Atrion (ATRI) 10-Q2023 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒     Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 for the  Quarterly Period Ended June 30, 2023 

or

☐     Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from    to    

Commission File Number 001-32982

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes     ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Registration S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes     ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes     ☒ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

ATRION CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 (Unaudited)

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

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

ATRION CORPORATION AND SUBSIDIARIES

NOTES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

ATRION CORPORATION AND SUBSIDIARIES

NOTES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation 

The accompanying unaudited condensed consolidated financial statements of Atrion Corporation and its subsidiaries (collectively referred to herein as “Atrion,” the “Company,” “we,” “our,” or “us”) have been prepared in accordance with accounting principles generally accepted in the United States (US GAAP) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, these statements include all normal and recurring adjustments necessary to present a fair statement of our consolidated results of operations, financial position, and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. Preparation of the Company’s financial statements in conformity with US GAAP requires management to make estimates and assumptions that can have a significant impact on our revenue, operating income, and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheets. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of August 8, 2023, the date of issuance of this Quarterly Report on Form 10-Q. However, these estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments, and estimates, and make changes as we deem necessary.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 ("2022 Form 10-K").

(2) Inventories 

Inventories are stated at the lower of cost or net realizable value. Cost is determined by using the first-in, first-out method. The following table details the major components of inventories (in thousands):

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) Income per share 

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

Incremental shares from stock options and restricted stock units were included in the calculation of weighted average diluted shares outstanding using the treasury stock method. Potential dilutive securities have been excluded when their inclusion would be anti-dilutive.   

(4)  Investments 

As of June 30, 2023, we held investments in commercial paper, bonds, money market accounts, mutual funds, and equity securities. The commercial paper and bonds are considered held-to-maturity and are recorded at amortized cost in the accompanying consolidated balance sheets. The money market accounts, equity securities, and mutual funds are recorded at fair value in the accompanying consolidated balance sheets. The fair values of these investments were estimated using recently executed transactions and market price quotations. We consider as current assets those investments which will mature in the next 12 months including interest receivable on the long-term bonds. The remaining investments are considered non-current assets which we intend to hold longer than 12 months.   

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

We utilize a lifetime “expected credit loss” measurement objective for the recognition of credit losses for held-to-maturity securities at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. During the second quarter of 2023, our allowance for credit losses was immaterial.

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the amortized cost of our held-to-maturity bonds at June 30, 2023 aggregated by credit quality indicator (in thousands):

Our investments are required to be measured for disclosure purposes at fair value on a recurring basis. Our investments are considered Level 1 or Level 2 as detailed in the table below. The fair values of these investments were estimated using recently executed transactions and market price quotations. The amortized cost and fair value of our investments, and the related gross unrealized gains and losses, were as follows as of the dates shown below (in thousands):

The carrying value of our investments is reviewed quarterly for changes in circumstances or the occurrence of events that suggests an investment may not be fully recoverable. The bonds represent investments in various issuers at June 30, 2023. The unrealized losses for some of these bond investments reflect changes in interest rates following their acquisition. As of June 30, 2023, we had seven bond investments in a loss position for more than 12 months.

At June 30, 2023, the length of time until maturity of the commercial paper we owned ranged from less than a month to two months and the length of time to maturity for the bonds ranged from less than a month to 23 months.

As of June 30, 2023, there were expenditures of $199 thousand related to property, plant, and equipment included in our accounts payable and accrued liabilities balance.

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(5) Patents and Licenses

Patents and license fees paid for the use of other entities’ patents are amortized over the useful life of the patent or license. The following tables provide information regarding patents and licenses (dollars in thousands):

Aggregated amortization expense for patents and licenses was $28 thousand and $30 thousand in the three-month period ended June 30, 2023 and June 30, 2022, respectively. Aggregated amortization expense for patents and licenses was $57 thousand and $60 thousand in the six-month period ended June 30, 2023 and June 30, 2022, respectively.

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

(6) Revenues

We recognize revenue when performance obligations under the terms of a contract with our customer are satisfied. This occurs with the transfer of control of our products to customers when products are shipped. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services. Sales and other taxes we may collect concurrent with revenue-producing activities are excluded from revenue.

A summary of revenue by geographic area, based on shipping destination, for the three and six months ended June 30, 2023 and 2022 is as follows (in thousands):

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A summary of revenue by product line for the three and six months ended June 30, 2023 and 2022 is as follows (in thousands):

More than 98 percent of our total revenue in the periods presented herein is pursuant to shipments initiated by a purchase order (our “contract”) and recognized at a single point in time when the performance obligation of the product being shipped is satisfied, rather than recognized over time, and is presented as a receivable on the balance sheet. Payment is typically due within 30 days.

We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the failure of customers to make required payments. We calculate our credit loss allowance for our trade receivables following a lifetime “expected credit loss” measurement objective. An account is written off when we determine the receivable will not be collected. Historically, bad debt has been immaterial.

We have elected to recognize the cost of shipping as an expense in cost of sales when control over the product has transferred to the customer.

We do not make any material accruals for product returns and warranty obligations because our returns and warranty obligations have been very low due to our focus on quality control.

We do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount for which we have the right to invoice. We believe that the complexity added to our disclosures by the inclusion of a large amount of insignificant detail in attempting to disclose information about immaterial contracts would potentially obscure more useful and important information.

(7) Recent Accounting Pronouncements

From time to time, new accounting pronouncements applicable to us are issued by the Financial Accounting Standards Board or other standards-setting bodies. We generally adopt these standards as of the specified effective date. Unless otherwise discussed, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We develop and manufacture products primarily for medical applications. We market components to other equipment manufacturers for incorporation in their products and sell finished devices to physicians, hospitals, clinics, and other treatment centers. Our medical products primarily serve the fluid delivery, cardiovascular, and ophthalmology markets. Our other medical and non-medical products include instrumentation and disposables used in valves and inflation devices used in marine and aviation safety products.

Our products are used in a wide variety of applications by numerous customers. We encounter competition in all of our markets and compete primarily on the basis of product quality, price, engineering, customer service, and delivery time.

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

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

For the three months ended June 30, 2023, we reported revenues of $43.8 million, down 10 percent, operating income of $7.4 million, down 33 percent, and net income of $6.6 million, down 30 percent from the three months ended June 30, 2022.

Results for the three months ended June 30, 2023

Consolidated net income totaled $6.6 million, or $3.73 per basic and $3.73 per diluted share, in the second quarter of 2023. This is compared with consolidated net income of $9.3 million, or $5.21 per basic and $5.20 per diluted share, in the second quarter of 2022. The income per basic share computations are based on weighted average basic shares outstanding of 1,760 thousand in the 2023 period and 1,794 thousand in the 2022 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,761 thousand in the 2023 period and 1,798 thousand in the 2022 period.

Consolidated revenues of $43.8 million for the second quarter of 2023 were 10.3 percent lower than revenues of $48.9 million for the second quarter of 2022 as customers cite continuing efforts to bring their inventories to appropriate levels. Our second quarter 2023 results were unfavorably impacted by a 19.8% decrease in Fluid Delivery revenue and 32.4% decrease in Other product line revenue partially offset by a 54.7% increase in Ophthalmic and 3.6% increase in Cardiovascular revenues compared to the second quarter of 2022.

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

Cost of goods sold of $26.6 million for the second quarter of 2023 was 5 percent lower than our cost of goods sold of $28.0 million for the second quarter of 2022, primarily due to lower sales volumes. Our cost of goods sold in the second quarter of 2023 was 60.6 percent of revenue compared to 57.4 percent of revenue in the second quarter of 2022.

Gross profit of $17.3 million in the second quarter of 2023 was $3.6 million or 17.2 percent lower than in the comparable 2022 period. Our gross profit percentage in the second quarter of 2023 was 39.4 percent of revenues compared with 42.6 percent of revenues in the second quarter of 2022. The decrease in gross profit percentage in the 2023 period compared to the 2022 period was related to higher manufacturing costs.

Our second quarter 2023 operating expenses of $9.9 million were $71 thousand higher than the operating expenses for the second quarter of 2022. This increase was attributable to a $328 thousand increase in general and administrative expenses, and a $54 thousand increase in R&D expenses, both of which were primarily for outside services, partially offset by a $312 thousand decrease in selling expenses, primarily for outside services.

Operating income of $7.4 million in the second quarter of 2023 represented a $3.7 million, or 33.1 percent, decrease in operating income compared to second quarter 2022 operating income. This decrease was due to lower sales and the gross profit decrease discussed above. Operating income was 16.8 percent of revenues for the second quarter of 2023 and 22.6 percent of revenues for the second quarter of 2022.

Interest and dividend income in the second quarter of 2023 was $127 thousand compared with $292 thousand for the same period in the prior year. The decrease in interest and dividend income was due to dividends received on equity investments in the prior-year period.

Other investment income in the second quarter of 2023 was a $98 thousand gain compared with Other investment loss of $308 thousand in the second quarter of 2022. These amounts were attributable to unrealized gains and losses on equity investments resulting from changes in the market values of the investments in each quarter.

Income tax expense was $1.0 million for the second quarter of 2023 compared with $1.7 million for the second quarter of 2022. The effective tax rate for the second quarter of 2023 was 13.7 percent compared with 15.6 percent for the second quarter of 2022. The decrease in the second quarter 2023 period effective tax rate was primarily related to the impact of the R&D tax credit on lower income before income taxes.

Results for the six months ended June 30, 2023

Consolidated net income totaled $10.0 million, or $5.71 per basic and $5.70 per diluted share, in the first six months of 2023. This is compared with consolidated net income of $17.8 million, or $9.94 per basic and $9.91 per diluted share, in the first six months of 2022. The income per basic share computations are based on weighted average basic shares outstanding of 1,761 thousand in the 2023 period and 1,796 thousand in the 2022 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,762 thousand in the 2023 period and 1,800 thousand in the 2022 period.

Consolidated revenues of $83.8 million for the first six months of 2023 were 12.7 percent lower than revenues of $96.0 million for the first six months of 2022. This decrease in revenue was due to decreased sales volumes in our Fluid Delivery and Other product lines.

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