UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
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, 2019
March 31, 2020
or
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
Atrion Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
63-0821819
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
One Allentown Parkway, Allen, Texas 75002
(Address of Principal Executive Offices)   (Zip Code)
(972) 390-9800
(972) 390-9800
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Trading Symbol
Name of each exchange on which registered
Common stock, Par Value $0.10 per share
ATRI
ATRI
The Nasdaq Stock Market LLC

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.  x☒ 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 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 and post such files). x☒ 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 “accelerated filer,” “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

Act.

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

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   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'sissuer’s classes of common stock, as of the latest practicable date.

Title of Each Class
 
Number of Shares Outstanding at July 25, 2019
April 28, 2020 
Common stock, Par Value $0.10 per share
 
1,854,8291,836,937

 
 
 
ATRION CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. Financial Information
Financial Information
12
Item 1.
Financial Statements
 
 
Item 1. Financial Statements
2
Consolidated Statements of Income (Unaudited) For the Three and Six Months Ended June 30,March 31, 2020 and 2019 and 2018
 23
 
Consolidated Balance Sheets (Unaudited) June 30, 2019March 31, 2020 and December 31, 20182019
 34
 
Consolidated Statements of Cash Flows (Unaudited) For the SixThree Months Ended June 30,March 31, 2020 and 2019 and 2018
 45
 
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) For the Three and Six Months Ended June 30,March 31, 2020 and 2019 and 2018
 56
  
Notes to Consolidated Financial Statements (Unaudited)
7
 
Item 2.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
 1214
  
Item 3.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
17
18
 
Item 4.
Controls and Procedures
17
18
 
PART II. Other Information
Other Information
17
18
 
Item 1.
Item 1. Legal Proceedings
17
18
 
Item 1A.
Item 1A. Risk Factors
17
19
 
Item 6. Exhibits
18
 
Unregistered Sales of Equity Securities and Use of Proceeds
19
20
 
Item 6.
Exhibits
20
SIGNATURES
21
Exhibit Index
20
22

P ART I
 
FINANCIAL INFORMATION

FINANCIAL INFORMATION
Item 1. Financial Statements
1
 
Item 1.
Financial Statements
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
(Unaudited)
  
Three Months Ended
March 31,
 
 
 
2020
 
 
2019
 
  (in thousands, except per share amounts) 
       
Revenues $43,594  $41,614 
Cost of goods sold  23,726   22,911 
Gross profit  19,868   18,703 
Operating expenses:        
Selling  2,070   2,384 
General and administrative  4,400   4,187 
Research and development  1,684   1,095 
   8,154   7,666 
Operating income  11,714   11,037 
         
Interest and dividend income  462   582 
Other investment income/(losses)  (997)  211 
   (535)  793 
         
Income before provision for income taxes  11,179   11,830 
Provision for income taxes  (2,281)  (2,392)
         
Net income $8,898  $9,438 
         
Net income per basic share $4.80  $5.09 
Weighted average basic shares outstanding  1,853   1,853 
         
         
Net income per diluted share $4.79  $5.07 
Weighted average diluted shares outstanding  1,859   1,862 
         
Dividends per common share $1.55  $1.35 
         
 
 
 
Three Months EndedJune 30,
 
 
Six Months EndedJune 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
(in thousands, except per share amounts)
 
Revenues
 
$
40,103
  
$
38,847
  
$
81,717
  
$
78,248
 
Cost of goods sold
  
21,511
   
19,624
   
44,422
   
40,074
 
Gross profit
  
18,592
   
19,223
   
37,295
   
38,174
 
Operating expenses:
  
 
   
 
   
 
   
 
 
Selling
  
2,098
   
2,045
   
4,482
   
4,064
 
General and administrative
  
4,304
   
4,309
   
8,490
   
8,537
 
Research and development
  
1,224
   
1,603
   
2,319
   
2,941
 
 
  
7,626
   
7,957
   
15,291
   
15,542
 
Operating income
  
10,966
   
11,266
   
22,004
   
22,632
 
 
  
 
   
 
   
 
   
 
 
Interest and dividend income
  
388
   
411
   
854
   
742
 
Other investment income (losses)
  
354
   
(408
)
  
681
   
(1,197
)
 
  
742
   
3
   
1,535
   
( 455
)
 
  
 
   
 
   
 
   
 
 
Income before provision for income taxes
  
11,708
   
11,269
   
23,539
   
22,177
 
Provision for income taxes
  
(2,044
)
  
( 2,472
)
  
(4,437
)
  
(4,892
)
 
  
 
   
 
   
 
   
 
 
Net income
 
$
9,664
  
$
8,797
  
$
19,102
  
$
17,285
 
 
  
 
   
 
   
 
   
 
 
Net income per basic share
 
$
5.21
  
$
4.75
  
$
10.30
  
$
9.33
 
Weighted average basic shares outstanding
  
1,854
   
1,852
   
1,854
   
1,853
 
 
  
 
   
 
   
 
   
 
 
Net income per diluted share
 
$
5.18
  
$
4.74
  
$
10.25
  
$
9.31
 
Weighted average diluted shares outstanding
  
1,864
   
1,857
   
1,863
   
1,856
 
 
  
 
   
 
   
 
   
 
 
Dividends per common share
 
$
1.35
  
$
1.20
  
$
2.70
  
$
2.40
 
The accompanying notes are an integral part of these statements.

2
ATRION CORPORATION AND SUBSIDIARIES
CCONSOLIDATEDONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(Unaudited)
Assets
 March 31,
2020		  
December 31,
2019
 
  (in thousands) 
Current assets:        
Cash and cash equivalents $44,080  $45,048 
Short-term investments  18,568   23,766 
Accounts receivable  22,813   18,886 
Inventories  41,252   42,093 
Prepaid expenses and other current assets  1,367   2,545 
   128,080   132,338 
         
Long-term investments  33,718   31,772 
         
Property, plant and equipment  204,280   200,990 
Less accumulated depreciation and amortization  118,834   116,384 
   85,446   84,606 
         
Other assets and deferred charges:        
Patents  1,510   1,539 
Goodwill  9,730   9,730 
Other  1,946   2,046 
   13,186   13,315 
         
Total assets $260,430  $262,031 
         
Liabilities and Stockholders’ Equity
        
Current liabilities:        
Accounts payable and accrued liabilities $10,325  $10,855 
Accrued income and other taxes  2,636   419 
   12,961   11,274 
         
Line of credit  --   -- 
         
Other non-current liabilities  12,472   12,887 
         
Stockholders’ equity:        
Common stock, par value $0.10 per share; authorized 10,000 shares, issued 3,420 shares  342   342 
Paid-in capital  52,422   52,043 
Retained earnings  323,733   317,745 
Treasury shares,1,580 at March 31, 2020 and 1,565 at December 31, 2019, at cost  (141,500)  (132,260)
Total stockholders’ equity  234,997   237,870 
         
 Total liabilities and stockholders’ equity $260,430  $262,031 
 
Assets
 
June 30,2019
 
 
December 31,2018
 
 
 
(in thousands)
 
Current assets:
  
 
   
 
 
Cash and cash equivalents
 
$
49,602
  
$
58,753
 
Short-term investments
  
25,595
   
9,684
 
Accounts receivable
  
20,368
   
17,014
 
Inventories
  
34,590
   
33,572
 
Prepaid expenses and other current assets
  
2,931
   
3,242
 
 
  
133,086
   
122,265
 
 
  
 
   
 
 
Long-term investments
  
23,051
   
21,048
 
 
  
 
   
 
 
Property, plant and equipment
  
191,045
   
181,582
 
Less accumulated depreciation and amortization
  
111,324
   
106,689
 
 
  
79,721
   
74,893
 
 
  
 
   
 
 
Other assets and deferred charges:
  
 
   
 
 
Patents
  
1,599
   
1,659
 
Goodwill
  
9,730
   
9,730
 
Other
  
1,564
   
1,621
 
 
  
12,893
   
13,010
 
 
  
 
   
 
 
Total assets
 
$
248,751
  
$
231,216
 
Liabilities and Stockholders’ Equity
  
 
   
 
 
Current liabilities:
  
 
   
 
 
Accounts payable and accrued liabilities
 
$
10,143
  
$
9,601
 
Accrued income and other taxes
  
799
   
619
 
 
  
10,942
   
10,220
 
 
  
 
   
 
 
Line of credit
  
—
   
—
 
 
  
 
   
 
 
Other non-current liabilities
  
12,549
   
10,229
 
 
  
 
   
 
 
Stockholders’ equity:
  
 
   
 
 
Common stock, par value $0.10 per share; authorized 10,000 shares, issued 3,420 shares
  
342
   
342
 
Paid-in capital
  
51,332
   
50,391
 
Retained earnings
  
305,846
   
291,761
 
Treasury shares,1,565 at June 30, 2019 and 1,567 at December 31, 2018, at cost
  
(132,260
)
  
(131,727
)
Total stockholders’ equity
  
225,260
   
210,767
 
 
  
 
   
 
 
 
  
 
   
 
 
Total liabilities and stockholders’ equity
 
$
248,751
  
$
231,216
 
The accompanying notes are an integral part of these financial statements.

3
ATRION CORPORATION AND SUBSIDIARIES
CConsolidatedonsolidated Statements of Cash Flows
(Unaudited)
 
(Unaudited)
 (In thousands)
 
Three Months Ended
March 31,
 
 
 
2020
 
 
2019
 
Cash flows from operating activities:        
Net income $8,898  $9,438 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  2,763   2,546 
Deferred income taxes  (500)  627 
Stock-based compensation  378   380 
Net change in unrealized gains and losses on investments  1,287   (147)
Net change in accrued interest, premiums, and discounts  on investments  77   184 
   12,903   13,028 
         
Changes in operating assets and liabilities:        
Accounts receivable  (3,931)  (4,226)
Inventories  841   771 
Prepaid expenses  1,178   1,439 
Other non-current assets  58   34 
Accounts payable and accrued liabilities  (530)  316 
Accrued income and other taxes  2,217   477 
Other non-current liabilities  95   1,066 
   12,831   12,905 
         
Cash flows from investing activities:        
Property, plant and equipment additions  (3,574)  (3,563)
Purchase of investments  (12,392)  (28,218)
Proceeds from sale of investments  329   — 
Proceeds from maturities of investments  13,951   6,667 
   (1,686)  (25,114)
         
Cash flows from financing activities:        
Purchase of treasury stock  (9,245)  — 
Dividends paid  (2,868)  (2,501)
   (12,113)  (2,501)
         
Net change in cash and cash equivalents  (968)  (14,710)
Cash and cash equivalents at beginning of period  45,048   58,753 
Cash and cash equivalents at end of period $44,080  $44,043 
         
         
Cash paid for:        
Income taxes $54  $56 
 
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
 
 
(in thousands)
 
 
Cash flows from operating activities:
  
 
   
 
 
Net income
 
$
19,102
  
$
17,285
 
Adjustments to reconcile net income to net cash provided by operating activities:  
 
   
 
 
   
 
   
 
 
Depreciation and amortization
  
5,209
   
4,455
 
Deferred income taxes
  
1,408
   
(235
)
Stock-based compensation
  
980
   
917
 
Net change in unrealized gains and losses on investments
  
(364
)
  
1,197
 
Net change in accrued interest, premiums, and discounts on investments
  
173
   
(125
)
Other 
   (6)   
3
 
 
  
26,502
   
23,497
 
 
  
 
   
 
 
Changes in operating assets and liabilities:
  
 
   
 
 
Accounts receivable
  
(3,354
)
  
(1,193
)
Inventories
  
(1,018
)
  
(3,149
)
Prepaid expenses
  
311
   
280
 
Other non-current assets
  
57
   
(90
)
Accounts payable and accrued liabilities
  
542
   
862
 
Accrued income and other taxes
  
180
   
(153
)
Other non-current liabilities
  
912
   
859
 
 
  
24,132
   
20,913
 
 
  
 
   
 
 
Cash flows from investing activities:
  
 
   
 
 
Property, plant and equipment additions
  
(9,977
)
  
(7,598
)
Purchase of investments
  
(45,843
)
  
(26,887
)
Proceeds from maturities of investments
  
28,121
   
24,035
 
 
  
(27,699
)
  
(10,450
)
 
  
 
   
 
 
Cash flows from financing activities:
  
 
   
 
 
Shares tendered for employees’ withholding taxes on stock-based compensation
  
 (579
)  
 (90
)
 
  
 
   
 
 
Dividends paid
  
(5,005
)
  
(4,446
)
 
  
(5,584
)
  
(4,536
)
 
  
 
   
 
 
Net change in cash and cash equivalents
  
(9,151
)
  
5,927
 
Cash and cash equivalents at beginning of period
  
58,753
   
30,136
 
Cash and cash equivalents at end of period
 
$
49,602
  
$
36,063
 
 
  
 
   
 
 
 
  
 
   
 
 
Cash paid for:
  
 
   
 
 
Income taxes
 
$
2,104
  
$
5,592
 
The accompanying notes are an integral part of these financial statements.

4
ATRION CORPORATION AND SUBSIDIARIES
Consolidated statementS of changes in stockholders’ equity
(Unaudited)
 
For the Three Months ended June 30, 2019 and 2018
 
 
 
Common Stock
 
 
Treasury Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares Outstanding
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
Retained Earnings
 
 
Total
 
Balances, April 1, 2018
 
 
1,852
 
 
$
342
 
 
 
1,568
 
 
$
(131,658
)
 
$
49,044
 
 
$
273,240
 
 
$
  190,968
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,798
 
 
 
8,798
 
Stock-based compensation transactions
 
 
1
 
 
 
 
 
 
 
(1
)
 
 
21
 
 
 
591
 
 
 
 
 
 
 
612
 
Shares surrendered in stock transactions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(90
)
 
 
 
 
 
 
 
 
 
 
(90
)
Dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,231
)
 
 
(2,231
)
Balances, June 30, 2018
 
 
1,853
 
 
$
342
 
 
 
1,567
 
 
$
(131,727
)
 
$
49,635
 
 
$
279,807
 
 
$
  198,057
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, April 1, 2019
 
 
1,853
 
 
$
342
 
 
 
1,567
 
 
$
(131,721
)
 
$
50,772
 
 
$
298,690
 
 
$
  218,083
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9,664
 
 
 
9,664
 
Stock-based compensation transactions
 
 
3
 
 
 
 
 
 
 
(3
)
 
 
40
 
 
 
560
 
 
 
 
 
 
 
600
 
Shares surrendered in stock transactions 
 
 
 
(1
)
 
 
 
 
 
 
1
 
 
 
(579
)
 
 
 
 
 
 
 
 
 
 
(579
)
Dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,508
)
 
 
(2,508
)
Balances, June 30, 2019
 
 
1,855
 
 
$
342
 
 
 
1,565
 
 
$
(132,260
)
 
$
51,332
 
 
$
305,846
 
 
$
  225,260
 
5
 
ATRION CORPORATION AND SUBSIDIARIES
For the Three Months ended March 31, 2020 and 2019
  Common Stock  Treasury Stock  Additional Paid-in Capital
 
 
 
 
Retained Earnings  
 
 
Total  
  Shares Outstanding  Amount  Shares  Amount   
Balances, January 1, 2019  1,853  $342   1,567  $(131,727) $50,391  $291,761  $210,767 
                             
Net income                      9,438   9,438 
Stock-based compensation transactions              6   381       387 
Dividends                      (2,509)  (2,509)
Balances, March 31, 2019  1,853  $342   1,567  $(131,721) $50,772  $298,690  $218,083 
                             
Balances, December 31, 2019  1,855  $342   1,565  $(132,260) $52,043  $317,745  $237,870 
Cumulative change in accounting principle                      (36)  (36)
Balances, January 1, 2020  1,855   342   1,565   (132,260)  52,043   317,709   237,834 
                             
Net income                      8,898   8,898 
Stock-based compensation transactions              5   379       384 
Purchase of treasury stock  (15)      15   (9,245)          (9,245)
Dividends                      (2,874)  (2,874)
Balances, March 31, 2020  1,840  $342   1,580  $(141,500) $52,422  $323,733  $234,997 
 
Consolidated statementS of changes in stockholders’ equity
(Unaudited)
 
 
For the Six Months ended June 30, 2019 and 2018
 
 
 
Common Stock
 
 
Treasury Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares Outstanding
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
Retained Earnings
 
 
Total
 
Balances, January 1, 2018
  
1,852
  
$
342
   
1,568
  
$
(131,663
)
 
$
48,730
  
$
  (1,215
)
 
$
268,194
  
$
  184,388
 
 
  
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Net income
  
 
   
 
   
 
   
 
   
 
   
 
   
17,285
   
17,285
 
Reclass from adopting ASO 2016-01
  
 
   
 
   
 
   
 
   
 
   
1,215
   
(1,215
)
  
--
 
Stock-based compensation transactions
  
1
   
 
   
(1
)
  
26
   
905
   
 
   
 
   
931
 
Shares surrendered in stock transactions
  
 
   
 
   
 
   
(90
)
  
 
   
 
   
 
   
(90
)
Dividends
  
 
   
 
   
 
   
 
   
 
   
 
   
(4,457
)
  
(4,457
)
Balances, June 30, 2018
  
1,853
  
$
342
   
1,567
  
$
(131,727
)
 
$
49,635
  
$
  --
  
$
279,807
  
$
  198,057
 
Balances, January 1, 2019
  
1,853
  
$
342
   
1,567
  
$
(131,727
)
 
$
50,391
  
$
  --
  
$
291,761
  
$
  210,767
 
 
  
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Net income
  
 
   
 
   
 
   
 
   
 
   
 
   
19,102
   
19,102
 
Stock-based compensation transactions
  
3
   
 
   
(3
)
  
46
   
941
   
  
   
 
   
987
 
Shares surrendered in stock transactions 
  
 
(1
)
  
 
   
1
   
(579
)
  
 
   
 
   
 
   
(579
)
Dividends
  
 
   
 
   
 
   
 
   
 
   
 
   
(5,017
)
  
(5,017
)
Balances, June 30, 2019
  
1,855
  
$
342
   
1,565
  
$
(132,260
)
 
$
51,332
  
$
  --
  
$
305,846
  
$
  225,260
 
The accompanying notes are an integral part of these financial statements

6
ATRION CORPORATION AND SUBSIDIARIES
N otes to Consolidated Financial Statements
(Unaudited)
(1)
Basis of Presentation
 
(Unaudited)
(1)        Basis of Presentation
The accompanying unaudited consolidated financial statements of Atrion Corporation and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States requires management to make estimates and assumptions that affectcan have a significant impact on our revenue, operating income, and net income, as well as on the reported amountsvalue 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. At least quarterly, we evaluate our assumptions, judgments, and estimates, and make changes as deemed necessary.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial statementsmarkets. 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 May 7, 2020, the date of issuance of this Quarterly Report on Form 10-Q. However, these estimates may change as new events occur and notes.additional information is obtained. Actual results could differ materially from those estimates.these estimates under different assumptions or conditions. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Annual Report on Form 10-K for the fiscal year ended December 31, 20182019 (“20182019 Form 10-K”). References herein to “Atrion,” the “Company,” “we,” “our,” and “us” refer to Atrion Corporation and its subsidiaries.
The Cornavirus Aid, Relief, and Economic Security Act (CARES Act), which became law on March 27, 2020, includes a provision that permits employers to defer the payment of the employer’s portion of payroll taxes that otherwise would be due between March 27, 2020 and December 31, 2020. The Company has elected to take advantage of such deferral provision and is evaluating its ability to take advantage of other provisions of the CARES Act.”
 
 
(2)        Inventories
(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):

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Raw materials

 

$

17,416

 

 

$

18,157

 

Work in process

 

 

9,563

 

 

 

8,525

 

Finished goods

 

 

14,273

 

 

 

15,411

 

Total inventories

 

$

41,252

 

 

$

42,093


ATRION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
 
 
June 30,
 
 
December 31,
 
 
 
2019
 
 
2018
 
Raw materials
 
$
15,565
  
$
14,994
 
Work in process
  
8,611
   
7,214
 
Finished goods
  
10,414
   
11,364
 
Total inventories
 
$
34,590
  
$
33,572
 
 
 
(3)
Income per share
 
The following is the computation for basic and diluted income per share:
 
  Three months Ended
March 31,		 
  2020  2019 
  (in thousands, except per share amounts) 
Net income $8,898  $9,438 
Weighted average basic shares outstanding  1,853   1,853 
Add: Effect of dilutive securities  6   9 
Weighted average diluted shares outstanding  1,859   1,862 
 
Earnings per share:        
Basic $4.80  $5.09 
Diluted $4.79  $5.07 
 
 
Three Months EndedJune 30,
 
 
Six Months EndedJune 30,
 
(1)   
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
(in thousands, except per share amounts)
 
Net income
 
$
    9,664
  
$
  8,797
  
$
  19,102
  
$
  17,285
 
Weighted average basic shares outstanding
  
1,854
   
1,852
   
1,854
   
1,853
 
Add:  Effect of dilutive securities
  
10
   
5
   
9
   
3
 
Weighted average diluted shares outstanding
  
1,864
   
1,857
   
1,863
   
1,856
 
Earnings per share:
  
 
   
 
   
 
   
 
 
Basic
 
$
5.21
  
$
4.75
  
$
10.30
  
$
9.33
 
Diluted
 
$
5.18
  
$
4.74
  
$
10.25
  
$
9.31
 
 
7
ATRION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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. Dilutive securities representing zero15 and 1,200zero shares of common stock for the quarters ended June 30,March 31, 2020 and 2019, and 2018, respectively, were excluded from the computation of weighted average diluted shares outstanding because their effect would have been anti-dilutive.
 
(4)        Investments
(4)
Investments
 
As of June 30, 2019,March 31, 2020, we held investments in commercial paper, bonds, money market accounts, mutual funds and equity securities that are required to be measured for disclosure purposes at fair value on a recurring basis.securities. The commercial paper and bonds are considered held-to-maturity and are recorded at amortized cost in the accompanying consolidated balance sheet. The money market accounts, equity securities and mutual funds are recorded at fair value in the accompanying consolidated balance sheet. TheseThe fair values of these investments are considered Level 1 or Level 2 as detailed in the table below.were estimated using recently executed transactions and market price quotations. We consider as current assets those investments which will mature in the next 12 months including interest receivable on the long-term bonds. The remaining investments are considered non-current assets including our investment in equity securities we intend to hold longer than 12 months.

ATRION CORPORATION AND SUBSIDIARIES
Notes to 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):
  March 31,
2020		  December 31,
2019		 
Cash and cash equivalents:        
Cash deposits $25,014  $38,942 
Money market funds  13,131   3,460 
Commercial paper  5,935   2,646 
Total cash and cash equivalents $44,080  $45,048 
Short-term investments:        
Commercial paper (held-to-maturity) $6,490  $6,778 
Bonds (held-to-maturity)  12,097   16,988 
Allowance for credit losses  (19)  - 
Total short-term investments $18,568  $23,766 
Long-term investments:        
Mutual funds (available for sale) $944  $1,105 
Bonds (held-to-maturity)  30,992   27,845 
Allowance for credit losses  (52)  - 
Equity securities (available for sale)  1,834   2,822 
Total long-term investments $33,718  $31,772 
         
Total cash, cash equivalents and short and long-term investments
 $96,366  $100,586
The newly adopted Topic 326 described in footnote 7, utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for held-to-maturity securities at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. Our credit loss calculations for held-to-maturity securities are based upon historical default and recovery rates of bonds rated with the same rating as our portfolio. We also apply an adjustment factor to these credit loss calculations based upon our assessment of the expected impact from current economic conditions on our investments, including the impact of COVID-19. We monitor the credit quality of debt securities classified as held-to-maturity through the use of their respective credit rating and update them on a quarterly basis with our latest assessment completed on March 31, 2020.

ATRION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following table summarizes the amortized cost of our held-to-maturity bonds at March 31, 2020, aggregated by credit quality indicator (in thousands):
Held-to-Maturity Bonds
Credit Quality Indicators
  Asset Backed Bonds   
Fed Govt Bonds/Notes  
   
Municipal Bonds
   
Corporate Bonds
   
Totals
 
 AAA/AA/A $2,706  $3,381  $761  $20,325  $27,173 
 BBB/BB  -   -   -   15,916   15,916 
 TOTAL $2,706  $3,381  $761  $36,241  $43,089
The following table presents information regarding our allowance for credit losses on our short-term and long-term investments for the quarter ended March 31, 2020 (in thousands):
  Short- Term Securities  Long- Term Securities  
Total
 
Beginning balance, December 31, 2019 $-  $-  $- 
Allowance recognized upon adoption of Topic 326  9   33   42 
Provision for credit loss expense  10   19   29 
Ending balance, March 31, 2020 $19  $52  $71
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):
 
 
 
 
 
 
 
 
 
Gross Unrealized
 
 
 
 
 
 
Level
 
 
Cost
 
 
Gains
 
 
Losses
 
 
Fair Value
 
As of June 30, 2019:
  
 
   
 
   
 
   
 
   
 
 
Money market
  
1
   
23,240
  
$
—
  
$
—
  
$
23,240
 
Commercial paper
  
2
   
14,467
  
$
2
  
$
—
  
$
14,469
 
Bonds
  
2
   
36,321
  
$
203
  
$
—
  
$
36,524
 
Mutual funds
  
1
   
936
  
$
38
  
$
—
  
$
974
 
Equity investments
  
2
   
5,675
  
$
—
  
$
(2,609
)
 
$
3,066
 
 
  
 
   
 
   
 
   
 
   
 
 
As of December 31, 2018:
  
 
   
 
   
 
   
 
   
 
 
Money market
  
1
   
12,319
  
$
—
  
$
—
  
$
12,319
 
Commercial paper
  
2
   
4,393
  
$
—
  
$
—
  
$
4,393
 
Bonds
  
2
   
25,922
  
$
—
  
$
(211
)
 
$
25,711
 
Mutual funds
  
1
   
795
  
$
—
  
$
(121
)
 
$
674
 
Equity investments
  
2
   
5,675
  
$
—
  
$
(2,814
)
 
$
2,861
 
  Gross Unrealized 
   Level   Cost   Gains   Losses   Fair Value 
As of March 31, 2020:                    
Money market  1   13,131  $--  $--  $13,131 
Commercial paper  2   12,425  $19  $--  $12,444 
Bonds  2   43,089  $--  $(1,233) $41,856 
Mutual funds  1   1,118  $--  $(174) $944 
Equity investments  2   5,675  $--  $(3,841) $1,834 
                     
As of December 31, 2019:                    
Money Market  1   3,460  $--  $--  $3,460 
Commercial paper  2   9,424  $2  $--  $9,426 
Bonds  2   44,833  $138  $(19) $44,952 
Mutual funds  1   1,052  $53  $--  $1,105 
Equity investments  2   5,675  $--  $(2,853) $2,822
8

ATRION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(Unaudited)
The above long-term bonds represent investments in various issuers at June 30, 2019.March 31, 2020.
 
The unrealized losses for these bond investments relate to the impact of COVID-19 on the bond market which resulted in a lower market price for those securities. None of these bond investments have been in a loss position for more than 12 months.
The commercial paper has maturities from less than a month to 48 months. The bonds have maturities from less than a month to 4057 months.
 
 
(5)        Patents and Licenses
(5)
Patents and Licenses
 
Purchased 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):
 
June 30, 2019
 
 
December 31, 2018
 
 
Weighted Average Original Life (years)
 
 
GrossCarryingAmount
 
 
AccumulatedAmortization
 
 
Weighted Average Original Life (years)
 
 
GrossCarryingAmount
 
 
AccumulatedAmortization
 
  
15.67
 
 
$
13,840
 
 
$
12,241
 
 
 
15.67
 
 
$
13,840
 
 
$
12,181
 
March 31, 2020  December 31, 2019 
Weighted Average
Original Life
(years)		  Gross
Carrying
Amount		  Accumulated
Amortization		  Weighted Average
Original Life
(years)		  Gross
Carrying
Amount		  Accumulated
Amortization		 
 15.67  $13,840  $12,330   15.67  $13,840  $12,301
 
Aggregate amortization expense for patents and licenses was $30,000 in each of the three months ended June 30, 2019March 31, 2020 and 2018 and $60,000 in each of the six months ended June 30, 2019 and 2018.
2019.
 
Estimated future amortization expense for each of the years set forth below ending December 31 is as follows (in thousands):
 
2020
 
$
119
 
2021
 
$
119
 $119
2022
 
$
117
 $117
2023
 
$
113
 $113
2024
 
$
113
 $113
2025$112
(6)        Revenues
 
(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.

9
ATRION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
A summary of revenues by geographic area, based on shipping destination, for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 areis as follows (in thousands):
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
United States
 
$
25,006
  
$
24,833
  
$
51,995
  
$
49,440
 
Germany
  
2,095
   
2,291
   
4,259
   
4,962
 
Other countries less than 5% of revenues
  
13,002
   
11,723
   
25,463
   
23,846
 
Total
 
$
40,103
  
$
38,847
  
$
81,717
  
$
78,248
 
  2020  2019 
United States $26,192  $26,989 
Germany  3,237   2,164 
Other countries less than 5% of revenues  14,165   12,461 
Total $43,594  $41,614
 
A summary of revenues by product line for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 areis as follows (in thousands):
 
  2020  2019 
Fluid Delivery $22,348  $18,161 
Cardiovascular  14,824   15,420 
Ophthalmology  863   2,283 
Other  5,559   5,750 
Total $43,594  $41,614
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Fluid Delivery
 
$
18,285
  
$
18,128
  
$
36,446
  
$
36,928
 
Cardiovascular
  
14,579
   
13,003
   
29,999
   
26,213
 
Ophthalmology
  
1,817
   
2,852
   
4,100
   
5,637
 
Other
  
5,422
   
4,864
   
11,172
   
9,470
 
  Total
 
$
40,103
  
$
38,847
  
$
81,717
  
$
78,248
 
 
The vast majority (98%)More than 99 percent of our total revenue in the periods presented herein is drivenpursuant 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. On an ongoing basis,Effective January 1, 2020, we adopted the collectability of accounts receivable is assessed based upon historical collection trends, current economic factors and the assessment of the collectability of specific accounts.new credit loss accounting methodology as discussed in footnote 7 to calculate our credit loss allowance for our trade receivables. 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.
 

10
ATRION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
(7)
Recent Accounting Pronouncements
 
(7)        Recent Accounting Pronouncements
ASU 2016-01,No. 2016-13, Financial Instruments - Overall (Subtopic 825-10)– Credit Losses (Topic 326): Recognition and Measurement of Credit Losses on Financial Assets and Financial Liabilities.Instruments.
 
In JanuaryJune 2016, the FASB issued ASU 2016-01, No. 2016-13, Financial Instruments - Overall (Subtopic 825-10)– Credit Losses (Topic 326): Recognition and Measurement of Credit Losses on Financial Assets and Financial LiabilitiesInstruments. The main objectiveASU introduces a new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of this update is to enhancecredit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the reporting model for financial instruments in order to provide users of financial statements with more decision-useful information. ChangesFASB has issued several updates to the previousoriginal ASU.
The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and trade and other receivables 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. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized.
On January 1, 2020, we adopted the guidance primarily affectprospectively with a cumulative adjustment to retained earnings. Atrion has not restated comparative information for 2019 and, therefore, the accountingcomparative information for equity investments, financial liabilities2019 is reported under the fair value option,old model and is not comparable to the presentation and disclosure requirementsinformation presented for financial instruments.  The primary impact of this change2020.
At adoption, we recognized an incremental allowance for us relatescredit losses on our allowance for credit losses related to our available-for-sale equity investmentheld-to-maturity debt securities of approximately $42,000 and resultedour trade accounts receivable of approximately $4,000. Additionally, we recorded an approximately $36,000 decrease in unrecognized gainsretained earnings associated with the increased estimated credit losses on our trade accounts receivable and losses from this investment being reflected in our income statement 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. This change in accounting is expected to create greater volatility in our investment income each quarter in the future.investments.
 
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.
 

11
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 design, product quality, price, customer service and delivery time.
 
Our strategy is to provide a broad selection of products in the areas of our expertise. Research and development 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 and payoff indebtedness, to fund capital expenditures, 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;
●Focusing on customer needs;
●Expanding existing product lines and developing new products;
●Manufacturing products to exacting quality standards; and
●Preserving and fostering a collaborative, respectful and entrepreneurial culture.
 
●    Expanding existing product lines and developing new products;
●    Manufacturing products to exacting quality standards; and●    Preserving and fostering a collaborative, respectful and entrepreneurial culture.
For the three months ended June 30, 2019,March 31, 2020, we reported revenues of $40.1$43.6 million, operating income of $11.0$11.7 million and net income of $9.7$8.9 million, up 35 percent, down 3up 6 percent and up 10down 6 percent, respectively, from the three months ended June 30, 2018. For the six months ended June 30, 2019, we reported revenues of $81.7 million, operating income of $22.0 million and net income of $19.1 million, up 4 percent, down 3 percent and up 11 percent, respectively, from the six months ended June 30, 2018.March 31, 2019.
 
Results for the three months ended June 30, 2019March 31, 2020
Consolidated net income totaled $9.7$8.9 million, or $5.21$4.80 per basic and $5.18$4.79 per diluted share, in the secondfirst quarter of 2019.2020. This is compared with consolidated net income of $8.8$9.4 million, or $4.75$5.09 per basic and $4.74$5.07 per diluted share, in the secondfirst quarter of 2018.2019. The income per basic share computations are based on weighted average basic shares outstanding of 1,854,0001,853,000 in the 20192020 period and 1,852,0001,853,000 in the 20182019 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,864,0001,859,000 in the 2020 period and 1,862,000 in the 2019 period and 1,857,000 in the 2018 period.
12
 
Consolidated revenues of $40.1$43.6 million for the secondfirst quarter of 20192020 were 35 percent higher than revenues of $38.8$41.6 million for the secondfirst quarter of 2018.2019. This increase was primarily attributable to increased volumes of our cardiovascularfluid delivery products partially offset by decreased volumes of our ophthalmology products.

Revenues by product line were as follows (in thousands):
 
 
Three Months endedJune 30,
 
 Three Months ended
March 31,		 
 
2019
 
 
2018
  2020 2019 
  
 
   
 
      
Fluid Delivery
 
$
18,285
  
$
18,128
  $22,348 $18,161 
Cardiovascular
  
14,579
   
13,003
  14,824 15,420 
Ophthalmology
  
1,817
   
2,852
  863 2,283 
Other
  
5,422
   
4,864
   5,559  5,750 
Total
 
$
40,103
  
$
38,847
  $43,594 $41,614 
 
Cost of goods sold of $21.5$23.7 million for the secondfirst quarter of 20192020 was 103.5 percent higher than cost of goods sold of $19.6$22.9 million for the secondfirst quarter of 20182019 primarily due to higher sales volumes, a less favorable product sales mix and increased manufacturing costs partially offset by the impact of continued cost improvement projects.volumes. Our cost of goods sold in the secondfirst quarter of 20192020 was 53.654.4 percent of revenues compared with 50.555.1 percent of revenues in the secondfirst quarter of 2018.2019.
 
Gross profit of $18.6$19.9 million in the secondfirst quarter of 20192020 was $631,000,$1.2 million or 36.2 percent, lowerhigher than in the comparable 20182019 period. Our gross profit percentage in the secondfirst quarter of 20192020 was 46.445.5 percent of revenues compared with 49.544.9 percent of revenues in the secondfirst quarter of 2018.2019. The decreaseincrease in gross profit percentage in the 20192020 period compared to the 20182019 period was primarily related to the less favorable product sales mix and increased manufacturing costs partially offset by cost improvement projects mentioned above.with higher margins.
 
Our secondfirst quarter 20192020 operating expenses of $7.6$8.2 million were $331,000 lower$488,000 higher than the operating expenses for the secondfirst quarter of 2018.2019. This decreaseincrease was attributable to a $379,000 decrease$589,000 increase in Research and Development, or R&D, expenses and a $5,000 decrease$213,000 increase in General and Administrative, or G&A, expenses partially offset by a $53,000 increase$314,000 decrease in Selling expenses. The decreaseincrease in R&D expenses was primarily related to decreased compensation, decreasedincreased outside services, and decreased materials and supplies costs. The increase in G&A expenses was primarily related to salaries and outside services. The decrease in Selling expenses was principally attributable to increased compensationCompany-mandated travel restrictions and commissions partially offset by decreased travel and decreased outside services.cancelled sales conferences due to COVID-19.
 
Operating income in the secondfirst quarter of 2019 decreased $300,0002020 increased $677,000 to $11.0$11.7 million, a 36 percent decreaseincrease compared to our operating income in the quarter ended June 30, 2018.March 31, 2019. Operating income was 27 percent of revenues for both the secondfirst quarter of 20192020 and 29 percent of revenues for the secondfirst quarter of 2018.2019.
 
Other investmentInterest and dividend income in the secondfirst quarter of 20192020 was $354,000$462,000 compared with an$582,000 for the same period in the prior year. The decline in interest income was due to lower interest rates in 2020 versus 2019.
Other investment loss of $408,000 in the secondfirst quarter of 2018. We adopted ASU 2016-01 as2020 was $997,000 compared with investment income of January 1, 2018 (see Note 7). For$211,000 in the secondfirst quarter of 2019 we recorded2019. These amounts were attributable to unrealized losses and gains on equity investments of $354,000 as a result of increases in the market value of investments during the quarter. For the second quarter of 2018 we recorded unrealized losses on equity investments of $408,000 as a result of a drop in the market value of investments during the quarter.
resulting from changes

13
Income tax expense was $2.0$2.3 million for the secondfirst quarter of 20192020 compared with $2.5$2.4 million for the secondfirst quarter of 2018.2019. The effective tax rate for the secondfirst quarter of 20192020 was 17.520.4 percent compared with 21.920.2 percent for the secondfirst quarter of 2018. The decrease in the 2019 period effective tax rate was primarily related to increased tax benefits from stock compensation and foreign sales transactions.2019. We expect the effective tax rate for the remainder of 20192020 to be approximately 20.020 percent.
Results for the six months ended June 30, 2019
Consolidated net income totaled $19.1 million, or $10.30 per basic and $10.25 per diluted share, in the first six months of 2019. This is compared with consolidated net income of $17.3 million, or $9.33 per basic and $9.31 per diluted share, in the first six months of 2018. The income per basic share computations are based on weighted average basic shares outstanding of 1,854,000 in the 2019 period and 1,853,000 in the 2018 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,863,000 in the 2019 period and 1,856,000 in the 2018 period.
Consolidated revenues of $81.7 million for the first six months of 2019 were 4 percent higher than revenues of $78.2 million for the first six months of 2018. This increase was primarily attributable to increased volumes of our cardiovascular products partially offset by decreased volumes of our ophthalmology products.
Revenues by product line were as follows (in thousands):
 
 
Six Months endedJune 30,
 
 
 
2019
 
 
2018
 
 
  
 
   
 
 
Fluid Delivery
 
$
    36,446
  
$
36,928
 
Cardiovascular
  
29,999
   
26,213
 
Ophthalmology
  
4,100
   
5,637
 
Other
  
11,172
   
9,470
 
Total
 
$
    81,717
  
$
78,248
 
Cost of goods sold of $44.4 million for the first six months of 2019 was $4.4 million higher than in the comparable 2018 period. The primary contributor to the increase in our cost of goods sold was increased volumes, a less favorable product sales mix and increased manufacturing costs partially offset by the impact of continued cost improvement projects in the first six months of 2019. Our cost of goods sold in the first six months of 2019 was 54.4 percent of revenues compared with 51.2 percent of revenues in the first six months of 2018.
Gross profit of $37.3 million in the first six months of 2019 was $879,000, or 2 percent, lower than in the comparable 2018 period. Our gross profit percentage in the first six months of 2019 was 45.6 percent of revenues compared with 48.8 percent of revenues in the first six months of 2018. The decrease in gross profit percentage in the 2019 period compared to the 2018 period was primarily related to the less favorable product sales mix and increased manufacturing costs partially offset by cost improvement projects mentioned above.
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Operating expenses of $15.3 million for the first six months 2019 were $251,000 lower than the operating expenses for the first six months of 2018. This decrease was comprised of a $622,000 decrease in R&D expenses, a $47,000 decrease in G&A expenses and a $418,000 increase in Selling expenses. The decrease in R&D expenses was primarily related to decreased compensation, decreased outside services and decreased materials and supplies costs partially offset by increased regulatory costs. The decrease in G&A expenses for the first six months of 2019 was principally attributable to decreased outside services partially offset by increased information technology costs. The increase in Selling expenses was principally attributable to increased compensation and commissions partially offset by decreased travel and decreased outside services.
Operating income in the first six months of 2019 decreased $628,000 to $22.0 million, a 3 percent decrease from our operating income in the six months ended June 30, 2018. Operating income was 27 percent of revenues in the first six months of 2019 and 29 percent of revenues in the first six months of 2018.
Interest and dividend income for the first six months of 2019 was $854,000, compared with $742,000 for the same period in the prior year. Increased levels of investment and increased interest rates were the primary reasons for the increase.
Other investment income for the first six months of 2019 was $681,000 compared with an investment loss of $1.2 million in the first six months of 2018. We adopted ASU 2016-01 as of January 1, 2018 (see Note 7). For the first six months of 2019 we recorded unrealized gains on equity investments of $681,000 as a result of increases in the market value of these investments during the 2019 period. For the first six months of 2018 we recorded unrealized losses on equity investments of $1.2 million as a result of declines in the market value of these investment during the 2018 period.
Income tax expense for the first six months of 2019 was $4.4 million compared to income tax expense of $4.9 million for the same period in the prior year. The effective tax rate for the first six months of 2019 was 18.8 percent, compared with 22.1 percent for the first six months of 2018. The decrease in the 2019 period effective tax rate was primarily related to increased tax benefits from stock compensation and foreign sales transactions.
Liquidity and Capital Resources
As of June 30, 2019,March 31, 2020, 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.  We had no outstanding borrowings under our credit facility at June 30, 2019.March 31, 2020. Our ability to borrow funds under the credit agreement 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 June 30, 2019,March 31, 2020, we were in compliance with all financial covenantscovenants.
 
At June 30, 2019,March 31, 2020, we had a total of $98.2$96.4 million in cash and cash equivalents, short-term investments and long-term investments, an increasea decrease of $8.8$4.2 million from December 31, 2018.2019. The principal contributor to this increasedecrease was operating results.
15
stock buybacks of $9.2 million.
 
Cash flows from operating activities of $24.1$12.9 million for the sixthree months ended June 30, 2019March 31, 2020 were primarily comprised of net income plus the net effect of non-cash expenses increases in other non-current liabilities and increases in accounts payableaccrued income and accrued liabilitiesother taxes partially offset by increases in accounts receivable and increases in inventories.receivable. During the sixfirst three months of 2019,2020, we expended $10.0$12.4 million for the purchase of investments, $3.6 million for the addition of property and equipment, $45.8$9.2 million for the purchase of investmentsin stock buybacks and $5.0$2.9 million for dividends. During the same period, maturities and sales of investments generated $28.1$14.3 million in cash.
 
At June 30, 2019,March 31, 2020, we had working capital of $122.1$115.1 million, including $49.6$44.1 million in cash and cash equivalents and $25.6$18.6 million in short-term investments. The $10.1$6.0 million increasedecrease in working capital during the first sixthree months of 20192020 was primarily related to an increase in short-termdecreases of short term investments and accounts receivable. This increase was partially offset by decreases in cash and cash-equivalents and increases in accounts payable and accrued liabilities. The increase in short-term investments was primarily related to operating results and the decrease in cash and cash equivalents. The increase in accounts receivable was primarily related to increased revenues for the second quarter of 2019 as compared to the fourth quarter of 2018. The increases in accounts payable and accrued liabilities are primarily related to the timing of payments for replenishment of inventories and operating expenses.$5.2 million.
 
We believe that our $98.2$96.4 million in cash, cash equivalents, short-term investments and long-term investments, along with cash flows from operations and available borrowings of up to $75.0 million under our credit facility, will be sufficient to fund our cash requirements for at least the foreseeable future, including the costs associated with the planned expansion of one of our manufacturing facilities. We believe that our strong financial position would allow us to access equity or debt financing should that be necessary. Additionally, we believe that our cash and cash equivalents, short-term investments and long-term investments, as a whole, will continue to increase during the remainder of 2019
Forward-Looking Statements2020.
 
COVID-19 Impact
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the United States and the world and has resulted in the implementation of numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. Although we are unable to predict accurately the full impact that COVID-19 will have on our results of operations, financial condition, liquidity, and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has affected our day-to-day operations and could disrupt our business and operations, as well as those of our key customers, suppliers, and other counterparties, for an indefinite period of time. To help protect the health and well-being of our employees and communities, some of our employees have been working remotely, and we have implemented additional health and safety measures in our facilities. In addition, many of our customers may have implemented similar measures in their facilities, which may delay the timing of some orders and deliveries.

Although such disruptions did not have a material adverse impact on our financial results for the first quarter of fiscal 2020, revenue in the current quarter and subsequent quarters of 2020 could be affected by the impact of the global pandemic. OEM customers and end users of our products could experience financial distress, mass illness, supply chain disruptions and government prohibitions that could impact purchases of products from us. Illnesses, government prohibitions and supply chain disruptions could also impact our ability to fulfill orders.
Our business may be adversely impacted as a result of the pandemic’s global economic impact. For example, we may be unable to collect receivables from those customers significantly impacted by COVID-19. Also, a decrease in orders in a given period could negatively affect our revenues in future periods, particularly if experienced on a sustained basis. We will continue to evaluate the nature and extent of the impact of COVID-19 to our business.
Forward-Looking Statements
Statements in this Management’s Discussion and Analysis and elsewhere in this Quarterly Report on Form 10-Q that are forward looking are based upon current expectations, and actual results or future events may differ materially. Therefore, the inclusion of such forward-looking information should not be regarded as a representation by us that our objectives or plans will be achieved. Such statements include, but are not limited to, our effective tax rate for the remainder of 2019,2020, our ability to fund our cash requirements for the foreseeable future with our current assets, long-term investments, cash flow and borrowings under the credit facility, our access to equity and debt financing, the impact of the COVID-19 pandemic on our business and operations, and the increase in cash, cash equivalents, and investments during the remainder of 2019.2020. Words such as “expects,” “believes,” “anticipates,” “intends,” “should,” “plans,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements contained herein involve numerous risks and uncertainties, and there are a number of factors that could cause actual results or future events to differ materially, including, but not limited to, the following: the risk that the COVID-19 pandemic could lead to material delays and cancellations of, or reduced demand for, procedures in which our products are utilized; curtailed or delayed capital spending by hospitals and other healthcare providers; disruption to our supply chain; closures of our facilities; delays in training; delays in gathering clinical evidence; diversion of management and other resources to respond to the COVID-19 outbreak; the impact of global and regional economic and credit market conditions on healthcare spending; the risk that the COVID-19 virus disrupts local economies and causes economies in our key markets to enter prolonged recessions; changing economic, market and business conditions; acts of war or terrorism; the effects of governmental regulation; the impact of competition and new technologies; slower-than-anticipated introduction of new products or implementation of marketing strategies; implementation of new manufacturing processes or implementation of new information systems; our ability to protect our intellectual property; changes in the prices of raw materials; changes in product mix; intellectual property and product  liability claims and product recalls; the ability to attract and retain qualified personnel; and the loss of, or any material reduction in sales to, any significant customers. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic review which may cause us to alter our marketing, capital expenditures or other budgets, which in turn may affect our results of operations and financial condition. The forward-looking statements in this Quarterly Report on Form 10-Q are made as of the date hereof, and we do not undertake any obligation, and disclaim any duty, to supplement, update or revise such statements, whether as a result of subsequent events, changed expectations or otherwise, except as required by applicable law.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
16
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
For the quarter ended June 30, 2019,March 31, 2020, we did not experience any material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in our 20182019 Form 10-K.
Item 4.    Controls and Procedures
Item 4.
Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2019.March 31, 2020. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting for the quarter ended June 30, 2019March 31, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
 
P ART II
 
OTHER INFORMATION
OTHER INFORMATION
Item 1.      Legal Proceedings
Item 1.
Legal Proceedings
From time to time, we may be involved in claims or litigation that arise in the normal course of business. We are not currently a party to any legal proceedings, which, if decided adversely, would have a material adverse effect on our business, financial condition, or results of operations.
.

Item 1A.   Risk Factors
Item 1A.
Risk Factors
There were no material changes to the risk factors disclosed in our 2018 Form 10-K.
17
 
The ongoing COVID-19 pandemic could adversely affect our business, results of operations, and financial condition.
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the United States and the world and has resulted in the implementation of numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. Although we are unable to predict accurately the full impact that COVID-19 will have on our results from operations, financial condition, liquidity, and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our key customers, suppliers, and other counterparties, for an indefinite period of time. To help protect the health and well-being of our employees and communities, some of our employees have been working remotely, and we have implemented additional health and safety measures in our facilities. In addition, many of our customers may have implemented similar procedures in their facilities, which may delay the timing of some orders and deliveries expected in the second and third quarters of this year. Certain of these measures and government-imposed restrictions may have an adverse effect on the productivity and profitability of our manufacturing facilities, and in turn may have an adverse effect on our business and operations.  Moreover, a prolonged pandemic, or the threat thereof, could result in employee absences and travel restrictions for our employees, lower productivity, voluntary closures of our offices and facilities, and other disruptions to our business. Any of these could have a material adverse effect on our business, financial condition, and results of operations.
The disruptions to our operations caused by COVID-19 may result in inefficiencies, delays, and additional costs in our product development, manufacturing, sales, marketing, and customer service efforts that we cannot fully mitigate through remote or other alternative work arrangements.  Revenue for the second and subsequent quarters of this year may be lower than initially anticipated at the beginning of the year due to compliance by us, our customers, and our suppliers with government-mandated or recommended shelter-in-place orders in jurisdictions in which we, our customers, and our suppliers operate. Additionally, the pandemic raises the possibility of an extended global economic downturn and has caused volatility in financial markets, which could affect demand for our products and services and impact our results and financial condition even after the pandemic is contained and the shelter-in-place and similar orders are lifted. For example, we may be unable to collect receivables from those customers significantly impacted by COVID-19. Also, a decrease in orders in a given period could negatively affect our revenues in future periods, particularly if experienced on a sustained basis. The  pandemic or any worsening of the global business and economic environment as a result thereof may also have the effect of heightening or exacerbating many of the other risks described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2019, such as those relating to our ability to maintain manufacturing efficiency, disruption of our operations at our manufacturing facilities or in our supply chain, and risks generally associated with our international business operations.

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds       
The table below sets forth information with respect to our purchases of our common stock during each of the three months in the period ended March 31, 2020.
Period Total Number of Shares Purchased  Average Price Paid per Share  Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs  
Maximum Number of Shares that May  Yet Be Purchased Under the Plans or Programs (1)
 
1/1/2020 through 1/31/2020 —   —   —   231,765 
2/1/2020 through 2/29/2020 —   —   —   231,765 
3/1/2020 through 3/31/2020 14,576  $634.27   14,576   217,189 
Total 14,576  $634.27   14,576   217,189 
Item 6.
Exhibits
(1)		On May 21, 2015, our Board of Directors approved a stock repurchase program pursuant to which we can repurchase up to 250,000 shares of our common stock from time to time in open market or privately-negotiated transactions.  At December 31, 2019, we had repurchased 18,235 shares of our common stock authorized under the program approved in May 2015. Our stock repurchase program has no expiration date but may be terminated by our Board of Directors at any time.
Item 6.      Exhibits
 
Exhibit Number
Exhibit
Number
Description
31.1
31.1
Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer
31.2
31.2
Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer
32.1
32.1
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes – Oxley Act Of 2002
32.2
32.2
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes – Oxley Act Of 2002
101.INS
101.INS
XBRL Instance Document
101.SCH
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

18
SIGNATURES
 
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Atrion Corporation
(Registrant)
 
Date:  May 7, 2020
By:
Date:  August 7, 2019
By:
/s/ David A. Battat
 
David A. Battat
President and
Chief Executive Officer
Date:  AugustMay 7, 2019
2020
By:
/s/ Jeffery Strickland
Jeffery Strickland
Vice President and
Chief Financial Officer
(Principal (Principal Accounting and Financial Officer)

19
Exhibit Index
 
Exhibit Index
Exhibit Number
Exhibit
Number
Description
31.1
31.2
32.1
32.2
101.INS
101.INS
XBRL Instance Document
101.SCH
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
20 22