percent of net revenues
for 2018, 44 percent of net revenues for 2017 and 42 percent of net
revenues for 2016. We have developed a wide variety of proprietary
valves designed to precisely fill, hold and release controlled
amounts of fluids or gasses on demand for use in various
intubation, intravenous, catheter and other applications in fields
such as anesthesia and oncology. We make products that deliver
fluids as well as promote infection control in hospital and home
healthcare environments.
Our cardiovascular products accounted for 33 percent of net
revenues for each of 2018, 2017 and 2016. At the core of our
cardiovascular products is the MPS2® Myocardial Protection
System, or MPS2, a proprietary technology that is the only system
used in open-heart surgery that delivers to the heart essential
fluids and medications, mixes critical drugs and controls
temperature, pressure and other variables. This system indicates
improved outcomes offering an integrated, flexible set of choices
during surgery without diluting the blood. We also develop and
manufacture other cardiovascular products such as cardiac surgery
vacuum relief valves; silicone vessel loops for retracting and
occluding vessels in minimally invasive surgical procedures;
inflation devices for balloon catheter dilation, stent deployment
and fluid dispensing; as well as products used in heart bypass
surgery to make a precision opening in the heart for attachment of
the bypass vessels.
Our ophthalmic products accounted for 7 percent, 9 percent and 11
percent of our net revenues for 2018, 2017 and 2016, respectively.
We are a leading manufacturer of specialized medical devices that disinfect contact lenses. We
also manufacture a proprietary line of balloon catheters used in
the treatment of nasolacrimal duct obstruction in children and
adults.
Our other medical and non-medical products accounted for 14 percent
of our net revenues for each of 2018, 2017 and 2016. One of these
product lines consists of instrumentation and associated
disposables used to measure the activated clotting time of blood.
In addition, we manufacture and sell a line of products designed
for safe needle and scalpel blade containment. We are also the
leading manufacturer of inflation systems and valves used in marine
and aviation safety products. We manufacture components used in
inflatable survival products and structures. We also produce
one-way and two-way pressure relief valves that protect sensitive
electronics and other products during transport in other medical
and non-medical applications.
Marketing and Major Customers
We
market components to other equipment manufacturers for
incorporation in their products and sell finished devices to
physicians, hospitals, clinics and other treatment centers. We sell
our products through a sales force which consists of direct sales
personnel, independent sales representatives and distributors. Our
sales managers also work closely with major customers in designing
and developing products to meet customer requirements.
We
offer customer service, training and education, and technical
support such as field service, spare parts, maintenance and repair
for certain of our products. We periodically advertise our products
in trade journals, routinely attend and participate in industry
trade shows throughout the United States and internationally, and
sponsor scientific symposia as a means of disseminating product
information. We also have supportive literature on the benefits of
our products.
Manufacturing
Our
medical and non-medical products are manufactured at facilities in
Florida, Alabama and Texas. The facilities in Alabama and Florida
both utilize plastic injection molding and specialized assembly as
their primary manufacturing processes. Our other manufacturing
processes consist of the assembly of standard and custom component
parts, including the assembly of electronic components, and the
testing of completed products.
We are
subject to the Quality System Regulation, or QSR, of the United
States Food and Drug Administration, or FDA, which requires
manufacturers of medical devices to adhere to certain design
testing, quality control, documentation and other quality assurance
procedures during the manufacturing process. We devote significant
attention to quality assurance. Our quality assurance measures
begin with the suppliers which participate in our supplier quality
assurance program. These measures continue at the manufacturing
level where many components are assembled in a clean room
environment designed and maintained to reduce product exposure to
particulate matter. Products are tested throughout the
manufacturing process for adherence to specifications. Most
finished products are then shipped to outside processors for
sterilization by radiation or ethylene oxide gas. After
sterilization, the products are quarantined and tested before they
are shipped to customers.
Skilled
workers are required for the manufacturing of our products, and we
believe that additional workers with these skills are readily
available in the areas where our plants are located.
Our
medical device operations are EN ISO13485:2016 certified and are
subject to FDA jurisdiction. Our non-medical device operations are
ISO9001-2008 certified.
Research and Development
A
well-targeted research and development, or R&D, program is an
essential part of our activities, and we are currently engaged in a
number of R&D projects. The objective of this program is to
develop new products in our current product lines, improve current
products and develop new product lines. The Company expects to
continue additional R&D in 2019 in all these
fields.
Sources and Availability of Raw Materials
The
principal raw materials that we use in our products are resins. Our
ability to operate profitably is dependent, in part, on the
availability and pricing of these resins. The resins we use are
derived from petroleum and natural gas, and the prices fluctuate
substantially as a result of changes in petroleum and natural gas
prices, demand and the capacity of the companies that produce these
resins to meet market needs. Instability in the world markets for
petroleum and natural gas could adversely affect the availability
and pricing of these resins.
We
contract with various suppliers to provide the component parts
necessary to assemble our products. Substantially all of these
components are available from a number of different suppliers,
although certain components are purchased from single sources that
manufacture these components using our tooling. We believe that we
have satisfactory alternative sources for single-sourced
components, although a sudden disruption in supply from one or more
of these suppliers could adversely affect our ability to deliver
finished products on time. We own the molds used for production of
substantially all our components. Consequently, in the event of
supply disruption, we should be able to fabricate our own
components or contract with another supplier, albeit after a
possible delay in the production process.
Patents and License Agreements
Our
commercial success is dependent, in part, on our ability to
continue developing patentable products, to preserve our trade
secrets and to operate without infringing or violating the
proprietary rights of third parties. We currently have 530 active
patents and patent applications pending on products that are either
being sold or are in development. We pay royalties to an outside
party for one patent. All of these patents and patents pending
relate to products currently being sold by us or to products in
evaluation stages. Our patents expire at various times over the
next 20 years.
We have
developed technical knowledge which, although non-patentable, we
consider to be significant in enabling us to compete. However, the
proprietary nature of such knowledge may be difficult to protect.
We have entered into agreements with key employees prohibiting them
from disclosing any of our confidential information or trade
secrets. In addition, generally these agreements also provide that
inventions or discoveries relating to our business by these
individuals will be assigned to us and become our sole
property.
The
medical device industry is characterized by extensive intellectual
property litigation, and companies in this industry sometimes use
intellectual property litigation to gain a competitive advantage.
Intellectual property litigation, regardless of outcome, is often
complex and expensive, and the outcome of this litigation is
generally difficult to predict.
Competition
Depending
on the product and the nature of the project, we compete on the
basis of our ability to provide engineering and design expertise,
quality, service, product and price. As such, successful
competitors must have technical strength, responsiveness and scale.
We believe that our expertise and reputation for quality medical
products have allowed us to compete favorably with respect to each
such factor and to maintain long-term relationships with our
customers.
In many
of our markets, we compete with numerous other companies in the
sale of healthcare products. These markets are dominated by
established manufacturers that have broader product lines, greater
distribution capabilities, substantially greater capital resources
and larger marketing, R&D staffs and facilities than ours. Many
of these competitors offer broader product lines within the
specific product market and in the general field of medical devices
and supplies. Broad product lines give many of our cardiovascular
and fluid delivery competitors the ability to negotiate exclusive,
long-term medical device supply contracts and, consequently, the
ability to offer comprehensive pricing of their competing products.
By offering a broader product line in the general field of medical
devices and supplies, competitors may also have a significant
advantage in marketing competing products to group purchasing
organizations, health maintenance organizations, and other managed
care organizations that are increasingly seeking to reduce costs
through centralization of purchasing functions. Furthermore,
innovations in surgical techniques, product design or functions, or
medical practices could have the effect of reducing or eliminating
market demand for one or more of our products. In addition, our
competitors may use price reductions to preserve market share in
their product markets.
We
design products for a customer or potential customer prior to
entering into long-term development and manufacturing agreements
with that customer. Because these products are somewhat limited in
number and normally are only a component of the ultimate product
sold by our customers, we are dependent on our ability to meet the
quality requirements of our customers and must continually be
attentive to the need to manufacture such products at competitive
prices and in compliance with strict manufacturing standards.
Additionally, we are dependent on our customers’ success in
the marketing of the ultimate products sold. We also compete in the
market for inflation devices used in marine and aviation
equipment.
Government
Regulation
Products
The
manufacture and sale of medical products are subject to
comprehensive regulation by numerous United States and foreign
regulatory agencies, principally the FDA in the United States. The
R&D, manufacturing, promotion, marketing and distribution of
medical products in the United States are subject to the provisions
of the Federal Food, Drug and Cosmetic Act, or FDCA, and the
regulations promulgated thereunder. All manufacturers of medical
devices must register with the FDA and list all medical devices
manufactured by them. The list must be updated annually. Our
medical products subsidiaries and certain of our customers are
subject to inspection by the FDA for compliance with such
regulations and procedures and our medical products manufacturing
facilities are subject to regulation by the FDA. In order for our
products to be marketed in countries outside the United States,
regulatory approvals must be obtained, and extensive product and
quality system regulations must be complied with, in those
countries. These regulations, including the requirements for
approvals or clearance and the time required for regulatory review,
vary significantly from country to country. Some countries have
regulatory review processes which are substantially longer than
similar processes in the United States. Failure to obtain
regulatory approval in a timely manner and to meet all local
requirements including language and specific safety standards in
any foreign country in which we would like for our products to be
marketed could prevent our products from being marketed in those
countries.
The FDA
has traditionally pursued a rigorous enforcement program to ensure
that regulated entities comply with the FDCA. A company not in
compliance may face a variety of regulatory actions, including
warning letters, product detentions, device alerts, mandatory
recalls or field corrections, product seizures, total or partial
suspension of production, injunctive actions or civil penalties and
criminal prosecutions of the company or responsible employees,
officers and directors.
The FDA
promulgates rules, which are available to the public, for the
approval of medical devices. The process of obtaining FDA approval
for new devices can take several months to several years depending
on the type of application required for a particular device.
Furthermore, the process of obtaining FDA approval can be expensive
and uncertain. Even if granted, FDA approval may include
significant limitations on the indicated uses for which a product
may be marketed. FDA enforcement policy strictly regulates the
promotion of approved medical devices. Product approvals can be
withdrawn for failure to comply with regulatory requirements or the
occurrence of unforeseen problems following initial marketing. In
addition, after a device is placed on the market, numerous FDA and
other regulatory requirements continue to apply. These include
establishment registration and device listing with the FDA;
compliance with medical device reporting regulations requiring that
manufacturers report to the FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a way
that would likely cause or contribute to a death or serious injury
if it were to recur; and compliance with corrections and removal
reporting regulations requiring that manufacturers report to the
FDA field corrections and product recalls or removals if undertaken
to reduce a risk to health posed by the device or to remedy a
violation of the FDCA that may present a risk to health. The FDA
and the Federal Trade Commission, or FTC, also regulate the
advertising and promotion of our products to ensure that the claims
we make are consistent with our regulatory clearances, that
scientific data substantiates the claims and that our advertising
is not false or misleading. Generally, we may not promote or
advertise our products for uses outside the scope of our intended
use statement in our clearances or make unsupported safety and
effectiveness claims. Many jurisdictions outside the United States
have similar regulations.
Certain
aviation and marine safety products are subject to regulation by
the United States Coast Guard and the Federal Aviation
Administration and similar organizations in foreign countries which
regulate the safety of marine and aviation equipment.
Healthcare Regulations
In the
United States, healthcare providers, including hospitals and
physicians, that purchase medical products for treatment of their
patients generally rely on third-party payors, principally
Medicare, Medicaid and private health insurance plans, to reimburse
all or a part of the costs and fees associated with the procedures
performed using these products.
Reimbursement
systems in international markets vary significantly by country and
by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis. Many international
markets have government-managed healthcare systems that control
reimbursement for new products and procedures. In most markets,
there are private insurance systems as well as government-managed
systems. Market acceptance of our products in international markets
depends, in part, on the availability and level of
reimbursement.
Medicare
and Medicaid reimbursement for hospitals is generally based on a
fixed amount for a patient based upon that patient’s specific
diagnosis. Because of this fixed reimbursement method, hospitals
may seek to reduce the costs they incur in treating Medicare and
Medicaid patients. Frequently, reimbursement is reduced to reflect
the availability of a new procedure or technique, and as a result
hospitals are generally willing to implement new cost saving
technologies before these downward adjustments take effect.
Likewise, because the rate of reimbursement for physicians who
perform certain procedures has been and may in the future be
reduced, physicians may seek greater cost efficiency in treatment
to minimize any negative impact of reduced reimbursement.
Third-party payors may challenge the prices charged for medical
products and services and may deny reimbursement if they determine
that a device was not used in accordance with cost-effective
treatment methods as determined by the payor, was experimental or
was used for an unapproved application.
In March 2010, the Patient Protection and Affordable Care Act and
the Health Care and Education Reconciliation Act (collectively
known as the “Affordable Care Act”) were enacted. The
Affordable Care Act made changes that have had a significant impact
on healthcare providers, medical device and pharmaceutical
companies and insurers. To generate revenues to fund the
expansion of healthcare coverage, the Affordable Care Act has a
number of provisions, including a 2.3 percent excise tax on the
sale in the United States of certain medical devices by the
manufacturer, producer or importer effective after December 31,
2012. The Consolidated Appropriations Act, 2016, signed into law on
December 18, 2015 included a two-year moratorium on collection of
the medical device tax, beginning January 1, 2016 and ending on
December 31, 2017. As part of stopgap spending legislation
signed into law by President Trump on January 22, 2018, the
imposition of the medical device excise tax was delayed for an
additional two years until January 1, 2020. The Affordable Care Act
also established a payment transparency program, sometimes
referred to as the Physician Payments Sunshine Act, that requires
medical device and drug manufacturers, including the Company, to
report to the Centers for Medicare & Medicaid Services, or CMS,
payments or other transfers of value made to physicians and
teaching hospitals. The program is intended to provide patients
with enhanced transparency as to the financial relationships that
physicians and teaching hospitals have with medical device and drug
manufacturers. On January 20, 2017, President Trump signed an
Executive Order directing federal agencies to exercise all
authority and discretion available to them under the Affordable
Care Act to waive, defer, grant exemptions from, or delay the
implementation of any provision of the Affordable Care Act that
would impose a fiscal or regulatory burden on states, individuals,
healthcare providers, health insurers, or manufacturers of
pharmaceuticals or medical devices. There have also been judicial
and congressional challenges to certain aspects of the Affordable
Care Act, as well as efforts by the Trump Administration to modify,
repeal, or otherwise invalidate all, or certain provisions of, the
Affordable Care Act. Since January 2017, President Trump has signed
two Executive Orders designed to delay the implementation of
certain provisions of the Affordable Care Act or otherwise
circumvent some of the requirements for health insurance mandated
by the Affordable Care Act. In addition, CMS has recently proposed
regulations that would give states greater flexibility in setting
benchmarks for insurers in the individual and small group
marketplaces, which may have the effect of relaxing the essential
health benefits required under the Affordable Care Act for plans
sold through such marketplaces. The Tax Cuts and Jobs Act of 2017,
or Tax Act, which was enacted on December 22, 2017, reduced the
Affordable Care Act's shared-responsibility payment to zero,
effective January 1, 2019. Following the enactment of the Tax
Act, on December 14, 2018 in a case in the United States District
Court for the Northern District of Texas, a federal judge ruled
that the individual mandate imposed by the Affordable Care Act is
unconstitutional and inseverable from the other provisions of the
Affordable Care Act and, therefore, the remaining provisions of the
Affordable Care Act are invalid. Although the Trump
Administration and CMS have indicated that this ruling will have no
immediate effect, we cannot presently determine how this case, as
well as other actions to repeal or replace the Affordable Care Act,
will affect our business. Even while the impact of that case is
unclear, the Trump Administration is likely to continue
shaping the law significantly through regulations that may impact
the health insurance marketplaces, essential health benefits
requirements, and Medicaid/marketplace waivers for state
flexibilities. Any regulatory or legislative developments in
domestic or foreign markets that eliminate or reduce reimbursement
rates for procedures performed with our products could harm our
ability to sell our products or cause downward pressure on the
prices of our products, either of which would adversely affect our
business, financial condition, and results of operations. Further,
we anticipate that state legislatures and the private sector will
continue to review and assess healthcare reform, including
alternative healthcare delivery and payment systems. We cannot
predict with certainty what impact the adoption or modification of
any such reform measures or market forces may have on our
business.
We are, directly or indirectly, subject to various federal and
state laws governing our relationship with healthcare providers and
pertaining to healthcare fraud and abuse, including anti-kickback
laws. In particular, the federal Anti-Kickback Statute prohibits
persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in
exchange for or to induce either the referral of an individual or
the furnishing, arranging for or recommending a good or service for
which payment may be made in whole or part under federal healthcare
programs, such as the Medicare and Medicaid programs. Penalties for
violations include criminal penalties and civil sanctions such as
fines, imprisonment and possible exclusion from Medicare, Medicaid
and other federal healthcare programs. The Anti-Kickback Statute is
broad and prohibits many arrangements and practices that are lawful
in businesses outside of the healthcare industry. In implementing
the statute, the Office of Inspector General of the United States
Department of Health and Human Services, or OIG, has issued a
series of regulations, known as the “safe harbors.”
These safe harbors set forth provisions that, if all their
applicable requirements are met, will assure healthcare providers
and other parties that they will not be prosecuted under the
Anti-Kickback Statute. The failure of a transaction or arrangement
to fit precisely within one or more safe harbors does not
necessarily mean that it is illegal or that prosecution will be
pursued. However, conduct and business arrangements that do not
fully satisfy each applicable element of a safe harbor may result
in increased scrutiny by government enforcement authorities, such
as the OIG.
The
Federal False Claims Act, or FCA, imposes civil liability on any
person or entity that submits, or causes the submission of, a false
or fraudulent claim to the United States government. Damages under
the FCA can be significant and consist of the imposition of fines
and penalties. The FCA also allows a private individual or entity
with knowledge of past or present fraud against the federal
government to sue on behalf of the government to recover the civil
penalties and treble damages. The United States Department of
Justice, on behalf of the government, has previously alleged that
the marketing and promotional practices of medical device and drug
manufacturers that included the off-label promotion of products or
the payment of prohibited kickbacks to doctors violated the FCA
resulting in the submission of improper claims to federal and state
healthcare entitlement programs such as Medicaid. In certain cases,
manufacturers have entered into criminal and civil settlements with
the federal government under which they entered into plea
agreements, paid substantial monetary amounts and entered into
corporate integrity agreements that require, among other things,
substantial reporting and remedial actions going
forward.
Product Liability and Insurance
The
design, manufacture and marketing of products of the types we
produce entail an inherent risk of product liability claims. A
problem with one of our products could result in product liability
claims or a recall of, or safety alert or advisory notice relating
to, the product. We have product liability insurance in amounts
that we believe are adequate.
Advisory Board
Several
physicians and other healthcare professionals serve as our clinical
advisors. These clinical advisors have assisted in the
identification of the market need for some of our products. Members
of our management and scientific and technical staff from time to
time consult with these clinical advisors to better understand the
technical and clinical requirements of current and future products.
We anticipate that these clinical advisors will continue to play a
role in our development activities.
Certain
of the clinical advisors are employed by academic institutions and
may have commitments to, or consulting or advisory agreements with,
other entities that may limit their availability to advise us. The
clinical advisors may also serve as consultants to other medical
device companies. Our clinical advisors are not expected to devote
more than a small portion of their time in providing services to
us.
People
At
January 31, 2019, we had 570 employees. We are proud that many of
our employees have tenures with us ranging from 10 to 40
years.
Available Information
Our
website address is www.atrioncorp.com.
We make available free of charge through our website our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and Proxy Statements, and amendments to these
filings, as soon as reasonably practicable after filing with or
furnished to the Securities and Exchange Commission, or SEC. These
filings are also available at www.sec.gov.
The contents of these websites are not incorporated in this Form
10-K, and any references to our website are intended to be inactive
textual references only.
In addition to the other information contained in this Form 10-K,
the following risk factors should be considered carefully in
evaluating our business. Our business, financial condition and
results of operations could be materially adversely affected by any
of these risks. Additional risks and uncertainties that we do not
currently know about or that we currently believe are immaterial,
or that we have not predicted, may also harm our business
operations or adversely affect us.
●
Our
sales could decline materially if we lose business from one or more
of our larger customers or a significant number of our smaller
customers.
Our
sales are generally made under open short-term purchase orders or
purchase contracts. Customers with purchase orders could reduce
their volumes, or cease purchasing our products, with minimal
notice. Customers having purchase contracts may elect not to renew
those contracts at expiration or the contracts may be renewed on
terms less favorable to us. The loss of, or material reduction in
orders by, one or more of our larger customers or a significant
number of our smaller customers could have a material adverse
effect on our business, financial condition and results of
operations.
●
Our
business is dependent on the price and availability of resins and
our ability to pass on resin price increases to our
customers.
The
principal raw materials that we use in our products are
polyethylene, polypropylene and polyvinyl chloride resins. Our
ability to operate profitably is dependent, in part, on the
availability and pricing of these resins. The resins we use are
derived from petroleum and natural gas; therefore, prices fluctuate
substantially as a result of changes in petroleum and natural gas
prices, demand and the capacity of the companies that produce these
products to meet market needs. Instability in the world markets for
petroleum and natural gas could adversely affect the prices of
these raw materials and their availability.
Our
ability to maintain profitability depends, in part, upon our
ability to pass through to our customers the full amount of any
increase in raw material costs. If resin prices increase and we are
not able to fully pass on the increases to our customers, our
results of operations and our financial condition will be adversely
affected.
●
The
loss of a key supplier of raw materials could lead to increased
costs and lower profit margins.
The
loss of a key supplier could force us to purchase raw materials in
the open market, which may be at higher prices, until we could
secure another source and such higher prices may not allow us to
remain competitive. If we are unable to obtain raw materials in
sufficient quantities, we may not be able to manufacture our
products. Even if we were able to replace one of our raw material
suppliers through another supply arrangement, there is no assurance
that the terms that we enter into with such alternate supplier will
be as favorable to us as the supply arrangements that we currently
have or that such replacement could be timely completed. A
disruption or termination in the supply of raw materials could
result in our inability to meet the demand for our products, which
could adversely affect our revenue generation and result in
customer dissatisfaction.
●
Political
and economic conditions could materially and adversely affect our
revenue and results of operations.
Our
business may be affected by a number of factors that are beyond our
control such as general geopolitical economic and business
conditions, conditions in the financial markets, and changes in the
overall demand for our products. A severe or prolonged economic
downturn could adversely affect our customers’ financial
condition and the levels of business activity of our customers.
Uncertainty about current global political or economic conditions
could cause businesses to postpone spending in response to tighter
credit, negative financial news or declines in income or asset
values, which could have a material negative effect on the demand
for our products. There could be additional effects on our business
from these economic developments including the insolvency of key
suppliers or their inability to obtain credit, the inability of our
customers to pay for or obtain credit to finance purchases of our
products and increased pressure to reduce the prices of our
products. Turbulence in the United States and international markets
and economies could have a material adverse impact on our business,
operating results and financial condition. In addition, if we are
unable to successfully anticipate changing economic and political
conditions, we may be unable to effectively plan for and respond to
those changes, which could materially adversely affect our business
and results of operations.
●
Product
liability claims could adversely affect our financial condition and
results of operations.
We may
be subject to product liability claims involving claims of personal
injury or property damage. Our product liability insurance coverage
may not be adequate to cover the cost of defense and the potential
award in the event of a claim. A product liability claim,
regardless of its merit or outcome, could result in significant
legal defense costs. Also, a well-publicized actual or perceived
problem with one or more of our products could adversely affect our
reputation and reduce the demand for our products.
●
Issues
with product quality could have an adverse effect upon our
business, subject us to regulatory actions and cause a loss of
customer confidence in us or our products.
Our
success depends upon the quality and reliability of our products.
Quality management plays an essential role in determining and
meeting customer requirements, preventing defects, improving our
products and assuring the safety and efficacy of our products. Our
future success depends on our ability to maintain and continuously
improve our quality management program. Although we have one
quality system that covers the lifecycle of our products, quality
and safety issues may occur with respect to any of our products. A
quality or safety issue may result in adverse inspection reports,
warning letters, product recalls, monetary sanctions, injunctions
to halt manufacture and distribution of products, civil or criminal
sanctions, costly litigation, refusal of a government to grant
approvals and licenses, restrictions on operations or withdrawal of
existing approvals and licenses. An inability to address a quality
or safety issue in an effective and timely manner may also cause
negative publicity or a loss of customer confidence in us or our
current or future products, which may result in the loss of sales
and difficulty in successfully launching new products.
Additionally, we have made and continue to make significant
investments in assets, including inventory and property, plant and
equipment, which relate to potential new products or modifications
to existing products. Product quality or safety issues and costs
associated there with may restrict us from being able to realize
the expected returns from these investments and may adversely
affect our results of operations and our financial
condition.
Unaffiliated third
party suppliers provide a number of goods and services to our
manufacturing and R&D organizations. Third party suppliers are
required to comply with our quality standards. Failure of a third
party supplier to provide compliant raw materials or supplies could
result in delays, service interruptions or other quality related
issues that may negatively impact our business
results.
●
Any
losses we incur as a result of our exposure to the credit risk of
our customers could harm our results of operations.
We
monitor individual customer payment capability in granting credit
arrangements, seek to limit credit to amounts we believe the
customers can pay, and maintain reserves we believe are adequate to
cover exposure for doubtful accounts. As we have grown our revenue
and customer base, our exposure to credit risk has increased. Any
material losses as a result of customer defaults could harm, and
have an adverse effect on, our business, operating results and
financial condition.
●
The success of certain of our products depends upon relationships
with healthcare professionals.
The
research, development, marketing, and sales of many of our new and
improved products are dependent upon our maintaining working
relationships with healthcare professionals. We rely on these
professionals to provide us with considerable knowledge and
experience regarding our products. If we are unable to maintain our
relationships with these professionals and do not continue to
receive their advice and input, the development and
commercialization of our products could suffer, which could have a
material, adverse impact on our revenues, financial condition,
profitability, and cash flows.
●
Our
success is measured in part by our ability to develop patentable
products, to preserve our trade secrets and operate without
infringing or violating the proprietary rights of third
parties.
Others
may challenge the validity of any patents issued to us, and we
could encounter legal and financial difficulties in enforcing our
patent rights against infringers. In addition, there can be no
assurance that other technologies cannot or will not be developed
or that patents will not be obtained by others which would render
our patents less valuable or obsolete. Our patents expire at
various times over the next 20 years. Once patents expire, some
customers may not continue to purchase from us, opting for
competitive copies instead. If we do not develop and launch new
products prior to the expiration of patents for our existing
products, our sales and profits could decline
substantially.
We have
developed technical knowledge which, although non-patentable, we
consider to be significant in enabling us to compete. However, the
proprietary nature of such knowledge may be difficult to
protect.
The
medical device industry is characterized by extensive intellectual
property litigation, and companies in the medical device industry
sometimes use intellectual property litigation to gain a
competitive advantage. Intellectual property litigation, regardless
of outcome, is often complex and expensive, and the outcome of this
litigation is generally difficult to predict. An adverse
determination in any such proceeding could subject us to
significant liabilities to third parties or require us to seek
licenses from third parties or pay royalties that may be
substantial. Furthermore, there can be no assurance that necessary
licenses would be available to us on satisfactory terms or at all.
Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses
could prevent us from manufacturing or selling certain of our
products, which could have a material adverse effect on our
business, financial condition and results of
operations.
●
International
patent protection is uncertain.
Patent
law outside the United States is uncertain and is currently
undergoing review and revision in many countries. Further, the laws
of some foreign countries may not protect our intellectual property
rights to the same extent as United States laws. We may participate
in opposition proceedings to determine the validity of our or our
competitors’ foreign patents, which could result in
substantial costs and diversion of our efforts.
●
New
lines of business or new or enhanced products and services may
subject us to additional risks.
We may
implement new lines of business or offer new or enhanced products
and services within existing lines of business. There are
substantial risks and uncertainties associated with these efforts,
particularly in instances where the markets are not fully
developed. In developing and marketing new lines of business or new
or enhanced products and services, we may invest significant time
and resources. Initial timetables for the introduction and
development of new lines of business and new or enhanced products
or services may not be achieved and price and profitability targets
may not prove feasible. External factors, such as compliance with
regulations, competitive alternatives, and shifting market
preferences, may also impact the successful implementation of a new
line of business or a new or enhanced product or service.
Furthermore, any new line of business or new or enhanced product or
service could have a significant impact on the effectiveness of our
system of internal control. Failure to successfully manage these
risks in the development and implementation of new lines of
business or new or enhanced products or services could have a
material adverse effect on our business, results of operations and
financial condition.
●
Some
of our competitors have significantly greater resources than we do,
and it may be difficult for us to compete against
them.
In many
of our markets, we compete with numerous other companies that have
substantially greater financial resources and engage in
substantially more R&D activities than we do. Furthermore,
innovations in surgical techniques or medical practices could have
the effect of reducing or eliminating market demand for one or more
of our products. In addition, the trend of consolidation in the
medical device industry and among our customers could result in
greater competition and pricing pressure.
Some of
the markets in which we compete are dominated by established
manufacturers that have broader product lines, greater distribution
capabilities, substantially larger marketing, R&D staffs and
facilities than we do. Many of these competitors offer broader
product lines within the specific product market and in the general
field of medical devices and supplies. Broad product lines give
many of our cardiovascular and fluid delivery competitors the
ability to negotiate exclusive, long-term medical device supply
contracts and, consequently, the ability to offer comprehensive
pricing of their competing products. By offering a broader product
line in the general field of medical devices and supplies,
competitors may also have a significant advantage in marketing
competing products to group purchasing organizations. In addition,
our competitors may use price reductions to preserve market share
in their product markets.
●
We
are subject to healthcare fraud and abuse regulations that could
result in significant liability, require us to change our business
practices and restrict our operations in the future.
We are
subject to various federal, state and local laws targeting fraud
and abuse in the healthcare industry, including anti-kickback and
false claims laws. Violations of these laws are punishable by
criminal or civil sanctions, including substantial fines,
imprisonment and exclusion from participation in healthcare
programs such as Medicare and Medicaid and health programs outside
the United States. These laws and regulations are wide ranging and
subject to changing interpretations and applications, which could
restrict our sales or marketing practices. A violation of these
laws could have a material adverse effect on our business, results
of operations, financial condition and cash flow.
●
We
will be unable to sell our products if we fail to comply with
governmental regulations.
To
manufacture our products commercially, we must comply with
governmental regulations that govern design controls, quality
systems and documentation policies and procedures, including
continued compliance with QSR. The FDA and equivalent foreign
governmental authorities periodically inspect our manufacturing
facilities and the manufacturing facilities of our Original
Equipment Manufacturer, or OEM, medical device customers. If we or
our OEM medical device
customers fail to comply with these manufacturing regulations,
including meeting reporting obligations to the FDA, or fail any FDA
inspections, marketing or distribution of our products may be
prevented or delayed, which would negatively impact our
business.
●
Our
products are subject to product recalls even after receiving
regulatory clearance or approval, and any such recalls would
negatively affect our financial performance and could harm our
reputation.
Any of
our products may be found to have significant deficiencies or
defects in design or manufacture. The FDA and similar governmental
authorities in other countries have the authority to require the
recall of any such defective products. A government-mandated or
voluntary recall could occur as a result of component failures,
manufacturing errors or design defects. We do not maintain
insurance to cover losses incurred as a result of product recalls.
Any product recall would divert managerial and financial resources
and negatively affect our financial performance and could harm our
reputation with customers and end-users.
●
We
may not receive regulatory approvals for new product candidates or
for modifications of existing products or approvals may be
delayed.
Regulation by
governmental authorities in the United States and foreign countries
is a significant factor in the development, manufacture and
marketing of our proposed products and in our ongoing research and
product development activities. Any failure to receive the
regulatory approvals necessary to commercialize our product
candidates, or the subsequent withdrawal of any such approvals,
would harm our business. Additionally, modification of our existing
products may require regulatory approval. The process of obtaining
these approvals and the subsequent compliance with federal and
state statutes and regulations require spending substantial time
and financial resources. If we fail to obtain or maintain, or
encounter delays in obtaining or maintaining, regulatory approvals,
it could adversely affect the marketing of any products we develop
or modify, our ability to receive product revenues, and our
liquidity and capital resources.
●
Any major disruption or failure of our
information technology systems, or our failure to successfully
implement new technology effectively, could adversely affect our
business and operations.
We rely
on various
information technology systems to manage our operations. Over the
last several years, we have been and continue to implement
modifications and upgrades to our systems, including making changes
to legacy systems, replacing legacy systems with successor systems
with new functionality and acquiring new systems with new
functionality For example, over the next several years, we plan to
continue the process of implementing a new enterprise resource
planning system across our company. These activities subject us to
inherent costs and risks associated with replacing and upgrading
these systems, including impairment of our ability to fulfill
customer orders, potential disruption of our internal control
structure, substantial capital expenditures, additional
administration and operating expenses, retention of sufficiently
skilled personnel to implement and operate the new systems, demands
on management time, and other risks and costs of delays or
difficulties in transitioning to new or upgraded systems or of
integrating new or upgraded systems into our current systems. Our
system implementations may not result in productivity improvements
at a level that outweighs the costs of implementation, or at all.
In addition, the difficulties with implementing new or upgraded
technology systems may cause disruptions in our business operations
and have an adverse effect on our business and operations, if not
anticipated and appropriately mitigated.
●
We
face cybersecurity risks and may incur increasing costs in an
effort to minimize those risks.
We
utilize systems and websites that allow for the secure storage and
transmission of proprietary or confidential information regarding
our customers, employees, and others, including personal
information. As evidenced by the numerous companies that have
suffered serious data security breaches, we may be vulnerable to,
and unable to anticipate or detect, data security breaches and data
loss, including rapidly evolving and increasingly sophisticated
cybersecurity attacks. In addition, data security breaches can also
occur as a result of a breach by us or our employees or by persons
with whom we have commercial relationships that result in the
unauthorized release of personal or confidential information. In
addition to our own databases, we use third-party service providers
to store, process and transmit confidential or sensitive
information on our behalf. Although we contractually require these
service providers to implement and use reasonable security
measures, we cannot control third parties and cannot guarantee that
a data security breach will not occur in the future either at their
location or within their systems. A data security breach may expose
us to a risk of loss or misuse of this information, and could
result in significant costs to us, which may include, among others,
fines and penalties, potential liabilities from governmental or
third-party investigations, proceedings or litigation and diversion
of management attention. We could also experience delays or
interruptions in our ability to function in the normal course of
business, including delays in the fulfillment of customer orders or
disruptions in the manufacture and shipment of products. In
addition, actual or anticipated attacks may cause us to incur
costs, including costs to deploy additional personnel and
protection technologies, train employees, and engage third-party
experts and consultants. Any compromise or breach of our security
could result in a violation of applicable privacy and other laws,
significant legal and financial exposure, and a loss of confidence
in our security measures, which could have an adverse effect on our
results of operations and our reputation.
The
regulatory environment surrounding information security and privacy
is increasingly demanding, with frequent imposition of new and
changing requirements. In the United States, various laws and
regulations apply to the collection, processing, disclosure and
security of certain types of data, including the Electronic
Communications Privacy Act, the Computer Fraud and Abuse Act, the
Health Insurance Portability and Accountability Act of 1996, the
Gramm Leach Bliley Act and state laws relating to privacy and data
security. Several foreign countries and governmental bodies,
including the European Union, also have laws and regulations
dealing with the handling and processing of personal information
obtained from their residents, which in certain cases are more
restrictive than those in the United States. Laws and regulations
in these jurisdictions apply broadly to the collection, use,
storage, disclosure and security of various types of data,
including data that identifies or may be used to identify an
individual, such as names, email addresses and, in some
jurisdictions, internet protocol addresses. Such laws and
regulations may be modified or subject to new or different
interpretations, and new laws and regulations may be enacted in the
future. Within the European Union, the General Data Protection
Regulation, which became effective in May 2018 and replaced the
1995 European Union Data Protection Directive and superseded
applicable European Union member state legislation, imposes
significant new requirements on how companies collect, process and
transfer personal data, as well as significant fines for
noncompliance. Any failure or perceived failure by us to comply
with laws, regulations, policies or regulatory guidance relating to
privacy or data security may result in governmental investigations
and enforcement actions, litigation, fines and penalties or adverse
publicity, and could cause our customers to lose trust in us, which
could have an adverse effect on our reputation and
business.
●
We
sell many of our products to healthcare providers that rely on
Medicare, Medicaid and private health insurance plans to reimburse
the costs associated with the procedures performed using our
products and these third party payors may deny reimbursement for
use of our products.
We are
dependent, in part, upon the ability of healthcare providers to
obtain satisfactory reimbursement from third-party payors for
medical procedures in which our products are used. Third-party
payors may deny reimbursement if they determine that a prescribed
product has not received appropriate regulatory clearances or
approvals, is not used in accordance with cost-effective treatment
methods as determined by the payor, or is experimental, unnecessary
or inappropriate. Failure by hospitals and other users of our
products to obtain reimbursement from third-party payors, or
adverse changes in government or private third-party payors’
policies toward reimbursement for procedures utilizing our
products, could have a material adverse effect on the
Company’s business, financial condition and results of
operations. Major third-party payors for medical services in the
United States and other countries continue to try to contain
healthcare costs. The introduction of cost containment incentives,
combined with closer scrutiny of healthcare expenditures by both
private health insurers and employers, has resulted in increased
discounts and contractual adjustments to charges for services
performed. Further implementation of legislative or administrative
reforms to the United States or international reimbursement systems
in a manner that significantly reduces reimbursement for procedures
using our products or denies coverage for such procedures may
result in hospitals or physicians substituting lower cost products
or other therapies for our products which, in turn, would have an
adverse effect on our business, financial condition and results of
operations. Additionally, uncertainty about whether and how changes
may be implemented could also have a negative impact on the demand
for our products.
●
Changes
in healthcare legislation and policy may have a material adverse
effect on our financial condition and results of
operations.
A
number of legislative initiatives to contain healthcare costs have
been and continue to be introduced in the United States. In March
2010, the Affordable Care Act was enacted, which made changes that
have impacted and are expected to significantly impact the
pharmaceutical and medical device industries. Among other things
the Affordable Care Act contains a number of provisions designed to
generate the revenues necessary to fund health insurance coverage
expansions. The Affordable Care Act also implemented a number of
Medicare payment system reforms including a national pilot program
on payment bundling to encourage hospitals, physicians and other
providers to improve the coordination, quality and efficiency of
certain healthcare services through bundled payment models, and
appropriated funding for comparative effectiveness research. The
taxes imposed by the Affordable Care Act and the expansion in the
government’s role in the United States healthcare industry
may result in decreased profits to us, lower reimbursement by
payors for our products, and reduced medical procedure volumes, all
of which may have a material adverse impact on our business,
financial condition, results of operations, or cash flows. Since
its enactment, there have been judicial and Congressional
challenges to certain aspects of the Affordable Care Act, as well
as efforts by the Trump Administration to modify, repeal or
otherwise invalidate all, or certain provisions of, the Affordable
Care Act. In addition, other legislative changes have been proposed
and adopted since the Affordable Care Act was enacted. These
changes included aggregate reductions to Medicare payments to
providers of up to 2 percent per fiscal year, which will remain in
effect through 2027 unless additional Congressional action is
taken. It is unclear what impact new quality and payment programs
may have on our business, financial condition, results of
operations or cash flows. Individual states in the United States
have also become increasingly aggressive in passing legislation and
implementing regulations designed to control product pricing,
including price or patient reimbursement constraints, and
discounts, and require marketing cost disclosure and transparency
measures. We believe that additional state and federal health care
reform measures will be adopted in the future that could have a
material adverse effect on our industry generally and on our
customers. Any changes in, or uncertainty with respect to, future
reimbursement rates could impact our customers’ demand for
our products, which in turn could have a material adverse effect on
our business, financial condition, results of operations, or cash
flows. Further, the federal, state and local governments, Medicare,
Medicaid, managed care organizations, and foreign governments have
in the past considered, are currently considering, and may in the
future consider healthcare policies and proposals intended to curb
rising healthcare costs, including those that could significantly
affect both private and public reimbursement for healthcare
services. Future significant changes in the healthcare systems in
the United States or other countries, including changes intended to
reduce expenditures along with uncertainty about whether and how
changes may be implemented, could have a negative impact on the
demand for our products. We are unable to predict whether other
healthcare policies, including policies stemming from legislation
or regulations affecting our business, may be proposed or enacted
in the future; what effect such policies would have on our
business; or the effect ongoing uncertainty about these matters
will have on our customers’ purchasing
decisions.
●
Our
existing credit agreement contains restrictions that may limit our
flexibility in operating our business.
Our
existing credit agreement contains, and any future agreements may
contain, covenants that could impose significant operating and
financial restrictions on us. Although we currently do not have any
borrowings under our existing credit agreement, the covenants in
those agreements may limit the manner in which we conduct our
business, and we may be unable to engage in favorable business
activities or finance future operations or capital
needs.
●
We
have pledged certain of our assets as collateral under our existing
credit agreement. If we borrow funds under that credit agreement
and default on the terms of such credit agreement and the holder of
our indebtedness accelerates the repayment of such indebtedness,
there can be no assurance that we will have sufficient assets to
repay our indebtedness.
Under
our existing credit agreement, we are required to satisfy and
maintain specified financial ratios. Our ability to meet those
financial ratios can be affected by events beyond our control, and
there can be no assurance that we will meet those ratios. A failure
to comply with the covenants contained in the agreement could
result in an event of default under such agreement, which, if not
cured or waived, could have a material adverse effect on
our
business, financial
condition, and profitability. In the event of any default under our
existing credit agreement, the holder of our indebtedness
thereunder:
●
Will not be
required to lend any additional amounts to us;
●
Could elect to
declare all indebtedness outstanding, together with accrued and
unpaid interest and fees, to be due and payable and terminate all
commitments to extend further credit, if applicable;
or
●
Could require us to
apply all of our available cash to repay such
indebtedness.
If we
are unable to repay those amounts, the holder of our indebtedness
could proceed against the collateral granted to them to secure that
indebtedness. If the indebtedness under our existing credit
agreement were to be accelerated, there can be no assurance that
our assets at that time would be sufficient to repay such
indebtedness in full.
●
We
may not be able to attract and retain skilled people.
Our
success depends, in large part, on our ability to attract and
retain key people. Competition for the best people in most
activities we engage in can be intense, and we may not be able to
hire qualified people or to retain them. The unexpected loss of
services of one or more of our key personnel could have a material
adverse impact on our business because of their skills, knowledge
of our market, years of industry experience and the difficulty of
promptly finding qualified replacement personnel.
●
A
portion of our business relies on distribution agreements and
relationships with various third parties and any adverse change in
those relationships could result in a loss of revenue and harm that
business.
We sell
many of our products through distributors. Some of our distributors
also sell our competitors’ products, and, if they favor our
competitors’ products for any reason, they may fail to market
our products as effectively or to devote resources necessary to
provide effective sales, which would cause our results to suffer.
The success of the arrangements with these third parties depends,
in part, on the continued adherence to the terms of our agreements
with them. Any disruption in these arrangements may adversely
affect our financial condition and results of operations. The
actions of distributors in foreign countries may adversely affect
our ability to market effectively our products in those countries,
particularly if a distributor holds the regulatory authorization in
such countries and such actions result in the suspension or
revocation of such authorization. In such cases, re-establishing
market access or regulatory authorization may be difficult,
expensive or time consuming.
●
We
utilize distributors for a portion of our sales, which subjects us
to risks that could harm our business.
We have
strategic relationships with a number of distributors for sales of
our products. To the extent that we rely on distributors, our
success will depend on the efforts of others over whom we may have
little or no control. If these strategic relationships are
terminated and not replaced, our revenues could be adversely
affected. Also, we may be named as a defendant in litigation
against our distributors related to sales of our products by
them.
●
Severe
weather, natural disasters, acts of war or terrorism or other
external events could significantly impact our
business.
We
currently conduct all our development, manufacturing and management
at three locations. Severe weather, natural disasters, acts of war
or terrorism and other adverse external events at any one or more
of these locations could have a significant impact on our ability
to conduct business. We have the ability to transfer the production
of certain products from a facility affected by such events, but
doing so would be expensive. Our disaster recovery policies and
procedures may not be effective and the occurrence of any such
event could have a material adverse effect on our business, which,
in turn, could have a material adverse effect on our financial
condition and results of operations. The insurance we maintain may
not be adequate to cover our losses.
●
Our
sales and operations are subject to the risks of doing business
internationally.
A
substantial portion of our sales occur outside the United States,
and we are increasing our presence in international markets. Sales
outside the United States subject us to many risks, such
as:
●
economic or
political problems that disrupt foreign healthcare payment systems
or businesses;
●
the imposition of
governmental controls;
●
less favorable
intellectual property or other applicable laws;
●
protectionist laws
and business practices that favor local competitors;
●
the inability to
obtain any necessary foreign regulatory or pricing approvals of
products in a timely manner;
●
changes in trade
policies, tariffs and tax laws;
●
receivables may be
more difficult to collect; and
Our
operations and marketing practices are also subject to regulation
and scrutiny by the governments of the other countries in which we
operate. In addition, the Foreign Corrupt Practices Act, or FCPA,
prohibits United States companies and their representatives
from offering, promising, authorizing or making payments to foreign
officials for the purpose of obtaining or retaining business
abroad. In certain countries, the healthcare professionals we
regularly interact with may meet the definition of a foreign
official for purposes of the FCPA. Additionally, we are subject to
other United States laws in our international operations.
Failure to comply with domestic or foreign laws could result in
various adverse consequences, including possible delay in approval
or refusal to approve a product, recalls, seizures, withdrawal of
an approved product from the market, and the imposition of civil or
criminal sanctions.
●
We
may lose revenues, market share and profits due to exchange rate
fluctuations related to our international business.
Fluctuations in
exchange rates may affect the prices that our international
customers are willing to pay and may put us at a price disadvantage
compared to other competitors. Potentially volatile shifts in
exchange rates may negatively affect our financial condition and
operations. Because payments from our international customers are
received primarily in United States dollars, increases in the value
of the United States dollar relative to foreign currencies could
make our products less competitive or less affordable, and
therefore adversely affect our sales in international
markets.
●
We
may experience fluctuations in our quarterly operating
results.
We
have historically experienced, and may continue to experience,
fluctuations in our quarterly operating results. These fluctuations
are due to a number of factors, many of which are outside our
control, and may result in volatility of our stock price. Future
operating results will depend on many factors,
including:
●
demand
for our products;
●
pricing
decisions, and those of our competitors, including decisions to
increase or decrease prices;
●
regulatory
approvals for our products;
●
timing
and levels of spending for R&D, sales and
marketing;
●
timing
and market acceptance of new product introductions by us or our
competitors;
●
development
or expansion of business infrastructure in new clinical and
geographic markets;
●
tax
rates in the jurisdictions in which we operate;
●
shipping
delays or interruptions;
●
timing
and recognition of certain R&D milestones and license fees;
and
●
ability
to control our costs;
●
Our
stock price has been and may continue to be volatile.
Stock
price volatility may make it more difficult for our stockholders to
sell their common stock when they want and at prices they find
attractive. Our stock price can fluctuate significantly in response
to a variety of factors including, among other things:
●
actual or
anticipated variations in quarterly results of
operations;
●
recommendations by
securities analysts;
●
operating and stock
price performance of other companies that investors deem comparable
to the Company;
●
perceptions in the
marketplace regarding the Company and our competitors;
●
new technology
used, or services offered, by competitors;
●
trading by funds
with high-turnover practices or strategies;
●
significant
acquisitions or business combinations, strategic partnerships,
joint ventures or capital commitments by or involving the Company
or our competitors;
●
failure to
integrate acquisitions or realize anticipated benefits from
acquisitions;
●
our stock
repurchase program;
●
changes in
government regulations; and
●
geopolitical
conditions such as acts or threats of terrorism or military
conflicts.
Additionally, our
public float is small which can result in large fluctuations in
stock price during periods with increased selling or buying
activity. General market fluctuations, industry factors and general
economic and political conditions and events, such as economic
slowdowns or recessions, interest rate changes or credit loss
trends, could also cause our stock price to decrease regardless of
operating results.
●
We
continue to evaluate expansion through acquisitions of, and
investments in, other companies or technologies, which may carry
significant risks.
If
we pursue acquisitions of, or investments in, other companies or
technologies, we may:
●
Use cash that we
may need in the future to operate our business;
●
Incur debt,
including on terms that could be unfavorable to us or debt that we
might be unable to repay;
●
Structure the
transaction in a manner that has unfavorable tax consequences, such
as a stock purchase that does not permit a step-up in the tax basis
for the assets acquired;
●
Be unable to
realize the anticipated benefits, such as increased revenues, cost
savings, or synergies from additional sales;
●
Be unable to
integrate, upgrade, or replace the purchasing, accounting,
financial, sales, billing, employee benefits, payroll, and
regulatory compliance functions of an acquisition
target;
●
Be unable to secure
or retain the services of key employees related to the
acquisition;
●
Be unable to
succeed in the marketplace with the acquisition; or
●
Assume material
unknown liabilities associated with the acquired
business.
Any
of the above risks, should they occur, could materially, adversely
affect our revenues, financial condition, profitability, and cash
flows, including the inability to recover our investment or cause a
write down or write off of such investment, associated goodwill, or
assets.
●
If
we make divestitures, we could encounter difficulties that harm our
business.
We
may sell a business or product line. Any divestiture may result in
significant write-offs, which could have a material adverse effect
on our business, financial condition or results of operations.
Divestitures could also involve additional risks, including
difficulties in separation of operations, services and personnel,
the diversion of management’s attention from other operations
and the potential loss of key personnel.
●
The enactment of tax reform legislation could materially impact our
financial position and results of operations.
Legislation
or other changes in tax laws could materially affect our financial
position and results of operation. For example, the Tax Act was
enacted in the United States on December 22, 2017. Among other
changes, the Tax Act reduces the United States corporate statutory
tax rate and eliminates, limits or adds certain deductions.
Further, the Tax Act is unclear in certain respects and will
require interpretations and implementing regulations by the
Internal Revenue Service, as well as state tax authorities, and
could be subject to amendments and technical corrections, any of
which could lessen or increase the impact of the Tax Act. The tax
and accounting treatment of the changes under the Tax Act are
complex, and some of the changes as well as other tax reform
legislation may affect both current and future periods. In the
ordinary course of our business, there are many transactions and
calculations where tax determinations may be uncertain. There can
be no assurance that our tax positions will not be challenged by
relevant tax authorities or that we would be successful in any such
challenge, which could result in additional taxation, penalties and
interest payments.
●
If
we fail to manage our exposure to market risk and credit risk
successfully, our financial condition could be adversely
impacted.
We
have exposure to market risk and credit risk in our investment
activities. The fair values of our investments vary from time to
time depending on economic and market conditions. Fixed income
securities expose us to interest rate risk as well as credit risk.
Equity securities expose us to equity price risk. Interest rates
are highly sensitive to many factors, including governmental
monetary policies and domestic and international economic and
political conditions. These and other factors also affect the
equity securities owned by us. The outlook of our investment
portfolio depends on the future direction of interest rates,
fluctuations in the equity securities market and the amount of cash
flows available for investment. Our investments may decline in
value in future periods, which could have a material adverse effect
on our financial condition.
●
Provisions
in our governing documents and Delaware law may discourage or
prevent a change of control, which could cause our stock price to
decline and prevent attempts by our stockholders to replace or
remove our current management.
Our
certificate of incorporation and bylaws contain provisions that may
discourage, delay or prevent a change in the ownership of the
Company or a change in our management. We are also subject to the
provisions of Section 203 of the Delaware General Corporation Law,
which may prohibit certain business combinations with stockholders
owning 15 percent or more of our outstanding common stock. Although
a delay or prevention of a change of control transaction or of
changes in our Board of Directors could be effective in improving
stockholder value, they also carry a risk of causing the market
price of our common stock to decline.
UNRESOLVED
STAFF COMMENTS.
None.
We own
three facilities comprising approximately 398,000 square feet, and
the 139 acres on which they are situated, in Texas, Alabama and
Florida. Administrative, engineering, manufacturing and warehouse
operations are conducted at each facility, and our corporate
headquarters are located at our Texas
facility.
We have
no pending legal proceedings of the type described in Item 103 of
Regulation S-K.
Not
applicable.
Executive Officers of the Company
|
Name
|
|
Age
|
|
Title
|
|
Emile A
Battat
|
|
80
|
|
Chairman
of the Board of the Company and Chairman of the Board of
Halkey-Roberts Corporation, or Halkey-Roberts, one of our
subsidiaries
|
|
|
|
|
|
|
|
David
A. Battat
|
|
49
|
|
President
and Chief Executive Officer of the Company, President of
Halkey-Roberts and Chairman of the Board of all other
subsidiaries
|
|
|
|
|
|
|
|
Jeffery
Strickland
|
|
60
|
|
Vice
President and Chief Financial Officer, Secretary and Treasurer of
the Company and Vice President or Secretary-Treasurer of all
subsidiaries
|
Messrs.
David Battat and Strickland currently serve as officers of the
Company and all subsidiaries. Mr. Emile Battat currently serves as
an officer of the Company. The officers of the Company and our
subsidiaries are elected annually by the respective Boards of
Directors of the Company and our subsidiaries at the first meeting
of such Boards of Directors held after the annual meetings of
stockholders of such entities. The next meetings of the
stockholders of the Company and our subsidiaries are expected to be
held in May 2019 and the Boards of Directors of the Company and our
subsidiaries are expected to meet promptly thereafter. Accordingly,
the terms of office of the current officers of the Company and our
subsidiaries are anticipated to expire in May 2019.
There
are no arrangements or understandings between any officer and any
other person pursuant to which the officer was elected. The only
family relationship between any of our executive officers or
directors is that Mr. David Battat is the son of Mr. Emile
Battat.
There
have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the
evaluation of the ability and integrity of any executive officers
during the past ten years.
Brief Account of Business Experience During the Past Five
Years
Mr.
Emile Battat has been a director of the Company since 1987 and has
served as Chairman of the Board of the Company since January 1998.
He has served as Chairman of the Board of Halkey-Roberts since
October 1998. He served as Chief Executive Officer of the Company
and Chairman of the Board or President of all subsidiaries from
October 1998 until May 2011.
Mr.
David Battat has been President and Chief Executive Officer of the
Company and Chairman of the Board of all subsidiaries with the
exception of Halkey-Roberts, Atrion Leasing Company, LLC and
AlaTenn Pipeline Company, LLC, since May 2011. He has been
President of Halkey-Roberts since January 2006. He also serves as
President of Atrion Leasing Company, LLC and AlaTenn Pipeline
Company, LLC. He served as the Company’s President and Chief
Operating Officer from May 2007 until May 2011 and from February
2005 until December 2005 he served as Vice President - Business
Development and General Counsel at Halkey-Roberts.
Mr.
Strickland has served as Vice President and Chief Financial
Officer, Secretary and Treasurer of the Company since February 1,
1997 and has served as a Vice President, Secretary or Treasurer of
all the Company’s subsidiaries since January 1997. Mr.
Strickland was employed by the Company or our subsidiaries in
various other positions from September 1983 through January
1997.
PART II
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our
common stock is traded on the NASDAQ Global Select Market (Symbol
ATRI). As of February 13, 2019, we had 115 record holders, and
6,100 beneficial owners, of our common stock. We are currently
paying quarterly cash dividends on our common stock and expect to
continue paying quarterly cash dividends in the
future.
During
the year ended December 31, 2018, we did not sell any equity
securities that were not registered under the Securities Act of
1933 and during the fourth quarter of 2018 we did not purchase any
of our common stock.
The
stock performance graph set forth in our 2018 Annual Report to
Stockholders is incorporated by reference herein and is
included in Exhibit 13.1 to this Form 10-K. However, the
stock performance graph is not to be deemed to be “soliciting
material” or to be “filed” with the SEC or
subject to the liabilities of Section 18 under the Securities
Exchange Act of 1934. In addition, the stock performance graph
shall not be deemed incorporated by reference by any statement that
incorporates this Form 10-K by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent that we specifically incorporate this
information by reference.
Selected Financial Data
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
Operating Results
for the Year ended December 31,
|
|
|
|
|
|
|
Revenues
|
$152,448
|
$146,595
|
$143,487
|
$145,733
|
$140,762
|
|
Operating
income
|
41,707
|
41,274
|
39,126
|
42,510
|
40,817
|
|
Net
income
|
34,255
|
36,593
|
27,581
|
28,925
|
27,808
|
|
Depreciation and
amortization
|
9,123
|
8,677
|
8,953
|
8,823
|
8,723
|
|
Per Share
Data:
|
|
|
|
|
|
|
Net income per
diluted share
|
$18.44
|
$19.71
|
$14.85
|
$15.47
|
$14.08
|
|
Cash dividends per
common share
|
$5.10
|
$4.50
|
$3.90
|
$3.30
|
$2.78
|
|
Average diluted
shares outstanding
|
1,858
|
1,857
|
1,857
|
1,870
|
1,975
|
|
Financial Position
at December 31,
|
|
|
|
|
|
|
Total
assets
|
$231,216
|
$203,780
|
$181,942
|
$164,336
|
$171,514
|
|
Long-term
debt
|
-
|
-
|
-
|
-
|
-
|
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 valves and inflation devices used in marine and
aviation safety products. In 2018, approximately 37 percent of our
sales were outside the United States.
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
strategy is to provide a broad selection of products in the areas
of our expertise. 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:
●
Focusing on
customer needs;
●
Expanding existing
product lines and developing new products;
●
Maintaining a
culture of controlling cost; and
●
Preserving and
fostering a collaborative, entrepreneurial management
structure.
For the
year ended December 31, 2018, we reported revenues of $152.5
million, operating income of $41.7 million and net income of $34.3
million.
Results of Operations
Our net
income was $34.3 million, or $18.49 per basic and $18.44 per
diluted share, in 2018 compared to $36.6 million, or $19.82 per
basic and $19.71 per diluted share, in 2017 and net income of $27.6
million, or $15.12 per basic and $14.85 per diluted share, in 2016.
Revenues were $152.5 million in 2018 compared with $146.6 million
in 2017 and $143.5 million in 2016. The four percent revenue
increase in 2018 over 2017 was generally attributable to higher
sales volumes. Our 2016 revenues were negatively impacted by the
strong U. S. dollar in our international markets and lower sales
prices in certain markets.
Annual
revenues by product lines were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Fluid
Delivery
|
$70,606
|
$65,053
|
$60,889
|
|
Cardiovascular
|
50,904
|
48,073
|
47,064
|
|
Ophthalmology
|
10,473
|
13,537
|
15,427
|
|
Other
|
20,465
|
19,932
|
20,107
|
|
Total
|
$152,448
|
$146,595
|
$143,487
|
Although
we have experienced decreasing revenues from sales of ophthalmic
products over the last three years, we expect revenues from those
products to remain at approximately the 2018 level for at least
2019.
Our
cost of goods sold was $80.7 million in 2018, $75.8 million in 2017
and $75.9 million in 2016. Increased sales volumes and an
unfavorable product sales mix partially offset by improved
manufacturing efficiencies and the impact of continued cost
improvement projects were the primary contributors to the increase
in cost of goods sold in 2018 compared to 2017. A favorable product
sales mix, improved manufacturing efficiencies and the impact of
continued cost improvement projects partially offset by higher
sales volumes were the primary contributors to the decrease in cost
of goods sold in 2017 compared to 2016.
Gross
profit in 2018 was $71.8 million compared with $70.8 million in
2017 and $67.6 million in 2016. Our gross profit was 47 percent of
revenues in 2018, 48 percent of revenues in 2017 and 47 percent of
revenues in 2016. The decrease in gross profit percentage in 2018
from 2017 was primarily related to an unfavorable product mix. The
increase in gross profit percentage in 2017 from 2016 was primarily
related to increased revenues and a favorable product sales
mix.
Operating
expenses were $30.1 million in 2018, $29.5 million in 2017 and
$28.5 in 2016. R&D expenses decreased $286,000 in 2018 as
compared with 2017 primarily as a result of decreased costs for
outside services and supplies partially offset by increased
compensation costs. R&D expenses consist primarily of salaries
and other related expenses of our R&D personnel as well as
costs associated with regulatory matters. In 2018, selling expenses
increased $1.1 million as compared with 2017 primarily as a result
of increased commissions, outside services, compensation and travel
costs. Selling expenses consist primarily of salaries, commissions
and other related expenses for sales and marketing personnel,
marketing, advertising and promotional expenses. General and
Administrative, or G&A, expenses decreased $213,000 in 2018 as
compared to 2017 primarily as a result of decreased compensation
and compensation related costs partially offset by increased
outside services and increased computer hardware and software
costs.
G&A
expenses consist primarily of salaries and other related expenses
of administrative, executive and financial personnel and outside
professional fees.
R&D
expenses decreased $775,000 in 2017 as compared with 2016 primarily
as a result of decreased costs for outside services and supplies.
In 2017, selling expenses increased $640,000 as compared with 2016
primarily as a result of increased commissions, outside services,
compensation and travel costs. G&A expenses increased $1.1
million in 2017 as compared to 2016 primarily as a result of
increased compensation and compensation related costs and increased
outside services partially offset by reduced depreciation,
amortization and travel costs.
Our
operating income for 2018 was $41.7 million compared with $41.3
million in 2017 and $39.1 million in 2016. Operating income was 27
percent of revenues in 2018, 28 percent of revenues for 2017 and 27
percent of revenues for 2016. An increase in 2018 gross profit
partially offset by increased operating expenses was the major
contributor to the increase in operating income for 2018 as
compared to the previous year. The increase in 2017 gross profit
was the major contributor to the increase in operating income for
2017 as compared to the previous year.
Interest
and Dividend income for 2018 was $1.7 million compared with $1.1
million in 2017 and $448,000 in 2016. Increased levels of
investments, increased interest rates and increased dividends on
our equity investments were the primary reason for the increases in
both 2018 and 2017 as compared to the previous years.
Other
Investment Loss in 2018 of $1.4 million was primarily related to an
unrealized loss on an equity investment as a result of a drop in
the market value on this investment. Other Investment Loss in 2016
was primarily related to a $311,000 impairment loss on one of our
long-term corporate bonds which experienced a significant decline
in market value.
Income
tax expense in 2018 totaled $7.8 million, compared with $5.7
million in 2017 and $11.7 million in 2016. The effective tax rates
for 2018, 2017 and 2016 were 18.5 percent, 13.6 percent and 29.8
percent, respectively. The Tax Act reduced the corporate federal
income tax rate in the United States from 35% to 21% effective for
us on January 1, 2018. This rate reduction reduced our net deferred
tax liability, including adjustments to our net state deferred tax
liabilities, by $4.1 million as of December 31, 2017. Based upon
this tax law enactment, we recorded a corresponding benefit in our
income tax provision of $4.1 million for the fourth quarter and the
full year of 2017. Also, in the fourth quarter of 2017 we recorded
a valuation allowance of $609,000 to reduce our deferred tax assets
which partially offset the benefit recorded in our income tax
provision from the tax law change in 2017. We recorded excess tax
benefits related to employee stock compensation of $95,000, $5.8
million and $687,000 for the years ended December 31 2018, 2017 and
2016, respectively. Benefits from R&D tax credits totaled $1.2
million in 2018, $1.0 million in 2017 and $1.1 million in 2016.
Benefits from tax incentives for domestic production totaled
$630,000 in 2017 and $1.2 million in 2016. The Tax Act ended the
domestic production activities deduction under Section 199 for
2018. The Tax Act added a new deduction starting in 2018 for
foreign-derived intangible income under Section 250 which created a
tax benefit for us in 2018 of $1.0 million. Charges from changes in
uncertain tax positions totaled $865,000 in 2017. Benefits from
changes in uncertain tax positions totaled $373,000 in 2018 and
$120,000 in 2016. Charges for state income taxes totaled $1.6
million in 2018, $662,000 in 2017 and $730,000 in 2016. We expect
our effective tax rate for 2019 to be approximately 20.0 percent.
Accounting for stock based awards could create volatility in our
effective tax rate depending upon the extent of exercise or vesting
activity.
Liquidity and Capital Resources
As of
December 31, 2018 we had a $75.0 million revolving credit facility
with a money center bank pursuant to which the lender is obligated
to make advances until February 28, 2022. This credit facility,
entered into on February 28, 2017, replaced a $40.0 million
revolving credit facility with the same bank which was in place for
several years prior to that date. The credit facility is secured by
substantially all 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 .875
percent (3.38 percent at December 31, 2018) and is payable monthly.
We had no outstanding borrowings under the credit facility at
December 31, 2018 or December 31, 2017. Our ability to borrow funds
under the credit facility from time to time is contingent on
meeting certain covenants in the loan agreement, the most
restrictive of which is the ratio of total debt to earnings before
interest, income tax, depreciation and amortization. At December
31, 2018, we were in compliance with all of these
covenants.
At
December 31, 2018, we had a total of $89.5 million in cash and cash
equivalents, short-term investments and long-term investments, an
increase of $14.7 million from December 31, 2017. The principal
contributor to this increase was positive cash flows resulting from
operations.
Cash
flows provided by operations of $43.2 million in 2018 were
primarily comprised of net income plus the net effect of non-cash
expenses. At December 31, 2018, we had working capital of $112.1
million, including $58.8 million in cash and cash equivalents and
$9.7 million in short-term investments. The $6.4 million increase
in working capital during 2018 was primarily related to increases
in cash and inventories partially offset by decreases in short-term
investments. The net increase in cash and short-term investments
was primarily a result of operational results partially offset by
purchases of property, plant and equipment and payment of
dividends. Working capital items consisted primarily of cash,
accounts receivable, short-term investments, inventories and other
current assets minus accounts payable and other current
liabilities.
Capital
expenditures for property, plant and equipment totaled $17.5
million in 2018, compared with $9.7 million in 2017 and $10.6
million in 2016. These expenditures were primarily for machinery
and equipment. Purchases of investments totaled $28.5 million in
2018, compared to $69.2 million in 2017 and $30.8 million in 2016.
Proceeds from maturities of investments totaled $40.9 million in
2018, $58.0 million in 2017 and $5.0 million in 2016. We expect
2019 capital expenditures, primarily machinery and equipment, to be
greater than the average of the levels expended during each of the
past three years.
We paid
cash dividends totaling $9.5 million, $8.3 million and $7.1 million
during 2018, 2017 and 2016, respectively. We expect to fund future
dividend payments with cash flows from operations. We purchased
treasury stock totaling $1.3 million during 2016. No treasury stock
was purchased in 2018 or 2017.
The
table below summarizes debt, lease and other contractual
obligations outstanding at December 31, 2018:
|
|
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
Purchase
Obligations
|
$1,915
|
$1,915
|
$-
|
|
Total
|
$1,915
|
$1,915
|
$-
|
We
believe our cash, cash equivalents, short-term investments and
long-term investments, 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. We believe our strong financial position would
allow us to access equity or debt financing should that be
necessary. Additionally, we expect our cash and cash equivalents
and investments, as a whole, will continue to increase in
2019.
Off-Balance Sheet Arrangements
We have
no off-balance sheet financing arrangements.
Impact of Inflation
We
experience the effects of inflation primarily in the prices we pay
for labor, materials and services. Over the last three years, we
have experienced the effects of moderate inflation in these costs.
At times, we have been able to offset a portion of these increased
costs by increasing the sales prices of our products. However,
competitive pressures have not allowed for full recovery of these
cost increases.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2014-09, Revenue from Contracts
with Customers, also known as ASC 606. This new standard requires
an entity to recognize the amount of revenue to which it expects to
be entitled for the transfer of promised goods or services to
customers. ASC 606 replaced most existing revenue recognition
guidance in United States Generally Accepted Accounting Principles
when it became effective for fiscal years beginning after December
15, 2017. We adopted the new standard on January 1, 2018, using the
full retrospective method. Because accounting for revenue from
contracts with customers did not materially change for us under the
new standard, prior period consolidated financial statements did
not require adjustment.
On February 25, 2016 the FASB issued ASU 2016-02, Leases (ASC
842). The main objective of this standard is to recognize
lease assets and lease liabilities on the balance sheet and
disclose key information about leasing arrangements. This
leasing standard requires lessees to recognize a right of use asset
and lease liability on the balance sheet. Lessor accounting is
updated to align with certain changes in the lessee model and the
new revenue recognition standard (ASC 606). We elected to
early adopt this standard as of January 1, 2018, using the modified
retrospective approach as required. The impact of this change on
our consolidated financial statements was not
material.
In July 2018, we adopted the practical expedient in ASU 2018-11 -
Leases: Targeted Improvements which allows lessors to combine lease
and non-lease components into a single performance obligation. If
the non-lease components are the predominant component of the
combined contract, ASU 2018-11 also allows for these agreements to
be accounted for under ASC 606 rather than as leases under ASC 842.
The impact of this change on our consolidated financial statements
was not material.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments
- Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities. The main objective of
this update is to enhance the reporting model for financial
instruments in order to provide users of financial statements with
more decision-useful information. Changes to the previous guidance
primarily affect the accounting for equity investments, financial
liabilities under the fair value option, and the presentation and
disclosure requirements for financial instruments.
The primary impact of this change for us relates to our
available-for-sale equity investments and resulted in unrecognized
gains and losses from our investments being reflected in our
Consolidated Statement of Income beginning in 2018. We
adopted ASU 2016-01 as of January 1, 2018, applying the update by
means of a cumulative-effect adjustment to the balance sheet by
reclassifying the balance of our Accumulated Other Comprehensive
Loss in the shareholders’ equity section of the balance sheet
to Retained Earnings. The balance reclassified of $1,215,000
was a result of prior-period unrealized losses from our equity
investments.
In 2018 we recorded an additional loss on our equity investments of
$1,399,000 as a result of a decrease in the market value of these
investments during the year. This loss is reflected in other
investment income (loss) in our Consolidated Statement of Income.
This change in accounting is expected to create greater volatility
in our investment income each quarter in the future.
In March 2017, the FASB issued ASU 2017-08, Receivables –
Non-refundable Fees and Other Costs (Subtopic 310-20). The main
objective of this update is to shorten the period of amortization
of the premium on certain callable debt securities to the earliest
call date. However, the update does not require an accounting
change for securities held at a discount; the discount continues to
be amortized to maturity. The update is effective for annual
periods beginning after December 15, 2018, including interim
periods within those annual periods. We elected to early adopt this
update as of January 1, 2018. None of our investments in 2017 and
2016 had any premium paid, so no adjustments were needed for
prior-period activity. The impact of this change on our
consolidated financial statements was not material.
From time to time, new accounting pronouncements applicable to us
are issued by the FASB, or other standards setting bodies, which we
will adopt as of the specified effective date. Unless otherwise
discussed, we believe the impact of recently issued standards that
are not yet effective will not have a material impact on our
consolidated financial statements upon adoption.
Critical Accounting Policies
The
discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States. In the preparation of
these financial statements, we make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and
liabilities. We believe the following discussion addresses our most
critical accounting policies and estimates, which are those that
are most important to the portrayal of our financial condition and
results and require management's most difficult, subjective and
complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Actual
results could differ significantly from those estimates under
different assumptions and conditions.
From
time to time, we accrue legal costs associated with certain
litigation. In making determinations of likely outcomes of
litigation matters, we consider the evaluation of legal counsel
knowledgeable about each matter, case law and other case-specific
issues. We believe these accruals are adequate to cover the legal
fees and expenses associated with litigating these matters.
However, the time and cost required to litigate these matters as
well as the outcomes of the proceedings may vary significantly from
what we have projected.
We
maintain an allowance for doubtful accounts to reflect estimated
losses resulting from the failure of customers to make required
payments. On an ongoing basis, the collectability of accounts
receivable is assessed based upon historical collection trends,
current economic factors and the assessment of the collectability
of specific accounts. We evaluate the collectability of specific
accounts and determine when to grant credit to our customers using
a combination of factors, including the age of the outstanding
balances, evaluation of customers’ current and past financial
condition, recent payment history, current economic environment,
and discussions with our personnel and with the customers directly.
Accounts are written off when it is determined the receivable will
not be collected. If circumstances change, our estimates of the
collectability of amounts could be changed by a material
amount.
We are
required to estimate our provision for income taxes and uncertain
tax positions in each of the jurisdictions in which we operate.
This process involves estimating our actual current tax exposure,
including assessing the risks associated with tax audits, together
with assessing temporary differences resulting from the different
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within the balance sheet. We assess the likelihood
that our deferred tax assets will be recovered from future taxable
income and, to the extent we believe that recovery is more likely
than not, do not establish a valuation allowance. In the event that
actual results differ from these estimates, the provision for
income taxes could be materially impacted.
We
assess the impairment of our long-lived identifiable assets,
excluding goodwill which is tested for impairment as explained
below, whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. This review is based
upon projections of anticipated future cash flows. Although we
believe that our estimates of future cash flows are reasonable,
different assumptions regarding such cash flows or changes in our
business plan could materially affect our evaluations. No such
changes are anticipated at this time.
We
assess goodwill for impairment pursuant to Accounting Standards
Codification, or ASC 350, Intangibles—Goodwill and Other, which requires that goodwill
be assessed on an annual basis, or whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable, by applying a qualitative assessment on goodwill
impairment to determine whether it is necessary to perform the
two-step goodwill impairment test.
We
assess the total carrying value for each of our investments on a
quarterly basis for changes in circumstances or the occurrence of
events that suggest our investment may not be recoverable. If an
investment is considered impaired, we must determine whether the
impairment is other than temporary. If it is determined to be other
than temporary, the impairment must be recognized in our financial
statements.
During
2018, 2017 and 2016, none of our critical accounting estimates
required significant adjustments. We did not note any material
events or changes in circumstances indicating that the carrying
value of long-lived assets were not recoverable.
Quantitative and Qualitative Disclosures About Market
Risks
Foreign Exchange Risk
We are not exposed to material fluctuations in currency exchange
rates that would result in realized gains or losses being reflected
in the consolidated statements of income because the payments from
our international customers are received primarily in United States
dollars.
However, fluctuations in exchange rates may affect the prices that
our international customers are willing to pay and may put us at a
price disadvantage compared to other customers. Increases in the
value of the United States dollar relative to foreign currencies
could make our products less competitive or less affordable and
therefore adversely affect our sales in international
markets.
Market Risk and Credit Risk
The Company’s cash and cash equivalents are held in accounts
with financial institutions that we believe are creditworthy.
Certain of these accounts at times may exceed federally-insured
limits. We have not experienced any credit losses in such accounts
and do not believe we are exposed to any significant credit risk on
these funds.
We have investments in commercial paper and corporate and
government bonds. As a result, we are exposed to potential loss
from market risks that may occur as a result of changes in interest
rates, changes in credit quality of the issuer and otherwise. These
securities have a higher degree of, and a greater exposure to,
credit or default risk and may be less liquid in times of economic
weakness or market disruptions. We have also invested a portion of
our available funds in equity securities and mutual funds. The
value of these securities fluctuates due to changes in the equity
and credit markets along with other factors. In times of economic
weakness, the market value and liquidity of these assets may
decline and may negatively impact our financial
condition.
Forward-looking Statements
Statements
in this Management’s Discussion and Analysis and elsewhere in
this Form 10-K 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 R&D program in 2019, our ability to continue operations in
the event of a supply disruption, our effective tax rate for 2019,
the impact of the restrictive covenants in our credit facility on
our liquidity and capital resources, our earnings in 2019, our 2019
capital expenditures, future dividend payments, funding future
dividend payments with cash flows from operations, availability of
equity and debt financing, our ability to meet our cash
requirements for the foreseeable future, the impact on our
consolidated financial statement of recently issued accounting
standards when we adopt those standards, and increases in 2019 in
cash, cash equivalents and investments. 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:
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 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 Form 10-K 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.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
Report
of Independent Registered Public Accounting Firm
Board
of Directors and Stockholders
Atrion
Corporation
Opinion
on the consolidated financial statements
We have
audited the accompanying consolidated balance sheets of Atrion
Corporation (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2018 and 2017, and the
related consolidated statements of income, comprehensive income,
changes in stockholders’ equity, and cash flows for each of
the three years in the period ended December 31, 2018, and the
related notes and the schedule included under Item 15(a)
(collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as
of December 31, 2018 and 2017, and the results of its operations
and its cash flows for each of the three years in the period ended
December 31, 2018, in conformity with accounting principles
generally accepted in the United States of America.
We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over
financial reporting as of December 31, 2018, based on criteria
established in the 2013 Internal
Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated February 26,
2019 expressed an
unqualified opinion.
Basis
for opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ GRANT THORNTON LLP
We have
served as the Company’s auditor since 2002.
Dallas,
Texas
February 26,
2019
ATRION
CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
For the
year ended December 31, 2018, 2017 and 2016
|
|
|
|
|
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
Revenues
|
$152,448
|
$146,595
|
$143,487
|
|
Cost of Goods
Sold
|
80,670
|
75,841
|
75,857
|
|
Gross
Profit
|
71,778
|
70,754
|
67,630
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
Selling
|
8,341
|
7,251
|
6,611
|
|
General and
administrative
|
16,217
|
16,430
|
15,319
|
|
Research and
development
|
5,513
|
5,799
|
6,574
|
|
|
30,071
|
29,480
|
28,504
|
|
|
|
|
|
|
Operating
Income
|
41,707
|
41,274
|
39,126
|
|
|
|
|
|
|
Interest and
Dividend Income
|
1,667
|
1,061
|
448
|
|
Other Investment
Income (Loss)
|
(1,380)
|
4
|
(311)
|
|
Other Income
(Expense), net
|
42
|
1
|
3
|
|
Income before
Provision for Income Taxes
|
42,036
|
42,340
|
39,266
|
|
|
|
|
|
|
Provision for
Income Taxes
|
(7,781)
|
(5,747)
|
(11,685)
|
|
|
|
|
|
|
Net
Income
|
$34,255
|
$36,593
|
$27,581
|
|
|
|
|
|
|
Net Income Per
Basic Share
|
$18.49
|
$19.82
|
$15.12
|
|
|
|
|
|
|
Weighted Average
Basic Shares Outstanding
|
1,853
|
1,846
|
1,824
|
|
|
|
|
|
|
Net Income Per
Diluted Share
|
$18.44
|
$19.71
|
$14.85
|
|
|
|
|
|
|
Weighted Average
Diluted Shares Outstanding
|
1,858
|
1,857
|
1,857
|
|
|
|
|
|
|
Dividends Per
Common Share
|
$5.10
|
$4.50
|
$3.90
|
The
accompanying notes are an integral part of these
statements.
ATRION
CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
For the
year ended December 31, 2018, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
$34,255
|
$36,593
|
$27,581
|
|
|
|
|
|
|
Other Comprehensive
Loss, net of tax:
Unrealized
Loss on investments, net of tax
benefits
of $68 and $408 in 2017 and 2016, respectively
|
--
|
(741)
|
(757)
|
|
|
|
|
|
|
Comprehensive
Income
|
$34,255
|
$35,852
|
$26,824
|
The
accompanying notes are an integral part of these
statements.
ATRION
CORPORATION
CONSOLIDATED
BALANCE SHEETS
As of
December 31, 2018 and 2017
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash and cash
equivalents
|
$58,753
|
$30,136
|
|
Short-term
investments
|
9,684
|
35,468
|
|
Accounts
receivable, net of allowance for doubtful accounts of $21 and $28
in 2018 and 2017, respectively
|
17,014
|
17,076
|
|
Inventories
|
33,572
|
29,354
|
|
Prepaid expenses
and other current assets
|
3,242
|
3,199
|
|
Total Current
Assets
|
122,265
|
115,233
|
|
|
|
|
|
Long-term
investments
|
21,048
|
9,136
|
|
|
|
|
|
|
|
|
|
Property, Plant and
Equipment
|
181,582
|
167,080
|
|
Less: accumulated
depreciation
|
106,689
|
100,711
|
|
|
74,893
|
66,369
|
|
|
|
|
|
|
|
|
|
Other Assets and
Deferred Charges:
|
|
|
|
Patents and
licenses, net of accumulated amortization of $12,181 and $12,062 in
2018 and 2017, respectively
|
1,659
|
1,778
|
|
Goodwill
|
9,730
|
9,730
|
|
Other
|
1,621
|
1,534
|
|
|
13,010
|
13,042
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
$231,216
|
$203,780
|
The accompanying
notes are an integral part of these statements.
ATRION
CORPORATION
CONSOLIDATED
BALANCE SHEETS
As of
December 31, 2018 and 2017
|
Liabilities and
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
$5,082
|
$3,929
|
|
Accrued
liabilities
|
4,519
|
4,947
|
|
Accrued income and
other taxes
|
619
|
746
|
|
Total Current
Liabilities
|
10,220
|
9,622
|
|
|
|
|
|
|
|
|
|
Line of
credit
|
--
|
--
|
|
|
|
|
|
|
|
|
|
Other Liabilities
and Deferred Credits:
|
|
|
|
Deferred income
taxes
|
6,687
|
7,312
|
|
Other
|
3,542
|
2,458
|
|
|
10,229
|
9,770
|
|
|
|
|
|
Total
Liabilities
|
20,449
|
19,392
|
|
|
|
|
|
Commitments and
Contingencies
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
Common stock, par
value $.10 per share, authorized 10,000 shares, issued 3,420
shares
|
342
|
342
|
|
Additional paid-in
capital
|
50,391
|
48,730
|
|
Accumulated other
comprehensive loss
|
--
|
(1,215)
|
|
Retained
earnings
|
291,761
|
268,194
|
|
Treasury shares,
1,567 shares in 2018 and 1,568 shares in 2017, at cost
|
(131,727)
|
(131,663)
|
|
Total
Stockholders’ Equity
|
210,767
|
184,388
|
|
|
|
|
|
|
|
|
|
Total Liabilities
and Stockholders’ Equity
|
$231,216
|
$203,780
|
The accompanying
notes are an integral part of these statements.
ATRION
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the
year ended December 31, 2018, 2017 and 2016
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
Net
income
|
$34,255
|
$36,593
|
$27,581
|
|
Adjustments to
reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
Depreciation and
amortization
|
9,123
|
8,677
|
8,953
|
|
Deferred income
taxes
|
(625)
|
(1,374)
|
(247)
|
|
Stock-based
compensation
|
1,659
|
1,602
|
1,566
|
|
Net change in
unrealized gains and losses on investments
|
1,399
|
--
|
345
|
|
Net change in
accrued interest, premiums, and discounts on
investments
|
47
|
(195)
|
(37)
|
|
Other
|
(18)
|
49
|
--
|
|
|
45,840
|
45,352
|
38,161
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
Accounts
receivable
|
62
|
88
|
(546)
|
|
Inventories
|
(4,218)
|
(339)
|
756
|
|
Prepaid expenses
and other current assets
|
(43)
|
(18)
|
(247)
|
|
Other non-current
assets
|
(87)
|
75
|
(673)
|
|
Accounts payable
and accrued liabilities
|
725
|
213
|
(324)
|
|
Accrued income and
other taxes
|
(127)
|
336
|
81
|
|
Other non-current
liabilities
|
1,084
|
1,330
|
195
|
|
|
43,236
|
47,037
|
37,403
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
Property, plant and
equipment additions
|
(17,507)
|
(9,677)
|
(10,639)
|
|
Purchase of
investments
|
(28,472)
|
(69,193)
|
(30,799)
|
|
Proceeds
from sale of investments
|
--
|
--
|
210
|
|
Proceeds from
maturities of investments
|
40,898
|
58,000
|
5,000
|
|
|
(5,081)
|
(20,870)
|
(36,228)
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
Shares tendered for
employees’ withholding taxes on stock-based
compensation
|
(90)
|
(7,735)
|
(1,112)
|
|
Purchase of
treasury stock
|
--
|
--
|
(1,276)
|
|
Dividends
paid
|
(9,448)
|
(8,318)
|
(7,111)
|
|
|
(9,538)
|
(16,053)
|
(9,499)
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
28,617
|
10,114
|
(8,324)
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
30,136
|
20,022
|
28,346
|
|
Cash
and cash equivalents, end of year
|
$58,753
|
$30,136
|
$20,022
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
Income taxes, net
of refunds
|
$9,858
|
$4,959
|
$10,750
|
|
|
|
|
|
|
Non-cash
financing activities:
|
|
|
|
|
Non-cash effect of
stock option exercises
|
$--
|
$10,237
|
$-
|
The accompanying
notes are an integral part of these statements.
ATRION
CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the
year ended December 31, 2018, 2017 and 2016
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in
Capital
|
Accumulated Other
Comprehensive Income (Loss)
|
|
|
|
Balances, January
1, 2016
|
1,824
|
$342
|
1,596
|
$(111,988)
|
$35,945
|
$283
|
$219,516
|
$144,098
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
27,581
|
27,581
|
|
Other
comprehensive income
|
|
|
|
|
|
(757)
|
|
(757)
|
|
Stock-based
compensation transactions
|
7
|
|
(7)
|
102
|
1,503
|
|
|
1,605
|
|
Shares
surrendered in stock transactions
|
(3)
|
|
3
|
(1,112)
|
|
|
|
(1,112)
|
|
Purchase
of treasury stock
|
(4)
|
|
4
|
(1,276)
|
|
|
|
(1,276)
|
|
Dividends
|
|
|
|
|
|
|
(7,151)
|
(7,151)
|
|
Balances, December
31, 2016
|
1,824
|
342
|
1,596
|
(114,274)
|
37,448
|
(474)
|
239,946
|
162,988
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
36,593
|
36,593
|
|
Other
comprehensive loss
|
|
|
|
|
|
(741)
|
|
(741)
|
|
Stock-based
compensation transactions
|
61
|
|
(61)
|
583
|
11,282
|
|
|
11,865
|
|
Shares
surrendered in stock transactions
|
(33)
|
|
33
|
(17,972)
|
|
|
|
(17,972)
|
|
Dividends
|
|
|
|
|
|
|
(8,345)
|
(8,345)
|
|
Balances, December
31, 2017
|
1,852
|
342
|
1,568
|
(131,663)
|
48,730
|
(1,215)
|
268,194
|
184,388
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
34,255
|
34,255
|
|
Reclass from
adopting ASU 2016-01
|
|
|
|
|
|
1,215
|
(1,215)
|
--
|
|
Stock-based
compensation transactions
|
1
|
|
(1)
|
26
|
1,661
|
|
|
1,687
|
|
Shares
surrendered in stock transactions
|
|
|
|
(90)
|
|
|
|
(90)
|
|
Dividends
|
|
|
|
|
|
|
(9,473)
|
(9,473)
|
|
Balances, December
31, 2018
|
1,853
|
$342
|
1,567
|
$(131,727)
|
$50,391
|
$0
|
$291,761
|
$210,767
|
The accompanying notes are an integral part of this
statement.
Atrion Corporation
Notes to Consolidated Financial Statements
(1)
Summary
of Significant Accounting Policies
Atrion
Corporation and its subsidiaries (“we,”
“our,” “us,” “Atrion” or the
“Company”) develop and manufacture products primarily
for medical applications. We market our products throughout the
United States and internationally. Our customers include
physicians, hospitals, distributors, and other manufacturers.
Atrion Corporation’s principal subsidiaries through which
these operations are conducted are Atrion Medical Products, Inc.,
Halkey-Roberts Corporation and Quest Medical, Inc.
Principles of Consolidation
The
consolidated financial statements include the accounts of Atrion
Corporation and its subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
Estimates
The
preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of
the financial statements and the reported amount of revenues and
expenses during the reporting periods. Actual results could differ
from those estimates.
Cash and Cash Equivalents and Investments
Cash
and cash equivalents include cash on hand and in the bank as well
as money market accounts and debt securities with maturities at the
time of purchase of 90 days or less.
Our
investments consist of corporate and government bonds, commercial
paper, mutual funds and equity securities. We classify our
investment securities in one of three categories: held-to-maturity,
available-for-sale, or trading. Securities that we have the
positive intent and ability to hold to maturity are reported at
amortized cost and classified as held-to-maturity
securities.
We
report our available-for-sale and trading securities at fair value
with changes in fair value recognized in other investment income
(loss) in the Consolidated Statement of Income. Prior to our
adoption of ASU 2016-01, Financial Instruments-Overall, Subtopic
825-10: Recognition and Measurement of
Financial Assets and Financial Liabilities (ASU 2016-01) in
January of 2018, unrealized gains and losses for our
available-for-sale securities were reported in stockholders’
equity as accumulated other comprehensive income.
We
consider as current assets those investments which will mature in
the next 12 months including interest receivable on long-term
bonds. The remaining investments are considered non-current assets
including our investment in equity securities which we intend to
hold longer than 12 months. We periodically evaluate our
investments for impairment.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
The
components of the Company’s cash and cash equivalents and our
short and long-term investments as of December 31, 2018 and 2017
are as follows (in thousands):
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
Cash
deposits
|
$24,670
|
$12,730
|
|
Money market
funds
|
30,965
|
17,406
|
|
Commercial
paper
|
3,118
|
--
|
|
Total cash and cash
equivalents
|
$58,753
|
$30,136
|
|
Short-term
investments:
|
|
|
|
Mutual funds
(trading)
|
$--
|
$222
|
|
Commercial paper
(held-to-maturity)
|
1,275
|
31,220
|
|
Certificates of
deposit (held-to-maturity)
|
--
|
4,020
|
|
Bonds
(held-to-maturity)
|
8,409
|
6
|
|
Total short-term
investments
|
$9,684
|
$35,468
|
|
Long-term
investments:
|
|
|
|
Mutual funds
(available for sale)
|
$674
|
$--
|
|
Bonds
(held-to-maturity)
|
17,513
|
5,000
|
|
Equity securities
(available for sale)
|
2,861
|
4,136
|
|
Total long-term
investments
|
$21,048
|
$9,136
|
|
Total
cash, cash equivalents and short and long-term
investments
|
$89,485
|
$74,740
|
Account Receivables
Accounts receivable
are recorded at the original sales price to the customer. We
maintain an allowance for doubtful accounts to reflect estimated
losses resulting from the failure of customers to make required
payments. The allowance for doubtful accounts is updated
periodically to reflect our estimate of collectability issues.
Accounts are written off when we determine the receivable will not
be collected.
Inventories
Inventories are
stated at the lower of cost (including materials, direct labor and
applicable overhead) or net realizable value. Cost is determined by
using the first-in, first-out method. The following table details
the major components of inventory (in thousands):
|
|
|
|
|
|
|
|
Raw
materials
|
$14,994
|
$13,545
|
|
Work in
process
|
7,214
|
6,647
|
|
Finished
goods
|
11,364
|
9,162
|
|
Total
inventories
|
$33,572
|
$29,354
|
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
Accounts Payable
We
reflect disbursements as trade accounts payable until such time as
payments are presented to our bank for payment. At December 31,
2018 and 2017, disbursements totaling approximately $388,000 and
$411,000, respectively, had not been presented for payment to our
bank.
Income Taxes
We
account for income taxes utilizing Accounting Standards
Codification (ASC 740), Income
Taxes, or ASC 740. ASC 740 requires the asset and liability
method for the recording of deferred income taxes, whereby deferred
tax assets and liabilities are recognized based on the tax effects
of temporary differences between the financial statement and the
tax bases of assets and liabilities, as measured at current enacted
tax rates. When appropriate, we evaluate the need for a valuation
allowance to reduce deferred tax assets.
ASC 740
also requires the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements and
prescribes a recognition threshold and measurement attributes of
income tax positions taken or expected to be taken on a tax return.
Under ASC 740, the impact of an uncertain tax position taken or
expected to be taken on an income tax return must be recognized in
the financial statements at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant
taxing authority. An uncertain income tax position will not be
recognized in the financial statements unless it is
more-likely-than-not of being sustained.
Our
uncertain tax positions are recorded within “Other
non-current liabilities” in the accompanying consolidated
balance sheet. We classify interest expense on underpayments of
income taxes and accrued penalties related to unrecognized tax
benefits in the income tax provision.
We
account for excess tax benefits (“windfalls”) and
deficiencies (“shortfalls”) related to employee stock
compensation as required by ASU 2016-09, Stock Compensation:
Improvements to Employee Share-Based Payment Accounting (ASU
2016-09), within income tax expense. An excess tax benefit is the
realized tax benefit related to the amount of deductible
compensation cost reported on an employer’s tax return for
equity instruments in excess of the compensation cost for those
instruments recognized for financial reporting
purposes.
During
the year ended December 31, 2018 we made quarterly payments in
excess of federal income taxes due of approximately $1,180,000.
This amount was recorded in prepaid expenses and other current
assets on our Consolidated Balance Sheet.
Property, Plant and Equipment
Property, plant and
equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the related assets.
Additions and improvements are capitalized, including all material,
labor and engineering costs to design, install or improve the
asset. Expenditures for repairs and maintenance are charged to
expense as incurred. The following table represents a summary of
property, plant and equipment at original cost (in
thousands):
|
|
|
|
|
|
|
|
|
|
Land
|
$5,511
|
$5,511
|
—
|
|
Buildings
|
32,719
|
32,461
|
|
|
Machinery and
equipment
|
143,352
|
129,108
|
|
|
Total property,
plant and equipment
|
$181,582
|
$167,080
|
|
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
Depreciation
expense of $9,003,000, $8,526,000 and $8,689,000 was recorded for
the years ended December 31, 2018, 2017 and 2016, respectively.
Depreciation expense is recorded in either cost of goods sold or
operating expenses based on the associated assets’
usage.
Patents and Licenses
Costs
for patents and licenses acquired are determined at acquisition
date. Patents and licenses are amortized over the useful lives of
the individual patents and licenses, which are from seven to 20
years. Patents and licenses are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable.
Goodwill
Goodwill represents
the excess of cost over the fair value of tangible and identifiable
intangible net assets acquired. Annual impairment testing for
goodwill is performed in the fourth quarter using a qualitative
assessment on goodwill impairment to determine whether it is more
likely than not that the carrying value of our reporting units
exceeds their fair value. If necessary, a two-step goodwill
impairment analysis is performed. Goodwill is also reviewed
whenever events or changes in circumstances indicate a change in
value may have occurred. We have identified three reporting units
where goodwill was recorded for purposes of testing goodwill
impairment annually: (1) Atrion Medical Products, Inc., (2)
Halkey-Roberts Corporation and (3) Quest Medical, Inc. The total
carrying amount of goodwill in each of the years ended December 31,
2018 and 2017 was $9,730,000. Our evaluation of goodwill during
each year resulted in no impairment losses.
Current Accrued Liabilities
The
items comprising current accrued liabilities are as follows (in
thousands):
|
|
|
|
|
|
|
|
Accrued payroll and
related expenses
|
$3,608
|
$3,943
|
|
Accrued
vacation
|
291
|
273
|
|
Other accrued
liabilities
|
620
|
731
|
|
Total accrued
liabilities
|
$4,519
|
$4,947
|
Revenues
We
recognize revenue when 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.
We
believe that our medical device business will benefit in the long
term from an aging world population along with an increase in life
expectancy. In the near term however, demand for our products
fluctuates based on our customers’ requirements which are
driven in large part by their customers’ needs for medical
care which does not always follow broad economic trends. This
affects the nature, amount, timing and uncertainty of our revenue.
Also, changes in the value of the United States dollar relative to
foreign currencies could make our products more or less affordable
and therefore affect our sales in international
markets.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
A
summary of revenues by geographic area, based on shipping
destination, for 2018, 2017 and 2016 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
United
States
|
$95,757
|
$93,082
|
$91,092
|
|
Germany
|
8,898
|
8,172
|
6,396
|
|
Other countries
less than 5% of revenues
|
47,793
|
45,341
|
45,999
|
|
Total
|
$152,448
|
$146,595
|
$143,487
|
A
summary of revenues by product line for 2018, 2017 and 2016 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fluid
Delivery
|
$70,606
|
$65,053
|
$60,889
|
|
Cardiovascular
|
50,904
|
48,073
|
47,064
|
|
Ophthalmology
|
10,473
|
13,537
|
15,427
|
|
Other
|
20,465
|
19,932
|
20,107
|
|
Total
|
$152,448
|
$146,595
|
$143,487
|
More
than 98 percent of our total revenue in the periods presented
herein is pursuant to shipments initiated by a purchase order.
Under the new guidance from Accounting Standards Update (ASU)
2014-09, Revenue from Contracts with Customers (ASC 606), the
purchase order is the contract with the customer. As a result, the
vast majority of our revenue is recognized at a single point in
time when the performance obligation of the product being shipped
is satisfied, rather than recognized over time, and presented as a
receivable on the balance sheet.
Our
payment terms vary by the type and location of our customers and
the products or services offered. The term between invoicing and
when payment is due is 30 days in most cases. For certain products
or services and customer types, we require payment before the
products or services are delivered to the customer.
We
evaluate the collectability of specific accounts and determine when
to grant credit to our customers using a combination of factors,
including the age of the outstanding balances, evaluation of
customers’ current and past financial condition, recent
payment history, current economic environment, and discussions with
our personnel and with the customers directly. We apply these same
factors and more when evaluating certain aged receivables for
collectability issues and to determine changes necessary to our
allowance for doubtful accounts. If circumstances change, our
estimates of the collectability of amounts could be changed by a
material amount.
We have
elected to recognize the cost for shipping as an expense in cost of
sales when control over the product has transferred to the
customer. Shipping and handling fees charged to customers are
reported as revenue.
We do
not make any material accruals for product returns and warranty
obligations. Our manufactured products come with a standard
warranty to be free from defect and, in the event of a defect, may
be returned by the customer within a reasonable period of time.
Historically, our returns have been unpredictable but very low due
to our focus on quality control. A one-year warranty is provided
with certain equipment sales but warranty claims and our accruals
for these obligations have been minimal.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
We
expense sales commissions when incurred because the amortization
period would be one year or less. These costs are recorded within
selling expense.
Atrion
has contracts in place with customers for equipment leases,
equipment financing, and equipment and other services. These
contracts represent less than 4% of our total revenue in all
periods presented herein. A portion of these contracts contain
multiple performance obligations including embedded leases. For
such arrangements, we historically allocated revenue to each
performance obligation which is capable of being distinct and
accounted for as a separate performance obligation based on
relative standalone selling prices. We generally determine
standalone selling prices based on observable inputs, primarily the
prices charged to customers.
Beginning July 1,
2018, for agreements with an embedded lease component, we adopted
the practical expedient in ASU 2018-11 Leases: Targeted
Improvements (ASU 2018-11) that allows us to treat these agreements
as a single performance obligation and recognize revenue under ASC
606 rather than under the lease accounting guidelines, since the
predominant component of revenue is the non-lease
component.
Our
fixed monthly equipment rentals to customers are accounted for as
operating leases under ASU 2016-02, Leases (ASC 842). Fixed monthly
rentals provide for a flat rental fee each month.
A
limited number of our contracts have variable consideration
including tiered pricing and rebates which we monitor closely for
potential constraints on revenue. For these contracts we estimate
our position quarterly using the most-likely-outcome method,
including customer-provided forecasts and historical buying
patterns, and we accrue for any asset or liability these
arrangements may create. The effect of accruals for variable
consideration on our consolidated financial statements is
immaterial.
We do
not disclose the value of unsatisfied performance obligations for
contracts for which we recognize revenue at the amount 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 under ASC 606 about immaterial
contracts would potentially obscure more useful and important
information.
Leases to Customers
The
lease assets from our sales type leases are recorded in our
accounts receivables in the accompanying consolidated balance
sheet, and as of December 31, 2018 and 2017 the balance totaled
$478,000 and $551,000 respectively.
Our
equipment treated as leases to customers under ASC 842 is included
in our Property Plant and Equipment on our balance sheet. After our
adoption of ASU 2018-11, the cost of the assets and associated
depreciation that remain under lease agreements is immaterial. Due
to the immaterial amount of revenue from our lessor activity, all
other lessor disclosures under ASC 842 have been
omitted.
As
a lessee, we have only two leases for equipment used internally
which we account for as operating leases. Upon adoption of ASC 842,
we recorded a right-of-use asset and a lease liability for these
leases as of January 1, 2018. The monthly expense of $2,025 for
these operating leases, which are our only lessee arrangements, is
immaterial and therefore all other lessee disclosures under ASC 842
have been omitted.
Research and Development Costs
R&D
costs relating to the development of new products and improvements
of existing products are expensed as incurred.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
Stock-Based Compensation
We have
a stock-based compensation plan covering certain of our officers,
directors and key employees. As explained in detail in Note 8, we
account for stock-based compensation utilizing the fair value
recognition provisions of ASC 718, Compensation-Stock Compensation, or ASC
718.
New Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (FASB) issued
ASC 606. This new standard requires an entity to recognize the
amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers. ASC 606
replaced most existing revenue recognition guidance in United
States Generally Accepted Accounting Principles when it became
effective for fiscal years beginning after December 15, 2017. We
adopted the new standard on January 1, 2018, using the full
retrospective method. Because accounting for revenue from contracts
with customers did not materially change for us under the new
standard, prior period consolidated financial statements did not
require adjustment.
On
February 25, 2016 the FASB issued ASC 842. The main objective
of this standard is to recognize lease assets and lease liabilities
on the balance sheet and disclose key information about leasing
arrangements. This leasing standard requires lessees to
recognize a right of use asset and lease liability on the balance
sheet. Lessor accounting is updated to align with certain changes
in the lessee model and the new revenue recognition standard (ASC
606). We elected to early adopt this standard as of January
1, 2018, using the modified retrospective approach as required. The
impact of this change on our consolidated financial statements was
not material.
In
July 2018, we adopted the practical expedient in ASU 2018-11 which
allows lessors to combine lease and non-lease components into a
single performance obligation. If the non-lease components are the
predominant component of the combined contract, ASU 2018-11 also
allows for these agreements to be accounted for under ASC 606
rather than as leases under ASC 842. The impact of this change on
our consolidated financial statements was not
material.
In
January 2016, the FASB issued ASU 2016-01. The main objective of
this update is to enhance the reporting model for financial
instruments in order to provide users of financial statements with
more decision-useful information. Changes to the previous guidance
primarily affect the accounting for equity investments, financial
liabilities under the fair value option, and the presentation and
disclosure requirements for financial instruments.
The
primary impact of this change for us relates to our
available-for-sale equity investments and resulted in unrecognized
gains and losses from our investments being reflected in our
Consolidated Statement of Income beginning in 2018. We
adopted ASU 2016-01 as of January 1, 2018, applying the update by
means of a cumulative-effect adjustment to the balance sheet by
reclassifying the balance of our Accumulated Other Comprehensive
Loss in the shareholders’ equity section of the balance sheet
to Retained Earnings. The balance reclassified of $1,215,000
was a result of prior-period unrealized losses from our equity
investment.
In
2018 we recorded an additional loss on our equity investments of
$1,399,000 as a result of a decrease in the market value of these
investments during the year. This loss is reflected in other
investment income (loss) in our Consolidated Statement of Income.
This change in accounting is expected to create greater volatility
in our investment income each quarter in the future.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
In
March 2017, the FASB issued ASU 2017-08, Receivables –
Non-refundable Fees and Other Costs (Subtopic 310-20). The main
objective of this update is to shorten the period of amortization
of the premium on certain callable debt securities to the earliest
call date. However, the update does not require an accounting
change for securities held at a discount; the discount continues to
be amortized to maturity. The update is effective for annual
periods beginning after December 15, 2018, including interim
periods within those annual periods. We elected to early adopt this
update as of January 1, 2018. None of our investments in 2017 and
2016 had any premium paid, so no adjustments were needed for
prior-period activity. The impact of this change on our
consolidated financial statements was not material.
From
time to time, new accounting pronouncements applicable to us are
issued by the FASB, or other standards setting bodies, which we
will adopt as of the specified effective date. Unless otherwise
discussed, we believe the impact of recently issued standards that
are not yet effective will not have a material impact on our
consolidated financial statements upon adoption.
Fair Value Measurements
Accounting
standards use a three-tier fair value hierarchy which prioritizes
the inputs used in measuring fair value. These tiers are: Level 1,
defined as observable inputs such as quoted prices in active
markets; Level 2, defined as inputs other than quoted prices in
active markets that are either directly or indirectly observable;
and Level 3, defined as unobservable inputs in which little or no
market data exists therefore requiring an entity to develop its own
assumptions.
As of
December 31, 2018 and 2017, we held certain investments in
corporate and government bonds, commercial paper, mutual funds,
certificates of deposit, and certain equity securities. These
investments, with the exception of mutual funds, are all considered
Level 2 assets and the fair value of our investments were estimated
using recently executed transactions and market price quotations
(see Note 2). Our investments in mutual funds are considered Level
1 assets and the reported fair value of these investments is based
on observable quoted prices from active markets.
The
carrying values of our other financial instruments including cash
and cash equivalents, accounts receivable, accounts payable,
accrued liabilities, and accrued income and other taxes
approximated fair value due to their liquid and short-term
nature.
Concentration of Credit Risk
Financial
instruments that potentially subject us to concentrations of credit
risk consist primarily of cash and cash equivalents, investments
and accounts receivable.
Our
cash and cash equivalents are held in accounts with financial
institutions that we believe are creditworthy. Certain of these
amounts at times may exceed federally-insured limits. At December
31, 2018, approximately 98 percent of our cash and cash equivalents
were uninsured. We have not experienced any credit losses in such
accounts and do not believe we are exposed to any significant
credit risk on these funds.
We have
investments in bonds and commercial paper. As a result, we are
exposed to potential loss from market risks that may occur as a
result of changes in interest rates, changes in credit quality of
the issuer and otherwise. These securities have a higher degree of,
and a greater exposure to, credit or default risk and may be less
liquid in times of economic weakness or market
disruptions.
For
accounts receivable, we perform ongoing credit evaluations of our
customers’ financial condition and generally do not require
collateral. We maintain reserves for possible credit
losses. As of December 31, 2018 and 2017, we had
allowances for doubtful accounts of approximately $21,000 and
$28,000, respectively. The carrying amount of the
receivables approximates their fair value. No customer exceeded 10%
of our accounts receivable as of December 31, 2018. One customer,
which accounted for 15.5% of accounts receivable as of December 31,
2017, was the only customer that exceeded 10% of our accounts
receivable at December 31, 2017.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
As of
December 31, 2018 and 2017, we held certain investments that were
required to be measured for disclosure purposes at fair value on a
recurring basis. These investments were considered Level 1 or Level
2 investments as detailed in the table below.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2018:
|
|
|
|
|
|
|
Short-term
Investments:
|
|
|
|
|
|
|
Bonds
|
2
|
$8,409
|
$--
|
$(13)
|
$8,396
|
|
Commercial
Paper
|
2
|
$1,275
|
$--
|
$--
|
$1,275
|
|
|
|
|
|
|
|
|
Long-term
Investments:
|
|
|
|
|
|
|
Bonds
|
2
|
$17,513
|
$--
|
$(198)
|
$17,315
|
|
Mutual
funds
|
1
|
$795
|
$--
|
$(121)
|
$674
|
|
Equity
investment
|
2
|
$5,675
|
$--
|
$(2,814)
|
$2,861
|
|
|
|
|
|
|
|
|
As of December 31,
2017:
|
|
|
|
|
|
|
Short-term
Investments:
|
|
|
|
|
|
|
Certificates of
deposit
|
2
|
$4,020
|
$--
|
$(3)
|
$4,017
|
|
Commercial
paper
|
2
|
$31,220
|
$26
|
$(38)
|
$31,208
|
|
Corporate
bonds
|
2
|
$6
|
$--
|
$--
|
$6
|
|
Mutual
funds
|
1
|
$219
|
$3
|
$--
|
$222
|
|
|
|
|
|
|
|
|
Long-term
Investments:
|
|
|
|
|
|
|
Corporate
bonds
|
2
|
$5,000
|
$--
|
$(75)
|
$4,925
|
|
Equity
investment
|
2
|
$5,675
|
$--
|
$(1,539)
|
$4,136
|
The
above short-term and long-term bonds represent investments in
multiple issuers at December 31, 2018. The above equity investment
represents an investment in one company at December 31, 2018 and is
classified as available for sale. The carrying value of our
investments is reviewed quarterly for changes in circumstances or
the occurrence of events that suggest an investment may not be
recoverable. The unrealized loss for our long-term bonds is
attributable to a rise in interest rates which resulted in a lower
market price for those securities. One of our bond investments has
been in a loss position for more than 12 months due to the rise in
interest rates. As of December 31, 2018 there were no changes in
circumstances or events that would suggest our investments may not
be recoverable. As a result, we recorded no impairment expense
related to our investments during 2018.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
At
December 31, 2018, the length of time until maturity of the bonds
we currently own ranged from 14 to 29.5 months and the length of
time until maturity of the commercial paper ranged from 3.8 to 6.4
months.
Our
accumulated other comprehensive loss at December 31, 2017 was
comprised solely of unrealized losses on our above equity
investment, net of tax.
Purchased patents
and licenses 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):
|
|
|
Weighted Average
Original Life (years)
|
|
|
Weighted Average
Original Life (years)
|
|
|
|
15.67
|
$13,840
|
$12,181
|
15.67
|
$13,840
|
$12,062
|
Aggregate
amortization expense for patents and licenses was $119,000,
$151,000 and $264,000 for 2018, 2017 and 2016, respectively.
Estimated future amortization expense for each of the years set
forth below ending December 31 is as follows (in
thousands):
|
2019
|
$119
|
|
2020
|
$119
|
|
2021
|
$119
|
|
2022
|
$117
|
|
2023
|
$113
|
As of
December 31, 2018 we had a $75.0 million revolving credit facility
with a money center bank pursuant to which the lender is obligated
to make advances until February 28, 2022. This credit facility,
entered into on February 28, 2017, replaced a $40.0 million
revolving credit facility with the same bank which was in place for
several years prior to that date. The credit facility is secured by
substantially all 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 .875
percent (3.38 percent at December 31, 2018) and is payable monthly.
We had no outstanding borrowings under the credit facility at
December 31, 2018 or December 31, 2017. Our ability to borrow funds
under the credit facility from time to time is contingent on
meeting certain covenants in the loan agreement, the most
restrictive of which is the ratio of total debt to earnings before
interest, income tax, depreciation and amortization. At December
31, 2018, we were in compliance with all of the
covenants.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
The
items comprising Provision for Income Taxes are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
Current — Federal
|
$6,405
|
$6,244
|
$10,706
|
|
— State
|
2,001
|
877
|
1,226
|
|
|
8,406
|
7,121
|
11,932
|
|
|
|
|
|
|
Deferred — Federal
|
(626)
|
(1,542)
|
(92)
|
|
— State
|
1
|
168
|
(155)
|
|
|
(625)
|
(1,374)
|
(247)
|
|
Provision for
Income Taxes
|
$7,781
|
$5,747
|
$11,685
|
Temporary
differences and carryforwards which have given rise to deferred tax
liabilities as of December 31, 2018 and 2017 are as follows (in
thousands):
|
|
|
|
|
Deferred
tax liabilities (assets):
|
|
|
|
Property, plant and
equipment
|
$7,540
|
$6,787
|
|
Patents and
goodwill
|
1,742
|
1,740
|
|
Benefit
plans
|
(1,847)
|
(854)
|
|
Inventories
|
(367)
|
(282)
|
|
Capital loss
carryover
|
(572)
|
(572)
|
|
Other
|
(418)
|
(116)
|
|
|
6,078
|
6,703
|
|
Plus: Valuation
allowance
|
609
|
609
|
|
Total deferred tax
liabilities
|
$6,687
|
$7,312
|
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
Total
income tax expense differs from the amount that would be provided
by applying the statutory federal income tax rate to pretax
earnings as illustrated below (in thousands):
|
|
|
|
|
|
|
|
|
Income tax expense
at the statutory federal income tax rate
|
$8,828
|
$14,819
|
$13,743
|
|
Increase (decrease)
resulting from:
|
|
|
|
|
State income
taxes
|
1,572
|
662
|
730
|
|
Section 199
manufacturing deduction
|
--
|
(630)
|
(1,165)
|
|
R&D
tax credits
|
(1,212)
|
(983)
|
(1,070)
|
|
Foreign-derived
intangible income deduction
|
(1,000)
|
--
|
--
|
|
Excess
tax benefit from stock compensation
|
(95)
|
(5,782)
|
(687)
|
|
Impact
from tax law rate change
|
--
|
(4,053)
|
--
|
|
Change in valuation
allowance
|
--
|
609
|
--
|
|
Uncertain tax
positions
|
(373)
|
865
|
(120)
|
|
Other,
net
|
61
|
240
|
254
|
|
Provision for
Income Taxes
|
$7,781
|
$5,747
|
$11,685
|
The Tax
Cuts and Jobs Act of 2017, or Tax Act, enacted in December 2017,
reduced the corporate federal income tax rate in the United States
from 35% to 21% effective on January 1, 2018. This rate reduction
reduced our net deferred tax liability, including adjustments to
our net state deferred tax liabilities, by $4.1 million as of
December 31, 2017. Based upon this tax law enactment, we recorded a
corresponding benefit in our income tax provision of $4.1 million
for the three months and year ended December 31, 2017. Also, in the
fourth quarter of 2017 we recorded a deferred tax valuation
allowance of $609,000 primarily related to deferred tax assets for
a $2.7 million capital loss carryover deduction which may not be
realized by its expiration date in 2021. This charge partially
offset the benefit recorded in our income tax provision as a result
of the Tax Act. The Tax Act also ended the domestic production
activities deduction under Section 199 which previously helped
lower our effective tax rate by three percentage points in 2017 and
2016. The Tax Act added a new deduction starting in 2018 for
foreign-derived intangible income under Section 250 which created a
tax benefit for us in 2018 of $1.0 million. We will continue to
evaluate the tax reform impacts noting that the ultimate impact of
tax reform may differ from the amounts recorded due to changes in
our interpretations and assumptions, as well as additional
regulatory guidance that may be issued.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
A
reconciliation of the beginning and ending balances of the total
amounts of gross unrecognized tax benefits as required by ASC 740
is as follows (in thousands):
|
Gross unrecognized
tax benefits at January 1, 2016
|
$120
|
|
Decrease in tax
positions for prior years
|
(120)
|
|
Increase in tax
positions for current year
|
0
|
|
Lapse in statutes
of limitation
|
0
|
|
Gross unrecognized
tax benefits at December 31, 2016
|
$0
|
|
Decrease in tax
positions for prior years
|
0
|
|
Increase in tax
positions for prior years
|
865
|
|
Lapse in statutes
of limitation
|
0
|
|
Gross unrecognized
tax benefits at December 31, 2017
|
$865
|
|
Increase in tax
positions for prior years
|
25
|
|
Increase in tax
positions for current year
|
0
|
|
Lapse in statutes
of limitation
|
(397)
|
|
Gross unrecognized
tax benefits at December 31, 2018
|
$493
|
As of
December 31, 2018 all of the unrecognized tax benefits, which were
comprised of uncertain tax positions, would impact the effective
tax rate if recognized. Unrecognized tax benefits that are affected
by statutes of limitation that expire within the next 12 months are
immaterial.
We are
subject to United States federal income tax as well as to income
tax of multiple state jurisdictions. We have concluded all
United States federal income tax matters for years through
2014. All material state and local income tax matters have
been concluded for years through 2014.
We
recognize interest and penalties, if any, related to unrecognized
tax benefits in income tax expense. The liability for unrecognized
tax benefits included accrued interest of $19,000 and $1,000 at
December 31, 2018 and 2017, respectively. Tax expense for the year
ended December 31, 2018 and 2017 included a net interest charge of
$18,000 and $1,000, respectively. There were no tax expenses or tax
benefits for interest and penalties in 2016.
Our
Board of Directors has at various times authorized repurchases of
our stock in open-market or privately-negotiated transactions at
such times and at such prices as management may from time to time
determine. On May 21, 2015 our Board of Directors adopted a stock
repurchase program authorizing the repurchase of up to 250,000
shares of our common stock in open-market or privately-negotiated
transactions. This program has no expiration date but may be
terminated by the Board of Directors at any time. As of December
31, 2018, there remained 231,765 shares available for repurchase
under this program. There were no stock repurchases during 2018 and
2017. We repurchased 3,427 shares under this program during
2016.
We
increased our quarterly cash dividend payments in September of each
of the past three years. The quarterly dividend was increased to
$1.05 per share in September 2016, to $1.20 per share in September
2017 and to $1.35 per share in September 2018. Holders of our stock
units earned non-cash dividend equivalents of $25,000 in 2018,
$27,000 in 2017 and $40,000 in 2016.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
The
following is the computation of basic and diluted income per
share:
|
|
|
|
|
|
|
|
|
|
(In
thousands, except per share amounts)
|
|
Net
Income
|
$34,255
|
$36,593
|
$27,581
|
|
|
|
|
|
|
Weighted average
basic shares outstanding
|
1,853
|
1,846
|
1,824
|
|
Add: Effect of
dilutive securities
|
5
|
11
|
33
|
|
Weighted average
diluted shares outstanding
|
1,858
|
1,857
|
1,857
|
|
|
|
|
|
|
Net Income per
share
|
|
|
|
|
Basic
|
$18.49
|
$19.82
|
$15.12
|
|
Diluted
|
$18.44
|
$19.71
|
$14.85
|
As required by ASC 260, Earnings per
Share, unvested share-based
payment awards that contain non-forfeitable rights to dividends or
dividend equivalents are considered participating securities and,
therefore, are included in the computation of basic income per
share pursuant to the two-class method.
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. Securities representing 148 shares of
common stock for the year ended December 31, 2017, were excluded
from the computation of weighted average diluted shares outstanding
because their effect would have been anti-dilutive. There were no
anti-dilutive shares excluded from the computation of weighted
average diluted shares outstanding in 2018 and 2016.
At
December 31, 2018, we had one stock-based compensation plan that is
described below. We account for our plan under ASC 718, and the
disclosures that follow are based on applying ASC 718.
Our
Amended and Restated 2006 Equity Incentive Plan, or 2006 Plan,
provides for awards to key employees, non-employee directors and
consultants of incentive and nonqualified stock options, restricted
stock, restricted stock units, deferred stock units, stock
appreciation rights, performance shares and other stock-based
awards. Under the 2006 Plan, 200,000 shares, in the aggregate, of
common stock have been 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
options granted become exercisable and expire as determined by the
Compensation Committee. As of December 31, 2018, there remained
23,100 shares reserved for future stock-based awards under the 2006
Plan.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
A
summary of stock option transactions for the year ended December
31, 2018, is presented below:
|
Options
|
|
Weighted Average
Exercise Price
|
Weighted
Average
Remaining Contractual Term
|
|
Outstanding at
December 31, 2017
|
20,000
|
$501.03
|
4.3
years
|
|
Granted
|
--
|
--
|
|
|
Exercised
|
--
|
--
|
|
|
Outstanding at
December 31, 2018
|
20,000
|
$501.03
|
3.3
years
|
|
Exercisable at
December 31, 2018
|
4,000
|
$501.03
|
3.3
years
|
All
nonvested options outstanding at December 31, 2018 are expected to
vest. None of our grants includes performance-based or market-based
vesting conditions. We estimate the fair value of stock options
granted using the Black-Scholes option-pricing formula and a single
option award approach. Our Black-Scholes valuation uses a
volatility factor based on our historical stock trading history, a
risk-free interest rate based on the implied yield currently
available on U.S. Treasury securities with an equivalent term, and
a dividend yield based on our dividend history. Our expected life
assumption represents the period that our 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.
There
were no options granted in 2018 and 2016. The fair value for the
options granted in 2017 was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted
average assumptions:
|
|
|
|
|
|
Risk-free interest
rate
|
--
|
2.13%
|
--
|
|
Dividend
yield
|
--
|
0.85%
|
--
|
|
Volatility
factor
|
--
|
25.45%
|
--
|
|
Expected
life
|
--
|
|
--
|
The
weighted average grant date fair value of the options granted in
2017 was $130.35. The total intrinsic value of options outstanding
at December 31, 2018, was $4.8 million. The total intrinsic value
of exercisable options at December 31, 2018, was $1.0
million.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
There
were no restricted stock grants during 2018. During 2017, we
granted two awards of restricted stock under the 2006 Plan. Under
the terms of our restricted stock awards, the restrictions usually
lapse over a five-year period. Both awards include restrictions on
transfer for a two-year period following vesting. During the
vesting period, holders of restricted stock have voting rights and
earn dividends, but the shares may not be sold, assigned,
transferred, pledged or otherwise encumbered. Nonvested shares are
generally forfeited on termination of employment unless otherwise
provided in the participant’s employment agreement or the
termination is in connection with a change in control. We
calculated the weighted average fair value per share of the
restricted stock awarded in 2017 using the market value of our
common stock on the date of the grant with a discount for
post-vesting restrictions of 11.2%. We estimated this
discount using the Chaffe protective put method. A summary of
changes in nonvested restricted stock for the year ended December
31, 2017, is presented below:
|
Nonvested
Shares
|
|
Weighted Average
Award Date Fair Value Per Share
|
|
Restricted stock at
December 31, 2017
|
5,900
|
$445.47
|
|
Granted in
2018
|
--
|
|
|
Vested in
2018
|
(1,180)
|
$445.47
|
|
Restricted stock at
December 31, 2018
|
4,720
|
$445.47
|
All
shares of nonvested restricted stock outstanding at December 31,
2018 are expected to vest. The total fair value of restricted stock
vested during 2018, 2017 and 2016 was $699,000, $803,000 and
$1,177,000, respectively.
During
2018, restricted stock units were awarded to certain employees
under the 2006 Plan. All of our restricted stock units are
convertible to shares of stock on a one-for-one basis when the
restrictions lapse, which is generally after a five-year period.
Nonvested stock units are generally forfeited on termination of
employment unless the termination is in connection with a change in
control. During the vesting period, holders of all restricted stock
units earn dividends in the form of additional units. During 2018,
one non-employee director elected to receive stock units in lieu of
a portion of his cash fees for his services as a member of the
Board of Directors.
A
summary of changes in stock units for the year ended December 31,
2018, is presented below:
|
Nonvested
Stock Units
|
|
Weighted Average
Award Date Fair Value Per Unit
|
|
Weighted Average
Award Date Fair Value Per Unit
|
|
Nonvested at
December 31, 2017
|
6,200
|
$361.28
|
--
|
|
|
Granted
|
869
|
$589.66
|
10
|
$645.00
|
|
Vested
|
(667)
|
$219.69
|
(10)
|
$645.00
|
|
Nonvested at
December 31, 2018
|
6,402
|
$407.03
|
--
|
|
All
nonvested restricted stock units at December 31, 2018 are expected
to vest. The total intrinsic value of all outstanding stock units
which were not convertible at December 31, 2018, including 478
stock units held for the accounts of non-employee directors, was
$5,099,000. The total fair value of directors’ stock units
that vested during
2018, 2017 and 2016 was $6,000, $6,000 and $10,000,
respectively.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
The
total value of stock awards to nonemployee directors awarded under
the 2006 Plan was $240,000, $312,000 and $240,000 in 2018, 2017 and
2016, respectively. These awards vested immediately at the time of
grants. Compensation related to stock awards, restricted stock and
stock units is based on the fair market value of the stock on the
date of the award. These fair values are then amortized on a
straight-line basis over the requisite service periods of the
entire awards, which is generally the vesting period. Compensation
related to stock options is based on the fair value of stock
options granted using the Black-Scholes option-pricing formula and
a single option award approach.
For the
years ended December 31, 2018, 2017 and 2016, we recorded
stock-based compensation expense as a G&A expense in the amount
of $1,659,000, $1,602,000 and $1,566,000, respectively, for all of
the above mentioned stock-based compensation arrangements. The
total tax benefit recognized in the income statement from
stock-based compensation arrangements for the years ended December
31, 2018, 2017 and 2016, was $441,000, $6,342,000 and $1,235,000,
respectively. These amounts include excess tax benefits in each
year.
Unrecognized
compensation cost information for our various stock-based
compensation types is shown below as of December 31,
2018:
|
|
Unrecognized
Compensation Cost
|
Weighted
Average
Remaining Years in
Amortization Period
|
|
Stock
options
|
$1,725,000
|
3.3
|
|
Restricted
stock
|
1,738,000
|
3.3
|
|
Restricted stock
units
|
1,150,000
|
3.5
|
|
Total
|
$4,613,000
|
|
We have
a policy of utilizing treasury shares to satisfy stock option
exercises, stock unit conversions and restricted stock
awards.
(9) Industry Segment and Geographic Information
We
operate in one reportable industry segment: developing and
manufacturing products primarily for medical applications and have
no foreign operating subsidiaries. We have other product lines
which include pressure relief valves and inflation systems, which
are sold primarily to the aviation and marine industries. Due to
the similarities in product technologies and manufacturing
processes, these products are managed as part of our medical
products segment. Our revenues from sales to customers outside the
United States totaled approximately 37 percent of our net revenues
in 2018, 2017 and 2016. We have no assets located outside the
United States.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
(10)
Employee
Retirement and Benefit Plans
We
sponsor a defined contribution 401(k) plan for all employees. Each
participant may contribute certain amounts of eligible
compensation. We make a matching contribution to the plan. Our
contributions under this plan were $752,000, $720,000 and $667,000
in 2018, 2017 and 2016, respectively.
The
Company adopted a Nonqualified Deferred Compensation Plan effective
September 1, 2017, for certain key management or highly-compensated
employees. The plan allows for the deferral of salary and bonus
compensation until retirement or other specified payment events
occur. Employees’ deferred compensation amounts are deemed to
be invested in certain investment funds, indexes or vehicles
selected by our Compensation Committee and designated by each
participant and their deferral balances are adjusted for earnings
based upon the performance of these deemed investments. Our
deferred compensation obligation under the plan was $1,774,000 and
$426,000 at December 31, 2018 and 2017, respectively. These amounts
are reflected in “Other Liabilities and Deferred
Credits” in the accompanying Consolidated Balance
Sheets.
(11)
Commitments
and Contingencies
From
time to time and in the ordinary course of business, we may be
subject to various claims, charges and litigation. In some cases,
the claimants may seek damages, as well as other relief, which, if
granted, could require significant expenditures. We accrue the
estimated costs of settlement or damages when a loss is deemed
probable and such costs are estimable, and accrue for legal costs
associated with a loss contingency when a loss is probable and such
amounts are estimable. Otherwise, these costs are expensed as
incurred. If the estimate of a probable loss or defense costs is a
range and no amount within the range is more likely, we accrue the
minimum amount of the range. As of December 31, 2018, the Company
had no ongoing litigation or arbitration for such
matters.
We had
a dispute which was favorably settled in the third quarter of 2007.
This settlement was amended in December 2008. The amended
settlement agreement provides that we may receive annual payments
from 2009 through 2024. We have not recorded $3.0 million in
potential future payments under this settlement as of December 31,
2018 due to the uncertainty of payment.
We have
arrangements with three of our executive officers pursuant to which
the termination of their employment under certain circumstances
would result in lump sum payments to them. Termination under such
circumstances at December 31, 2018, could have resulted in payments
aggregating $5.0 million.
At
December 31, 2018, the Company had purchase obligations with
certain suppliers for the purchase of inventory for 2019. These
contracts were commitments to purchase inventory used in the
production of the Company’s products totaling $1.9
million.
Atrion Corporation
Notes to Consolidated Financial Statements –
(continued)
(12)
Quarterly
Financial Data (Unaudited):
|
QuarterEnded
|
|
|
|
|
|
|
|
(In
thousands, except per share amounts)
|
|
03/31/18
|
$39,401
|
$11,366
|
$8,487
|
$4.58
|
$4.57
|
|
06/30/18
|
38,847
|
11,266
|
8,797
|
4.75
|
4.74
|
|
09/30/18
|
39,274
|
10,757
|
9,221
|
4.98
|
4.96
|
|
12/31/18
|
34,926
|
8,318
|
7,749
|
4.18
|
4.17
|
|
|
|
|
|
|
|
|
03/31/17
|
$38,504
|
$11,327
|
$9,950
|
$5.42
|
$5.36
|
|
06/30/17
|
36,164
|
10,175
|
10,026
|
5.44
|
5.40
|
|
09/30/17
|
37,903
|
11,479
|
7,971
|
4.30
|
4.29
|
|
12/31/17
|
34,024
|
8,293
|
8,646
|
4.67
|
4.66
|
The
quarterly information presented above reflects, in the opinion of
management, all adjustments necessary for a fair presentation of
the results for the interim periods presented.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
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 December 31, 2018. Based upon this evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures, as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, were effective
as of December 31, 2018. There were no changes in our internal
control over financial reporting for the fourth fiscal quarter
ended December 31, 2018 that have materially affected or are
reasonably likely to materially affect our internal control over
financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our
management, including our Chief Executive Officer and Chief
Financial Officer, is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as
amended. Our internal control system is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. All internal control systems, no matter how well
designed, have inherent limitations. A system of internal control
may become inadequate over time because of changes in conditions or
deterioration in the degree of compliance with the policies or
procedures. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Our
management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2018 using the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway
Commission in the 2013 Internal
Control-Integrated Framework. Based on this assessment, our
management concluded that, as of December 31, 2018, our internal
control over financial reporting was effective.
Grant Thornton LLP, an independent registered public accounting
firm, has audited the consolidated financial statements included in
this Report and, as part of its audit, has issued the following
attestation report on the effectiveness of our internal control
over financial reporting.
Report of Independent Registered Public Accounting
Firm
Board
of Directors and Stockholders
Atrion
Corporation
Opinion on internal control over financial reporting
We have
audited the internal control over financial reporting of Atrion
Corporation (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2018, based on criteria
established in the 2013 Internal
Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). In
our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December
31, 2018, based on criteria established in the 2013 Internal Control—Integrated
Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated financial statements and
schedule of the Company as of and for the year ended December 31,
2018, and our report dated February 26, 2019 expressed an
unqualified opinion on
those financial statements and schedule.
Basis for opinion
The
Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
Definition and limitations of internal control over financial
reporting
A
company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with
authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/
GRANT THORNTON LLP
Dallas,
Texas
February
26, 2019
There
was no information required to be disclosed in a report on Form 8-K
during the three months ended December 31, 2018 that was not
reported.
PART III
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Certain
information required by Part III is omitted from this Form 10-K and
is incorporated herein by reference to our definitive proxy
statement for our 2019 annual meeting of stockholders which we
intend to file pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, within 120 days after December
31, 2018.
Directors
The
information for this item relating to our directors is incorporated
by reference from our definitive proxy statement to be filed in
connection with our 2019 annual meeting of
stockholders.
Executive Officers
The
information required by this item relating to executive officers is
set forth in Part I of this report.
The
information required by Item 405 of Regulation S-K is incorporated
by reference from our definitive proxy statement to be filed in
connection with our 2019 annual meeting of
stockholders.
We have
adopted a Code of Business Conduct that applies to all of our
directors, officers and employees. The Code of Business Conduct
will be provided to any person, without charge, upon request
addressed to: Corporate Secretary, Atrion Corporation, One
Allentown Parkway, Allen, Texas 75002.
The
information required by this item is incorporated by reference from
our definitive proxy statement to be filed in connection with our
2019 annual meeting of stockholders.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The
information contained in the section entitled “Securities
Ownership” in our definitive proxy statement to be filed in
connection with our 2019 annual meeting of stockholders is
incorporated herein by reference.
Equity Compensation Plan Information
The
following table provides certain information about securities
authorized for issuance under our equity compensation plan as of
December 31, 2018:
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants and rights(a)
|
Weighted-average
exercise price of outstanding options, warrants and
rights(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))(c)
|
|
Equity compensation plans approved by security
holders (1)
|
26,402
|
$501.03(2)
|
23,129
|
|
Equity
compensation plans not approved by security holders
|
--
|
--
|
--
|
|
Total
|
26,402
|
$501.03
|
23,129
|
(1)
Consists
of shares of our common stock authorized for issuance under our
2006 Plan. The number of shares available for issuance under this
plan is subject to equitable adjustment by the Compensation
Committee of the Board of Directors in the event of any change in
our capitalization, including, without limitation, a stock dividend
or stock split. For more information regarding this plan, see Note
8 of the Notes to Consolidated Financial Statements presented in
Part II, Item 8 of this Form 10-K.
(2)
The
stock units awarded under our 2006 Plan are excluded from the
calculation of the weighted average exercise price.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The
information required by this item is incorporated by reference from
our definitive proxy statement to be filed in connection with our
2019 annual meeting of stockholders.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
The
information required by this item is incorporated by reference from
our definitive proxy statement to be filed in connection with our
2019 annual meeting of stockholders.
PART IV
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
(a)
The following
documents are filed as a part of this report on Form
10-K:
1.
Financial
Statements of the Company:
Report
of Independent Registered Public Accounting Firm
Consolidated
Statements of Income
Consolidated
Balance Sheets
Consolidated
Statements of Cash Flows
Consolidated
Statement of Changes in Stockholders Equity
2.
Financial Statement
Schedules:
Schedule
II – Consolidated Valuation and Qualifying
Accounts
|
|
|
|
|
Balance at Beginning
of Period
|
Additions Charged to
Expense
|
|
|
|
|
|
|
|
Allowance for
Doubtful Receivables
|
|
|
|
|
|
2018
|
$28
|
$30
|
$(37)
|
$21
|
|
2017
|
$71
|
$14
|
$(57)
|
$28
|
|
2016
|
$50
|
$42
|
$(21)
|
$71
|
|
|
|
|
|
|
|
Deferred Income Tax
Valuation Allowance
|
|
|
|
|
|
2018
|
$609
|
$-
|
$-
|
$609
|
|
2017
|
$-
|
$609
|
$-
|
$609
|
|
2016
|
$-
|
$-
|
$-
|
$-
|
All
other financial statement schedules have been omitted since the
required information is included in the consolidated financial
statements or the notes thereto or is not applicable or
required.
3.
Exhibits.
Reference as made to Item 15(b) of this report on Form
10-K.
|
Exhibit
Numbers
|
Description
|
|
|
Certificate of Incorporation of Atrion
Corporation, dated December 30, 1996(1)
|
|
|
Bylaws of Atrion Corporation (as last amended on
August 14, 2013) (2)
|
|
|
Atrion Corporation Short-Term Incentive
Compensation Plan (3)
|
|
|
Severance Plan for Chief Financial Officer
(4)
|
|
|
Amended and Restated Employment Agreement for
Chairman (5)
|
|
|
First Amendment to Amended and Restated Employment
Agreement for Chairman (6)
|
|
|
Second Amendment to Amended and Restated
Employment Agreement for Chairman (7)
|
|
10f*
|
Third Amendment to
Amended and Restated Employment Agreement for Chairman (8)
|
|
|
Amended and Restated Atrion Corporation 2006
Equity Incentive Plan (as last amended on August 14, 2017)
(9)
|
|
|
Form of Award Agreement for Incentive Stock Option
Award under Amended and Restated Atrion Corporation 2006 Equity
Incentive Plan (10)
|
|
|
Form of Award Agreement for Non-Qualified Stock
Option Award under Amended and Restated Atrion Corporation 2006
Equity Incentive Plan (11)
|
|
|
Form of Award Agreement for Common Stock Award
under Amended and Restated Atrion Corporation 2006 Equity Incentive
Plan (12)
|
|
|
Form of Award Agreement for Restricted Stock Award
under Amended and Restated Atrion Corporation 2006 Equity Incentive
Plan (13)
|
|
|
Form of Award Agreement for Restricted Stock Units
Award under Amended and Restated Atrion Corporation 2006 Equity
Incentive Plan (14)
|
|
|
Non-Employee Directors Stock Purchase Plan (as
amended and restated as of December 2, 2008) (15)
|
|
|
Form of Stock Purchase Election Form –
Non-Employee Directors Stock Purchase Plan (16)
|
|
|
Deferred Compensation Plan for Non-Employee
Directors (as amended and restated as of December 2, 2008)
(17)
|
|
|
Form of Deferred Fee Election Form –
Deferred Compensation Plan for Non-Employee Directors
(18)
|
|
|
Amended and Restated Change in Control Agreement
for President and Chief Executive Officer (19)
|
|
|
Form of Indemnification Agreement for Directors
and Executive Officers (20)
|
|
|
Credit Agreement dated as of February 28, 2017 by
and between Atrion Corporation, as Borrower, and Wells Fargo Bank,
National Association, as Lender (21)
|
|
|
Guaranty Agreement dated as of February 28, 2017
made by certain Subsidiaries of Atrion Corporation in favor of
Wells Fargo Bank, National Association, as Lender
(22)
|
|
|
Collateral Agreement dated as of February 28, 2017
among Atrion Corporation, certain Subsidiaries of Atrion
Corporation and Wells Fargo Bank, National Association, as
lender. (23)
|
|
|
Nonqualified Deferred Compensation Plan
(24)
|
|
|
Stock Performance Graph (25)
|
|
|
Subsidiaries of Atrion Corporation as of December
31, 2017 (25)
|
|
|
Consent of Grant Thornton LLP (25)
|
|
|
Sarbanes-Oxley Act Section 302 Certification of
Chief Executive Officer (25)
|
|
|
Sarbanes-Oxley Act Section 302 Certification of
Chief Financial Officer (25)
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The Sarbanes – Oxley
Act Of 2002 (25)
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The Sarbanes – Oxley
Act Of 2002 (25)
|
|
101.INS**
|
XBRL
Instance Document
|
|
101.SCH**
|
XBRL
Taxonomy Extension Schema Document
|
|
101.CAL**
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF**
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
101.LAB**
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
101.PRE**
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
Notes
(1)
Incorporated by
reference to Appendix B to the Definitive Proxy Statement of the
Company filed January 10, 1997.
(2)
Incorporated by
reference to Exhibit 3.1 to the Form 8-K of Atrion Corporation
filed March 19, 2018.
(3)
Incorporated by
reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed
May 9, 2018.
(4)
Incorporated by
reference to Exhibit 10b to Form 10-Q of Atrion Corporation filed
May 12, 2000.
(5)
Incorporated by
reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed
November 6, 2006.
(6)
Incorporated by
reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed
May 27, 2011.
(7)
Incorporated by
reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed
May 25, 2016.
(8)
Incorporated by
reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed
March 19, 2019.
(9)
Incorporated by
reference to Exhibit 10.2 to Form 10-Q of Atrion Corporation filed
on November 8, 2017.
(10)
Incorporated by
reference to Exhibit 10.2 to Form 10-Q of Atrion Corporation filed
August 4, 2011.
(11)
Incorporated by
reference to Exhibit 10.3 to Form 10-Q of Atrion Corporation filed
August 4, 2011.
(12)
Incorporated by
reference to Exhibit 10.4 to Form 10-Q of Atrion Corporation filed
August 4, 2011.
(13)
Incorporated by
reference to Exhibit 10.5 to Form 10-Q of Atrion Corporation filed
August 4, 2011.
(14)
Incorporated by
reference to Exhibit 10.6 to Form 10-Q of Atrion Corporation filed
August 4, 2011.
(15)
Incorporated by
reference to Exhibit 10l to Form 10-K of Atrion Corporation filed
March 13, 2009.
(16)
Incorporated by
reference to Exhibit 10.1 to the Form S-8 of Atrion Corporation
filed June 27. 2007 (File No. 333-144085).
(17)
Incorporated by
reference to Exhibit 10n to Form 10-K of Atrion Corporation filed
March 13, 2009.
(18)
Incorporated by
reference to Exhibit 10.1 to the Form S-8 of Atrion Corporation
filed June 27. 2007 (File No. 333-144086).
(19)
Incorporated by
reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed
October 31, 2014.
(20)
Incorporated by
reference to Exhibit 10v to Form 10-K of Atrion Corporation filed
March 12, 2012.
(21)
Incorporated by
reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed
March 3, 2017.
(22)
Incorporated by
reference to Exhibit 10.2 to Form 8-K of Atrion Corporation filed
March 3, 2017.
(23)
Incorporated by
reference to Exhibit 10.3 to Form 8-K of Atrion Corporation filed
March 3, 2017.
(24)
Incorporated by
reference to Exhibit 10.1 to Form 10-Q filed November 8,
2017.
*
Management Contract
or Compensatory Plan or Arrangement
**
XBRL
(Extensible Business Reporting Language) information is furnished
and not filed for purposes of Section 11 and 12 of the Securities
Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
In accordance with Rule 406T of Regulation S-T, the XBRL
information in Exhibit 101 of this Form 10-K shall not be subject
to the liability of Section 18 of the Securities Exchange Act of
1934 and shall not be part of any registration statement or other
document filed under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except as shall be expressly set forth by
specific reference in such filing.
Pursuant
to the requirements of Section 13 or 15(d) 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 |
|
|
|
|
|
|
|
By:
|
/s/ David A.
Battat
|
|
|
|
|
David A.
Battat
|
|
|
|
|
President and Chief
Executive Officer |
|
Dated:
February 26, 2019
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
David A. Battat
|
|
President
and Chief Executive
|
|
February
26, 2019
|
|
David
A. Battat
|
|
Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jeffery Strickland
|
|
Vice
President, Chief Financial Officer and
|
|
February
26, 2019
|
|
Jeffery
Strickland
|
|
Secretary-Treasurer
(Principal Financial
|
|
|
|
|
|
and
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Emile A Battat
|
|
Chairman
|
|
February
26, 2019
|
|
Emile A
Battat
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Hugh J. Morgan, Jr.
|
|
Director
|
|
February
26, 2019
|
|
Hugh J.
Morgan, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
John P. Stupp, Jr.
|
|
Director
|
|
February
26, 2019
|
|
John P.
Stupp, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Ronald N. Spaulding
|
|
Director
|
|
February
26, 2019
|
|
Ronald
N. Spaulding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Preston G. Athey
|
|
Director
|
|
February
26, 2019
|
|
Preston
G. Athey
|
|
|
|
|
Exhibit Index
|
Exhibit
Numbers
|
Description
|
|
|
Certificate of Incorporation of Atrion
Corporation, dated December 30, 1996(1)
|
|
|
Bylaws of Atrion Corporation (as last amended on
August 14, 2013) (2)
|
|
|
Atrion Corporation Short-Term Incentive
Compensation Plan (3)
|
|
|
Severance Plan for Chief Financial Officer
(4)
|
|
|
Amended and Restated Employment Agreement for
Chairman (5)
|
|
|
First Amendment to Amended and Restated Employment
Agreement for Chairman (6)
|
|
|
Second Amendment to Amended and Restated
Employment Agreement for Chairman (7)
|
|
10f*
|
Third Amendment to
Amended and Restated Employment Agreement for Chairman (8)
|
|
|
Amended and Restated Atrion Corporation 2006
Equity Incentive Plan (as last amended on August 14, 2017)
(9)
|
|
|
Form of Award Agreement for Incentive Stock Option
Award under Amended and Restated Atrion Corporation 2006 Equity
Incentive Plan (10)
|
|
|
Form of Award Agreement for Non-Qualified Stock
Option Award under Amended and Restated Atrion Corporation 2006
Equity Incentive Plan (11)
|
|
|
Form of Award Agreement for Common Stock Award
under Amended and Restated Atrion Corporation 2006 Equity Incentive
Plan (12)
|
|
|
Form of Award Agreement for Restricted Stock Award
under Amended and Restated Atrion Corporation 2006 Equity Incentive
Plan (13)
|
|
|
Form of Award Agreement for Restricted Stock Units
Award under Amended and Restated Atrion Corporation 2006 Equity
Incentive Plan (14)
|
|
|
Non-Employee Directors Stock Purchase Plan (as
amended and restated as of December 2, 2008) (15)
|
|
|
Form of Stock Purchase Election Form –
Non-Employee Directors Stock Purchase Plan (16)
|
|
|
Deferred Compensation Plan for Non-Employee
Directors (as amended and restated as of December 2, 2008)
(17)
|
|
|
Form of Deferred Fee Election Form –
Deferred Compensation Plan for Non-Employee Directors
(18)
|
|
|
Amended and Restated Change in Control Agreement
for President and Chief Executive Officer (19)
|
|
|
Form of Indemnification Agreement for Directors
and Executive Officers (20)
|
|
|
Credit Agreement dated as of February 28, 2017 by
and between Atrion Corporation, as Borrower, and Wells Fargo Bank,
National Association, as Lender (21)
|
|
|
Guaranty Agreement dated as of February 28, 2017
made by certain Subsidiaries of Atrion Corporation in favor of
Wells Fargo Bank, National Association, as Lender
(22)
|
|
|
Collateral Agreement dated as of February 28, 2017
among Atrion Corporation, certain Subsidiaries of Atrion
Corporation and Wells Fargo Bank, National Association, as
lender. (23)
|
|
|
Nonqualified Deferred Compensation Plan
(24)
|
|
|
Stock Performance Graph (25)
|
|
|
Subsidiaries of Atrion Corporation as of December
31, 2017 (25)
|
|
|
Consent of Grant Thornton LLP (25)
|
|
|
Sarbanes-Oxley Act Section 302 Certification of
Chief Executive Officer (25)
|
|
|
Sarbanes-Oxley Act Section 302 Certification of
Chief Financial Officer (25)
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The Sarbanes – Oxley
Act Of 2002 (25)
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The Sarbanes – Oxley
Act Of 2002 (25)
|
|
101.INS**
|
XBRL
Instance Document
|
|
101.SCH**
|
XBRL
Taxonomy Extension Schema Document
|
|
101.CAL**
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF**
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
101.LAB**
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
101.PRE**
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
Notes
(1)
Incorporated by
reference to Appendix B to the Definitive Proxy Statement of the
Company filed January 10, 1997.
(2)
Incorporated by
reference to Exhibit 3.1 to the Form 8-K of Atrion Corporation
filed March 19, 2018.
(3)
Incorporated by
reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed
May 9, 2018.
(4)
Incorporated by
reference to Exhibit 10b to Form 10-Q of Atrion Corporation filed
May 12, 2000.
(5)
Incorporated by
reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed
November 6, 2006.
(6)
Incorporated by
reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed
May 27, 2011.
(7)
Incorporated by
reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed
May 25, 2016.
(8)
Incorporated by
reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed
March 19, 2019.
(9)
Incorporated by
reference to Exhibit 10.2 to Form 10-Q of Atrion Corporation filed
on November 8, 2017.
(10)
Incorporated by
reference to Exhibit 10.2 to Form 10-Q of Atrion Corporation filed
August 4, 2011.
(11)
Incorporated by
reference to Exhibit 10.3 to Form 10-Q of Atrion Corporation filed
August 4, 2011.
(12)
Incorporated by
reference to Exhibit 10.4 to Form 10-Q of Atrion Corporation filed
August 4, 2011.
(13)
Incorporated by
reference to Exhibit 10.5 to Form 10-Q of Atrion Corporation filed
August 4, 2011.
(14)
Incorporated by
reference to Exhibit 10.6 to Form 10-Q of Atrion Corporation filed
August 4, 2011.
(15)
Incorporated by
reference to Exhibit 10l to Form 10-K of Atrion Corporation filed
March 13, 2009.
(16)
Incorporated by
reference to Exhibit 10.1 to the Form S-8 of Atrion Corporation
filed June 27. 2007 (File No. 333-144085).
(17)
Incorporated by
reference to Exhibit 10n to Form 10-K of Atrion Corporation filed
March 13, 2009.
(18)
Incorporated by
reference to Exhibit 10.1 to the Form S-8 of Atrion Corporation
filed June 27. 2007 (File No. 333-144086).
(19)
Incorporated by
reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed
October 31, 2014.
(20)
Incorporated by
reference to Exhibit 10v to Form 10-K of Atrion Corporation filed
March 12, 2012.
(21)
Incorporated by
reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed
March 3, 2017.
(22)
Incorporated by
reference to Exhibit 10.2 to Form 8-K of Atrion Corporation filed
March 3, 2017.
(23)
Incorporated by
reference to Exhibit 10.3 to Form 8-K of Atrion Corporation filed
March 3, 2017.
(24)
Incorporated by
reference to Exhibit 10.1 to Form 10-Q filed November 8,
2017.
*
Management Contract
or Compensatory Plan or Arrangement
**
XBRL
(Extensible Business Reporting Language) information is furnished
and not filed for purposes of Section 11 and 12 of the Securities
Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
In accordance with Rule 406T of Regulation S-T, the XBRL
information in Exhibit 101 of this Form 10-K shall not be subject
to the liability of Section 18 of the Securities Exchange Act of
1934 and shall not be part of any registration statement or other
document filed under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except as shall be expressly set forth by
specific reference in such filing.