| Recent Accounting Pronouncements | Accounting Standards Update 2014-09, Revenue
from Contracts with Customers 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 as explained below, prior period consolidated financial statements did not require adjustment. 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 customer 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. A summary of revenues by geographic area, based on shipping
destination, for the three and nine months ended September 30, 2018 and 2017 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
United States $ 23,979 $ 24,200 $ 73,419 $ 71,384
Germany 1,675 2,033 6,637 6,989
Other countries less than 5% of revenues 13,620 11,670 37,466 34,198
Total $ 39,274 $ 37,903 $ 117,522 $ 112,571 A summary of revenues by product line for the three and
nine months ended September 30, 2018 and 2017 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
Fluid Delivery $ 17,106 $ 16,083 $ 54,033 $ 49,718
Cardiovascular 13,292 12,837 39,505 36,523
Ophthalmology 2,768 3,595 8,405 11,030
Other 6,108 5,388 15,579 15,300
Total $ 39,274 $ 37,903 $ 117,522 $ 112,571 More than 98 percent of our total revenue in the periods
presented herein is pursuant to shipments initiated by a purchase order, which under the new ASC 606 guidance 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 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 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. 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. 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 four percent of our total revenue
in all periods presented herein. A portion of these contracts representing less than two percent of our revenues include multiple
performance obligations. For such arrangements, we allocate 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. Lease revenues, including embedded leases
under certain of these contracts, represent less than one percent of our total revenue in all periods presented herein. 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
about immaterial contracts under ASC 606 would potentially obscure more useful and important information. ASU 2016-02, Leases On February 25, 2016 the FASB issued ASU 2016-02, Leases
(ASC 842). The main objective of this new standard is to recognize lease assets and lease liabilities on the balance sheet
and disclose key information about leasing arrangements. The new 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 new standard as of January 1, 2018, using
the modified retrospective approach as required. 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. As a lessor, Atrion has agreements with certain customers
for the rental of our equipment for use in hospitals. These arrangements include sales type leases, fixed monthly rentals and agreements
containing a lease component (embedded lease) and non-lease components. Lease revenues from all of these agreements represented
less than one percent of our total revenue in the first nine months of 2018 and in all of 2017. The fixed monthly equipment rentals are accounted for as
operating leases under ASC 842. Fixed monthly rentals provide for a flat rental fee each month. Beginning the third quarter of 2018, the agreements containing
an embedded lease component and non-lease components (formerly accounted for as operating leases) are now accounted for under ASC
606, as allowed by the practical expedient under ASU 2018-11 - Leases: Targeted Improvements, issued in July of 2018. The practical expedient provided for in ASU 2018-11 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. We have elected to implement ASU 2018-11 on a prospective basis beginning with the third quarter of 2018. The lease assets from our sales type leases are recorded
in our accounts receivables in the accompanying consolidated balance sheet, and as of September 30, 2018 the balance totaled $499,000. Our equipment treated as leases under ASC 842 is included
in our Property Plant and Equipment on our balance sheet. As a result of 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. ASU 2016-01, Financial Instruments - Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. 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 investment and resulted in unrecognized gains 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. In the third quarter of 2018 we recorded an unrealized
gain on our equity investment of $21,000 as a result of an increase in the market value of this investment during the quarter.
This brings the 2018 year-to-date loss on this investment to $1,169,000. This gain and year-to-date loss are reflected in other
investment income (loss) in our income statement. This change in accounting is expected to create greater volatility in our investment
income each quarter in the future. ASU 2017-08, Receivables – Non-refundable Fees
and Other Costs (Subtopic 310-20). 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 had any premium paid, so no adjustments were needed for prior-period
activity. We do not believe the adoption of this standard will have a material impact on our Financial Statements in 2018 or future
periods. 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. |
