| Summary of Significant Accounting Policies | Atrion Corporation and its subsidiaries (“we,”
“our,” “us,” “Atrion” or the “Company”) develop and manufacture products primarily
for medical applications. We market our products throughout the United States and internationally. Our customers include physicians,
hospitals, distributors, and other manufacturers. Atrion Corporation’s principal subsidiaries through which these operations
are conducted are Atrion Medical Products, Inc., Halkey-Roberts Corporation and Quest Medical, Inc. Principles of Consolidation The consolidated financial statements include the accounts
of Atrion Corporation and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Estimates The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual
results could differ from those estimates. Cash and Cash Equivalents and Investments Cash and cash equivalents include cash on hand and in the
bank as well as money market accounts and debt securities with maturities at the time of purchase of 90 days or less. Our investments consist of corporate and government bonds,
commercial paper, mutual funds and equity securities. We classify our investment securities in one of three categories: held-to-maturity,
available-for-sale, or trading. Securities that we have the positive intent and ability to hold to maturity are reported at amortized
cost and classified as held-to-maturity securities. We report our available-for-sale and trading securities
at fair value with changes in fair value recognized in other investment income (loss) in the Consolidated Statement of Income.
Prior to our adoption of ASU 2016-01, Financial Instruments-Overall, Subtopic 825-10: Recognition and Measurement of Financial
Assets and Financial Liabilities (ASU 2016-01) in January of 2018, unrealized gains and losses for our available-for-sale securities
were reported in stockholders’ equity as accumulated other comprehensive income. We consider as current assets those investments which will
mature in the next 12 months including interest receivable on long-term bonds. The remaining investments are considered non-current
assets including our investment in equity securities which we intend to hold longer than 12 months. We periodically evaluate our
investments for impairment. The components of the Company’s cash and cash equivalents
and our short and long-term investments as of December 31, 2018 and 2017 are as follows (in thousands):
2018 2017
Cash and cash equivalents:
Cash deposits $ 24,670 $ 12,730
Money market funds 30,965 17,406
Commercial paper 3,118 --
Total cash and cash equivalents $ 58,753 $ 30,136
Short-term investments:
Mutual funds (trading) $ -- $ 222
Commercial paper (held-to-maturity) 1,275 31,220
Certificates of deposit (held-to-maturity) -- 4,020
Bonds (held-to-maturity) 8,409 6
Total short-term investments $ 9,684 $ 35,468
Long-term investments:
Mutual funds (available for sale) $ 674 $ --
Bonds (held-to-maturity) 17,513 5,000
Equity securities (available for sale) 2,861 4,136
Total long-term investments $ 21,048 $ 9,136
Total cash, cash equivalents and short and long-term investments $ 89,485 $ 74,740 Account Receivables Accounts receivable are recorded at the original sales price
to the customer. We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the failure of customers
to make required payments. The allowance for doubtful accounts is updated periodically to reflect our estimate of collectability
issues. Accounts are written off when we determine the receivable will not be collected. Inventories Inventories are stated at the lower of cost (including materials,
direct labor and applicable overhead) or net realizable value. Cost is determined by using the first-in, first-out method. The
following table details the major components of inventory (in thousands):
December 31,
2018 2017
Raw materials $ 14,994 $ 13,545
Work in process 7,214 6,647
Finished goods 11,364 9,162
Total inventories $ 33,572 $ 29,354 Accounts Payable We reflect disbursements as trade accounts payable until
such time as payments are presented to our bank for payment. At December 31, 2018 and 2017, disbursements totaling approximately
$388,000 and $411,000, respectively, had not been presented for payment to our bank. Income Taxes We account for income taxes utilizing Accounting Standards
Codification (ASC 740), Income Taxes ASC 740 also requires the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attributes
of income tax positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain tax position taken
or expected to be taken on an income tax return must be recognized in the financial statements at the largest amount that is more-likely-than-not
to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial
statements unless it is more-likely-than-not of being sustained. Our uncertain tax positions are recorded within “Other
non-current liabilities” in the accompanying consolidated balance sheet. We classify interest expense on underpayments of
income taxes and accrued penalties related to unrecognized tax benefits in the income tax provision. We account for excess tax benefits (“windfalls”)
and deficiencies (“shortfalls”) related to employee stock compensation as required by ASU 2016-09, Stock Compensation:
Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), within income tax expense. An excess tax benefit is the
realized tax benefit related to the amount of deductible compensation cost reported on an employer’s tax return for equity
instruments in excess of the compensation cost for those instruments recognized for financial reporting purposes. During the year ended December 31, 2018 we made quarterly
payments in excess of federal income taxes due of approximately $1,180,000. This amount was recorded in prepaid expenses and other
current assets on our Consolidated Balance Sheet. Property, Plant and Equipment Property, plant and equipment is stated at cost and depreciated
using the straight-line method over the estimated useful lives of the related assets. Additions and improvements are capitalized,
including all material, labor and engineering costs to design, install or improve the asset. Expenditures for repairs and maintenance
are charged to expense as incurred. The following table represents a summary of property, plant and equipment at original cost
(in thousands):
December 31, Useful
2018 2017 Lives
Land $ 5,511 $ 5,511 —
Buildings 32,719 32,461 30-40 yrs
Machinery and equipment 143,352 129,108 3-15 yrs
Total property, plant and equipment $ 181,582 $ 167,080 Depreciation expense of $9,003,000, $8,526,000 and $8,689,000
was recorded for the years ended December 31, 2018, 2017 and 2016, respectively. Depreciation expense is recorded in either cost
of goods sold or operating expenses based on the associated assets’ usage. Patents and Licenses Costs for patents and licenses acquired are determined at
acquisition date. Patents and licenses are amortized over the useful lives of the individual patents and licenses, which are from
seven to 20 years. Patents and licenses are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Goodwill Goodwill represents the excess of cost over the fair value
of tangible and identifiable intangible net assets acquired. Annual impairment testing for goodwill is performed in the fourth
quarter using a qualitative assessment on goodwill impairment to determine whether it is more likely than not that the carrying
value of our reporting units exceeds their fair value. If necessary, a two-step goodwill impairment analysis is performed. Goodwill
is also reviewed whenever events or changes in circumstances indicate a change in value may have occurred. We have identified three
reporting units where goodwill was recorded for purposes of testing goodwill impairment annually: (1) Atrion Medical Products,
Inc., (2) Halkey-Roberts Corporation and (3) Quest Medical, Inc. The total carrying amount of goodwill in each of the years ended
December 31, 2018 and 2017 was $9,730,000. Our evaluation of goodwill during each year resulted in no impairment losses. Current Accrued Liabilities The items comprising current accrued liabilities are as
follows (in thousands):
December 31,
2018 2017
Accrued payroll and related expenses $ 3,608 $ 3,943
Accrued vacation 291 273
Other accrued liabilities 620 731
Total accrued liabilities $ 4,519 $ 4,947 Revenues We recognize revenue when obligations under the terms of
a contract with our customer are satisfied. This occurs with the transfer of control of our products to customers when products
are shipped. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services.
Sales and other taxes we may collect concurrent with revenue-producing activities are excluded from revenue. We believe that our medical device business will benefit
in the long term from an aging world population along with an increase in life expectancy. In the near term however, demand for
our products fluctuates based on our customers’ requirements which are driven in large part by their customers’ needs
for medical care which does not always follow broad economic trends. This affects the nature, amount, timing and uncertainty of
our revenue. Also, changes in the value of the United States dollar relative to foreign currencies could make our products more
or less affordable and therefore affect our sales in international markets. A summary of revenues by geographic area, based on shipping
destination, for 2018, 2017 and 2016 is as follows (in thousands):
Year ended December 31,
2018 2017 2016
United States $ 95,757 $ 93,082 $ 91,092
Germany 8,898 8,172 6,396
Other countries less than 5% of revenues 47,793 45,341 45,999
Total $ 152,448 $ 146,595 $ 143,487 A summary of revenues by product line
for 2018, 2017 and 2016 is as follows (in thousands):
2018 2017 2016
Fluid Delivery $ 70,606 $ 65,053 $ 60,889
Cardiovascular 50,904 48,073 47,064
Ophthalmology 10,473 13,537 15,427
Other 20,465 19,932 20,107
Total $ 152,448 $ 146,595 $ 143,487 More than 98 percent of our total revenue in the periods
presented herein is pursuant to shipments initiated by a purchase order. Under the new guidance from Accounting Standards
Update (ASU) 2014-09, Revenue from Contracts with Customers (ASC 606), the purchase order is the contract with the customer. As
a result, the vast majority of our revenue is recognized at a single point in time when the performance obligation of the product
being shipped is satisfied, rather than recognized over time, and presented as a receivable on the balance sheet. Our payment terms vary by the type and location of our customers
and the products or services offered. The term between invoicing and when payment is due is 30 days in most cases. For certain
products or services and customer types, we require payment before the products or services are delivered to the customer. We evaluate the collectability of specific accounts and
determine when to grant credit to our customers using a combination of factors, including the age of the outstanding balances,
evaluation of customers’ current and past financial condition, recent payment history, current economic environment, and
discussions with our personnel and with the customers directly. We apply these same factors and more when evaluating certain aged
receivables for collectability issues and to determine changes necessary to our allowance for doubtful accounts. If circumstances
change, our estimates of the collectability of amounts could be changed by a material amount. We have elected to recognize the cost for shipping as an
expense in cost of sales when control over the product has transferred to the customer. Shipping and handling fees charged to customers
are reported as revenue. We do not make any material accruals for product returns
and warranty obligations. Our manufactured products come with a standard warranty to be free from defect and, in the event of a
defect, may be returned by the customer within a reasonable period of time. Historically, our returns have been unpredictable but
very low due to our focus on quality control. A one-year warranty is provided with certain equipment sales but warranty claims
and our accruals for these obligations have been minimal. We expense sales commissions when incurred because the amortization
period would be one year or less. These costs are recorded within selling expense. Atrion has contracts in place with customers for equipment
leases, equipment financing, and equipment and other services. These contracts represent less than 4% of our total revenue in all
periods presented herein. A portion of these contracts contain multiple performance obligations including embedded leases. For
such arrangements, we historically allocated revenue to each performance obligation which is capable of being distinct and accounted
for as a separate performance obligation based on relative standalone selling prices. We generally determine standalone selling
prices based on observable inputs, primarily the prices charged to customers. Beginning July 1, 2018, for agreements with an embedded
lease component, we adopted the practical expedient in ASU 2018-11 Leases: Targeted Improvements (ASU 2018-11) that allows us to
treat these agreements as a single performance obligation and recognize revenue under ASC 606 rather than under the lease accounting
guidelines, since the predominant component of revenue is the non-lease component. Our fixed monthly equipment rentals to customers are accounted
for as operating leases under ASU 2016-02, Leases (ASC 842). Fixed monthly rentals provide for a flat rental fee each month. A limited number of our contracts have variable consideration
including tiered pricing and rebates which we monitor closely for potential constraints on revenue. For these contracts we estimate
our position quarterly using the most-likely-outcome method, including customer-provided forecasts and historical buying patterns,
and we accrue for any asset or liability these arrangements may create. The effect of accruals for variable consideration on our
consolidated financial statements is immaterial. We do not disclose the value of unsatisfied performance
obligations for contracts for which we recognize revenue at the amount which we have the right to invoice. We believe that the
complexity added to our disclosures by the inclusion of a large amount of insignificant detail in attempting to disclose information under
ASC 606 about immaterial contracts would potentially obscure more useful and important information. Leases to Customers The lease assets from our sales type leases are recorded
in our accounts receivables in the accompanying consolidated balance sheet, and as of December 31, 2018 and 2017 the balance totaled
$478,000 and $551,000 respectively. Our equipment treated as leases to customers under ASC 842
is included in our Property Plant and Equipment on our balance sheet. After our adoption of ASU 2018-11, the cost of the assets
and associated depreciation that remain under lease agreements is immaterial. Due to the immaterial amount of revenue from our
lessor activity, all other lessor disclosures under ASC 842 have been omitted. As a lessee, we have only two leases for equipment used
internally which we account for as operating leases. Upon adoption of ASC 842, we recorded a right-of-use asset and a lease liability
for these leases as of January 1, 2018. The monthly expense of $2,025 for these operating leases, which are our only lessee arrangements,
is immaterial and therefore all other lessee disclosures under ASC 842 have been omitted. Research and Development Costs R&D costs relating to the development of new products
and improvements of existing products are expensed as incurred. Stock-Based Compensation We have a stock-based compensation plan covering certain
of our officers, directors and key employees. As explained in detail in Note 8, we account for stock-based compensation utilizing
the fair value recognition provisions of ASC 718, Compensation-Stock Compensation, New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB)
issued ASC 606. This new standard requires an entity to recognize the amount of revenue to which it expects to be entitled for
the transfer of promised goods or services to customers. ASC 606 replaced most existing revenue recognition guidance in United
States Generally Accepted Accounting Principles when it became effective for fiscal years beginning after December 15, 2017. We
adopted the new standard on January 1, 2018, using the full retrospective method. Because accounting for revenue from contracts
with customers did not materially change for us under the new standard, prior period consolidated financial statements did not
require adjustment. On February 25, 2016 the FASB issued ASC 842. The
main objective of this standard is to recognize lease assets and lease liabilities on the balance sheet and disclose key information
about leasing arrangements. This leasing standard requires lessees to recognize a right of use asset and lease liability on
the balance sheet. Lessor accounting is updated to align with certain changes in the lessee model and the new revenue recognition
standard (ASC 606). We elected to early adopt this standard as of January 1, 2018, using the modified retrospective approach
as required. The impact of this change on our consolidated financial statements was not material. In July 2018, we adopted the practical expedient in ASU
2018-11 which allows lessors to combine lease and non-lease components into a single performance obligation. If the non-lease components
are the predominant component of the combined contract, ASU 2018-11 also allows for these agreements to be accounted for under
ASC 606 rather than as leases under ASC 842. The impact of this change on our consolidated financial statements was not material. In January 2016, the FASB issued ASU 2016-01. The main objective
of this update is to enhance the reporting model for financial instruments in order to provide users of financial statements with
more decision-useful information. Changes to the previous guidance primarily affect the accounting for equity investments, financial
liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The primary impact of this change for us relates to our
available-for-sale equity investments and resulted in unrecognized gains and losses from our investments being reflected in our
Consolidated Statement of Income beginning in 2018. We adopted ASU 2016-01 as of January 1, 2018, applying the update by
means of a cumulative-effect adjustment to the balance sheet by reclassifying the balance of our Accumulated Other Comprehensive
Loss in the shareholders’ equity section of the balance sheet to Retained Earnings. The balance reclassified of $1,215,000
was a result of prior-period unrealized losses from our equity investment. In 2018 we recorded an additional loss on our equity investments
of $1,399,000 as a result of a decrease in the market value of these investments during the year. This loss is reflected in other
investment income (loss) in our Consolidated Statement of Income. This change in accounting is expected to create greater volatility
in our investment income each quarter in the future. In March 2017, the FASB issued ASU 2017-08, Receivables
– Non-refundable Fees and Other Costs (Subtopic 310-20). The main objective of this update is to shorten the period of amortization
of the premium on certain callable debt securities to the earliest call date. However, the update does not require an accounting
change for securities held at a discount; the discount continues to be amortized to maturity. The update is effective for annual
periods beginning after December 15, 2018, including interim periods within those annual periods. We elected to early adopt this
update as of January 1, 2018. None of our investments in 2017 and 2016 had any premium paid, so no adjustments were needed for
prior-period activity. The impact of this change on our consolidated financial statements was not material. From time to time, new accounting pronouncements applicable
to us are issued by the FASB, or other standards setting bodies, which we will adopt as of the specified effective date. Unless
otherwise discussed, we believe the impact of recently issued standards that are not yet effective will not have a material impact
on our consolidated financial statements upon adoption. Fair Value Measurements Accounting standards use a three-tier fair value hierarchy
which prioritizes the inputs used in measuring fair value. These tiers are: Level 1, defined as observable inputs such as quoted
prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in which little or no market data exists therefore requiring an entity
to develop its own assumptions. As of December 31, 2018 and 2017, we held certain investments
in corporate and government bonds, commercial paper, mutual funds, certificates of deposit, and certain equity securities. These
investments, with the exception of mutual funds, are all considered Level 2 assets and the fair value of our investments were estimated
using recently executed transactions and market price quotations (see Note 2). Our investments in mutual funds are considered Level
1 assets and the reported fair value of these investments is based on observable quoted prices from active markets. The carrying values of our other financial instruments including
cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and accrued income and other taxes approximated
fair value due to their liquid and short-term nature. Concentration of Credit Risk Financial instruments that potentially subject us to concentrations
of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. Our cash and cash equivalents are held in accounts with
financial institutions that we believe are creditworthy. Certain of these amounts at times may exceed federally-insured limits.
At December 31, 2018, approximately 98 percent of our cash and cash equivalents were uninsured. We have not experienced any credit
losses in such accounts and do not believe we are exposed to any significant credit risk on these funds. We have investments in bonds and commercial paper. As a
result, we are exposed to potential loss from market risks that may occur as a result of changes in interest rates, changes in
credit quality of the issuer and otherwise. These securities have a higher degree of, and a greater exposure to, credit or default
risk and may be less liquid in times of economic weakness or market disruptions. For accounts receivable, we perform ongoing credit evaluations
of our customers’ financial condition and generally do not require collateral. We maintain reserves for possible
credit losses. As of December 31, 2018 and 2017, we had allowances for doubtful accounts of approximately $21,000 and
$28,000, respectively. The carrying amount of the receivables approximates their fair value. No customer exceeded 10%
of our accounts receivable as of December 31, 2018. One customer, which accounted for 15.5% of accounts receivable as of December
31, 2017, was the only customer that exceeded 10% of our accounts receivable at December 31, 2017. |
