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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 0-10763
ATRION CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 63-0821819
- ------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
ONE ALLENTOWN PARKWAY, ALLEN, TEXAS 75002
-----------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(972) 390-9800
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(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
NUMBER OF SHARES OUTSTANDING AT
TITLE OF EACH CLASS SEPTEMBER 30, 1998
- --------------------------------------- -------------------------------
COMMON STOCK, PAR VALUE $0.10 PER SHARE 3,201,645
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ATRION CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION 2
ITEM 1. Financial Statements
Consolidated Statements of Income (Unaudited)
For the Three Months and Nine Months Ended
September 30, 1998 and 1997 3
Consolidated Balance Sheets (Unaudited)
September 30, 1998 and December 31, 1997 4-5
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended
September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION 13
ITEM 6. Exhibits and Reports on
Form 8-K 13
SIGNATURES 14
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PART I
FINANCIAL INFORMATION
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ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- --------------------
1998 1997 1998 1997
------- -------- ------- -------
(In thousands, except per share data)
Revenues $11,570 $ 7,292 $33,108 $23,375
Cost of goods sold 7,426 4,802 20,594 14,978
------- -------- ------- -------
Gross profit 4,144 2,490 12,514 8,397
------- -------- ------- -------
Operating expenses:
Selling expense 1,406 514 3,751 1,617
General and administrative 1,774 1,305 5,226 4,472
Research and development 747 239 2,035 708
------- -------- ------- -------
3,927 2,058 11,012 6,797
------- -------- ------- -------
Operating income 217 432 1,502 1,600
------- -------- ------- -------
Other income:
Interest income, net 124 493 454 396
Other income 13 52 53 218
------- -------- ------- -------
137 545 507 614
------- -------- ------- -------
Income from continuing operations before
provision for income taxes 354 977 2,009 2,214
Provision for income taxes 128 319 747 801
------- -------- ------- -------
Income from continuing operations 226 658 1,262 1,413
Income from discontinued operations,
net of income taxes -- (20) -- 1,921
Gain on disposal of discontinued operations,
net of income taxes -- -- -- 17,002
------- -------- ------- -------
Net income $ 226 $ 638 $ 1,262 $20,336
======= ======== ======= =======
Earnings per basic share:
Continuing operations $ 0.07 $ 0.20 $ 0.39 $ 0.44
Discontinued operations -- -- -- 0.60
Gain on disposal of discontinued operations -- -- -- 5.28
------- -------- ------- -------
$ 0.07 $ 0.20 $ 0.39 $ 6.32
======= ======== ======= =======
Weighted average basic shares outstanding 3,202 3,230 3,212 3,218
======= ======== ======= =======
Earnings per diluted share:
Continuing operations $ 0.07 $ 0.20 $ 0.39 $ 0.43
Discontinued operations -- -- -- 0.59
Gain on disposal of discontinued operations -- -- -- 5.23
------- -------- ------- -------
$ 0.07 $ 0.20 $ 0.39 $ 6.25
======= ======== ======= =======
Dividends per share $ 0.00 $ 0.10 $ 0.00 $ 0.50
======= ======== ======= =======
Weighted average diluted shares outstanding 3,202 3,267 3,216 3,251
======= ======== ======= =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
- ------ ------------- ------------
(In thousands)
Current assets:
Cash and cash equivalents $ 7,972 $32,172
Accounts receivable 7,721 2,897
Inventories 8,102 3,960
Prepaid expenses and other 782 337
------- -------
24,577 39,366
------- -------
Property, plant and equipment:
Original cost 21,463 15,617
Less accumulated depreciation and amortization 4,326 2,475
------- -------
17,137 13,142
------- -------
Deferred charges:
Patents 3,663 908
Goodwill 13,976 4,862
Other 2,571 2,664
------- -------
20,210 8,434
------- -------
$61,924 $60,942
======= =======
(Continued)
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ ------------- ------------
(In thousands)
Current liabilities:
Current maturities of long-term debt $ 203 $ 453
Accounts payable and accrued liabilities 5,547 5,320
------- -------
5,750 5,773
------- -------
Long-term debt, less current maturities -- 203
------- -------
Other noncurrent liabilities 5,392 4,980
------- -------
Stockholders' equity:
Common shares, par value $0.10 per share; authorized
10,000,000 shares, issued 3,419,953 shares 342 342
Paid-in capital 6,403 6,395
Retained earnings 45,942 44,681
Treasury shares, at cost (1,905) (1,432)
------- -------
Total stockholders' equity 50,782 49,986
------- -------
$61,924 $60,942
======= =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
1998 1997
-------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 1,262 $ 20,336
Adjustments to reconcile net income to
net cash provided by operating activities:
Income from discontinued operations -- (1,921)
Gain on disposal of discontinued operations -- (17,002)
Depreciation and amortization 2,510 1,459
Deferred income taxes 343 120
Other 155 (193)
-------- --------
4,270 2,799
Change in current assets and liabilities:
(Increase) in accounts receivable (2,741) 136
(Increase) in other current assets (605) (234)
Increase (decrease) in accounts payable 673 (211)
Increase in other current liabilities 1,074 179
-------- --------
Net cash provided by continuing operations 2,671 2,669
Net cash provided (used) by discontinued operations (1,609) 309
-------- --------
1,062 2,978
-------- --------
Cash flows from investing activities:
Property, plant and equipment additions - continuing operations (1,146) (994)
Property, plant and equipment additions - discontinued operations -- (78)
Acquisition of subsidiary (23,198) --
Proceeds from disposal of discontinued operations -- 38,178
Other -- 8
(24,344) 37,114
-------- --------
Cash flows from financing activities:
Decrease in long-term indebtedness (453) (6,091)
Cash dividends paid -- (1,607)
Issuance of common stock 20 424
Repurchase of common stock (485) (126)
-------- --------
(918) (7,400)
Net increase (decrease) in cash and cash equivalents (24,200) 32,692
Cash and cash equivalents at beginning of period 32,172 144
-------- --------
Cash and cash equivalents at end of period $ 7,972 $ 32,836
======== ========
Cash paid for:
Interest (net of capitalized amounts) $ 19 $ 266
Income taxes (net of refunds) $ 1,415 $ 2,080
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, all adjustments necessary for a fair
presentation of results of operations for the periods presented have
been included in the accompanying unaudited consolidated financial
statements of Atrion Corporation (the "Company"). Such adjustments
consist of normal recurring items. The accompanying financial
statements have been prepared in accordance with the instructions to
Form 10-Q and include the information and notes required by such
instructions. Accordingly, the consolidated financial statements and
notes thereto should be read in conjunction with the financial
statements and notes included in the Company's 1997 Annual Report on
Form 10-K.
(2) PURCHASE OF CERTAIN QUEST MEDICAL, INC. ASSETS.
On January 30, 1998, the Company, through a wholly owned Texas
subsidiary then known as "QMI Medical, Inc.", acquired certain assets
of Quest Medical, Inc. (including all rights to the name "Quest
Medical, Inc.") pursuant to the terms of an Asset Purchase Agreement,
dated as of December 29, 1997. The Company paid $22,922,028 (after
taking into account certain postclosing adjustments and excluding
$276,445 of related acquisition costs) in cash under the Asset Purchase
Agreement. This acquisition was accounted for using the purchase method
of accounting and, accordingly, the results of operations relating to
those assets prior to the acquisition date have not been included in
the Company's financial statements. The Company recently changed the
name of QMI Medical, Inc. to "Quest Medical, Inc." and that subsidiary
is herein referred to as "Quest."
The following table presents unaudited consolidated selected financial
data on a pro forma basis assuming the purchase of these assets had
occurred as of January 1, 1997. The unaudited consolidated pro forma
data reflect certain assumptions, which are based on estimates. The
unaudited consolidated pro forma combined results presented have been
prepared for comparative purposes only and are not necessarily
indicative of actual results that would have been achieved had the
acquisition occurred at the beginning of the period presented, or of
future results.
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
1998 1997
----------- -----------
Revenues from continuing operations (000) $11,570 $10,899
Income from continuing operations (000) $ 226 $ 294
Net income (000) $ 226 $ 274
Net income per basic share $ 0.07 $ 0.08
Net income per diluted share $ 0.07 $ 0.08
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
1998 1997
----------- -----------
Revenues from continuing operations (000) $34,229 $34,191
Income from continuing operations (000) $ 1,285 $ 800
Net income (000) $ 1,285 $19,723
Net income per basic share $ 0.40 $ 6.13
Net income per diluted share $ 0.40 $ 6.07
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ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For further information regarding the acquisition of these assets,
refer to the Company's Report on Form 8-K, filed with the Securities
and Exchange Commission on February 17, 1998, as amended on April 15,
1998.
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ATRION CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
The Company's consolidated income from continuing operations for the
quarter ended September 30, 1998 was $226,000, or $.07 per basic and
diluted share, compared with $658,000, or $.20 per basic and diluted
share, for the third quarter of 1997. The earnings per basic share
computations are based on weighted average basic shares outstanding of
3,201,645 in 1998 and 3,230,387 in 1997. The earnings per diluted share
computations are based on weighted average diluted shares outstanding
of 3,201,645 in 1998 and 3,266,631 in 1997.
Consolidated revenues of $11.6 million from continuing operations for
the third quarter of 1998 were $4.3 million or 59 percent higher than
revenues for the third quarter of 1997. The increase in revenues in the
third quarter of 1998, compared to the same period in the prior year,
was primarily a result of the inclusion of the operations of Quest for
the 1998 period. Gross profit of $4.1 million in the third quarter of
1998 was $1.7 million or 66 percent higher than that in the comparable
period of 1997 primarily due to the inclusion of the operations of
Quest in the current-year period. The gross profit percentage in the
third quarter of 1998 of 36 percent is higher than the gross profit
percentage in the third quarter of 1997 of 34 percent due to the
inclusion of the operations of Quest in the 1998 period. Quest
generally has a higher gross profit percentage on sales than the
Company's other operations.
The Company's operating expenses of $3.9 million for the third quarter
of 1998 were $1.9 million higher than operating expenses for the third
quarter of 1997. This increase is primarily a result of the inclusion
of the operating expenses of Quest in the 1998 period. Operating income
in the third quarter of 1998 totaled $217,000 compared with $432,000 in
the comparable 1997 quarter.
Net interest income of $124,000 in the third quarter of 1998 was
$369,000 lower than net interest income in the same period in the prior
year. The net interest income amount in 1998 reflects interest earned
on the proceeds from the sale of the Company's natural gas subsidiaries
in May 1997 which were substantially reduced in late January 1998 to
fund the purchase of assets now held by Quest. Other income in the
third quarter of 1998 of $13,000 was $39,000 lower than the third
quarter of 1997 primarily as a result of a one-time gain during the
1997 period.
The Company believes that its revenues from continuing operations, cost
of goods sold, gross profit and operating expenses for the fourth
quarter of 1998 will be materially greater than those reported for the
same quarter last year (excluding the fourth quarter 1997 impairment
loss) as a result of the inclusion of Quest's operations. The increase
in operating expenses for the 1998 fourth quarter is expected to result
from the inclusion of Quest's operations at approximately the level of
operating expenses associated with Quest's product lines prior to
acquisition plus additional SG&A expenses associated with a planned
expansion of Quest's marketing organization and additional R&D expense
associated with planned enhancements to certain of Quest's product
lines. After taking into account the additional SG&A and R&D expenses
described above, the Company expects
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to report only modest operating income for the fourth quarter of 1998.
The Company reported an operating loss in the fourth quarter of 1997
primarily resulting from significant nonrecurring charges. As a result
of the factors discussed above, the Company expects that its income
from continuing operations for the fourth quarter of 1998 will be only
modest and will be below income from continuing operations, excluding
nonrecurring charges, for the 1997 fourth quarter. The Company
anticipates recognizing a one-time gain from discontinued operations
related to its natural gas subsidiaries, which were sold in 1997, of
approximately $650,000 (after tax) in the fourth quarter of 1998.
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
The Company's consolidated income from continuing operations for the
nine-month period ended September 30, 1998 was $1,262,000, or $.39 per
basic and diluted share, compared with $1,413,000, or $.44 per basic
share and $.43 per diluted share, for the first nine months of 1997.
The earnings per basic share computations are based on weighted average
basic shares outstanding of 3,212,448 in 1998 and 3,217,537 in 1997.
The earnings per diluted share computations are based on weighted
average diluted shares outstanding of 3,216,205 in 1998 and 3,250,820
in 1997.
Consolidated revenues of $33.1 million from continuing operations for
the nine months ended September 30, 1998 were $9.7 million or 42
percent higher than revenues for the nine months ended September 30,
1997. The increase in revenues for the first nine months of 1998,
compared to the same period in the prior year, was primarily a result
of the inclusion of the operations of Quest for eight months in the
current year period. Gross profit of $12.5 million for the first nine
months of 1998 was $4.1 million or 49 percent higher than that in the
comparable period of 1997 primarily due to the inclusion of the
operations of Quest in the current year period. The gross profit
percentage for the first nine months of 1998 of 38 percent is higher
than the gross profit percentage in the same period of 1997 of 36
percent due to the inclusion of the operations of Quest in the 1998
period. Quest generally has a higher gross profit percentage on sales
than the Company's other operations.
The Company's operating expenses of $11.0 million for the first nine
months of 1998 were $4.2 million higher than operating expenses for the
first nine months of 1997. This increase is primarily a result of the
inclusion of the operating expenses of Quest in the 1998 period.
Operating income in the nine months ended September 30, 1998 totaled
$1.5 million compared with $1.6 million in the same period of 1997.
Net interest income of $454,000 in the first nine months of 1998 was
$58,000 higher than net interest income in the same period in the prior
year. Net interest income in the 1998 period reflects interest earned
on the proceeds from the sale of the Company's natural gas subsidiaries
in May 1997 which were substantially reduced in late January 1998 to
fund the purchase of assets now held by Quest. Other income for the
nine-month period ended September 30, 1998 of $53,000 was $165,000
lower than other income for the same period of 1997 primarily as a
result of a one-time gain during the 1997 period.
The Company recorded income from discontinued operations in the
nine-month period ended September 30, 1997 of $1.9 million or $.60 per
basic and $.59 per diluted share. The Company also recorded a gain on
the disposal of discontinued operations relating to
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the sale of its natural gas subsidiaries of $17 million, or $5.28 per
basic share and $5.23 per diluted share, for the nine months ended
September 30, 1997. There was no similar transaction during the same
period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of
$8.0 million compared with $32.2 million at December 31, 1997. The
asset acquisition in January 1998 used approximately $23.2 million of
the Company's existing cash balance. The Company believes that its
remaining cash and cash equivalents, cash flows from operations,
borrowings available under the Company's revolving loan agreement and
other equity and debt financing, which the Company believes would be
available if needed, is sufficient to fund operations, including the
Company's previously announced increase of approximately $2.0 million
in annual SG&A and R&D expenses in connection with the ongoing
expansion of certain of the Company's product lines and of the
Company's marketing organization, potential projects, and budgeted
capital expenditures over the next two years.
In January 1998, the Board of Directors discontinued the payment of
quarterly cash dividends. Such action was taken to facilitate the
Company's growth strategy as well as to bring the Company's dividend
policy more in line with other companies in the medical products
industry.
YEAR 2000 ISSUES
The Company is continuing its actions to assess the nature and extent
of the work required to make its information systems, products,
facilities and equipment Year 2000 ready. The Company's operating units
are currently using several different information systems. As a part of
the Company's ongoing efforts to achieve operating synergies, the
Company has continued its review of various measures, and has taken
certain actions, to integrate and update its information systems and,
in connection therewith, is also seeking to determine which systems are
Year 2000 compliant and whether updated or replacement systems will be
Year 2000 ready. The Company is also contacting suppliers to determine
whether they are Year 2000 compliant and, if not, intends to monitor
their progress and take appropriate actions. In addition, the Company
has reviewed its products that process information that may be date
sensitive and believes that those products are not Year 2000 sensitive
products. The Company's facilities and equipment are also being
examined to determine whether they are Year 2000 ready. The Company has
not completed its assessment of its information systems, products,
facilities and equipment and, accordingly, has not determined the costs
associated with its efforts to prepare for Year 2000. However, the
Company currently believes that the costs of addressing its Year 2000
transition will not have a material adverse effect on the Company's
financial condition or business operations. Given the uncertain
consequences of failure to resolve significant Year 2000 issues,
however, there is no assurance that any one or more of such failures
would not have a material adverse impact on the Company. The Company
has not yet developed a contingency plan addressing failure to be Year
2000 ready.
FORWARD-LOOKING STATEMENTS
The statements in this Management's Discussion and Analysis that are
forward-looking are based upon current expectations, and actual results
may differ materially. Therefore, the
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inclusion of such forward-looking information should not be regarded as
a representation by the Company that the objectives or plans of the
Company would be achieved. Such statements include, but are not limited
to, the Company's expectations regarding fourth quarter 1998 revenues,
cost of sales, gross profit and gross profit percentage, expenses,
operating income and income from continuing operations, as well as
future liquidity and capital resources and Year 2000 compliance and
impact. Words such as "anticipates," "believes," "expects," "estimated"
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 to differ
materially including, but not limited to, the following: changing
economic, market and business conditions, the effects of governmental
regulation, the impact of competition and new technologies,
slower-than-anticipated introduction of new products or implementation
of marketing strategies, changes in the prices of raw materials, the
ability to attract and retain qualified personnel and the loss of any
significant customer. 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 the Company to alter its marketing,
capital expenditures or other budgets, which in turn may affect the
Company's results of operations and financial condition.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedules (for SEC use only)
(b) No reports on Form 8-K have been filed during the quarter
ended September 30, 1998.
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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: November 12, 1998 /s/ Emile A. Battat
-------------------------------
Emile A. Battat
Chairman, President and
Chief Executive Officer
Date: November 12, 1998 /s/ Jeffery Strickland
-------------------------------
Jeffery Strickland
Vice President and
Chief Financial Officer
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