TABLE OF CONTENTS THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 2017 Atrion Corporation and its subsidiaries (”we,” “our,” “us,” “Atrion,” or the “Company”) develop and manufacture products, primarily for medical applications. Our medical products are used in a number of fields including fluid delivery, cardiovascular, and ophthalmologyophthalmic applications. Our fluid delivery products accounted for 44 percent of net revenues for 2017 and 42 percent of net revenues for both 20162023, 46 percent for 2022, and 2015.47 percent for 2021. We have developed a wide variety of proprietary valves designed to precisely fill, hold, and release and/or remove controlled amounts of fluids, including blood and drugs, or gasses on demand for use in variousareas such as intubation, intravenous, catheter, and other applications in fields such asincluding anesthesia and oncology. We makemanufacture products that deliver fluids as well as promote infection control in hospital and home healthcare environments. Our cardiovascular products accounted for 3341 percent of net revenues for both 20172023, 37 percent for 2022, and 2016 and 3234 percent of net revenues for 2015.2021. At the core of our cardiovascular products is the MPS2®our Myocardial Protection System, or MPS2, a proprietary technology that is the only system used in open-heart surgery system that delivers to the heart essential fluids and medications, mixes critical drugs, and controls temperature, pressure, and other important variables. This system indicates improved outcomes offering an integrated, flexible set of choices during surgery without diluting the blood. We also develop and manufacture other cardiovascular products such as cardiac surgery vacuum relief valves; silicone vessel loops for retracting and occluding vessels in minimally invasive surgical procedures; inflation devices for balloon catheter dilation, stent deployment, and fluid dispensing; as well as products used in heart bypass surgery to make a precision opening in the heart for attachment of the bypass vessels. Our ophthalmic products accounted for 95 percent 11 percent and 12 percent of our net revenues for 2017, 20162023, 3 percent for 2022, and 2015, respectively.4 percent for 2021. We are a leading manufacturer of specialized medical devices that disinfect contact lenses. We also manufacture a proprietary line of balloon catheters used in the treatment of nasolacrimal duct obstruction in children and adults. Our other medical and non-medical products accounted for 1412 percent of our net revenues for 2017, 20162023, 14 percent for 2022, and 2015. One of these product lines consists of instrumentation and associated disposables used to measure the activated clotting time of blood. In addition,15 percent for 2021. Within this area, we manufacture and sell a line of products designed for safe needle and scalpel blade containment. We are also the leading manufacturer of inflation systems and valves used in marine and aviation safety products. We manufacture components used in inflatable survival products and structures. We also produce one-way and two-way pressure relief valves that protect sensitive electronics and other products during transport in other medical and non-medical applications. MarketingBusiness Strategy Our business strategy is to provide hospitals, physicians, and Major Customers other healthcare providers with the tools they need to improve the lives of the patients they serve. To do so, we provide a broad selection of products in our areas of expertise in the medical device industry. We focus on meeting customer needs with existing products and expanding current product lines. We seek to develop new products for our current customers and to develop new customers in niche markets. We reach a broad base of customers through our direct sales force, independent sales representatives, and distributors in the United States, Canada, Europe, and other countries. We have diverse product lines serving primarily the fluid delivery, cardiovascular, and ophthalmic markets, and this diversity has served us well as we encounter changing market conditions. Our manufacturing operations are conducted at three geographically separate facilities, thereby lessening the risk that a singular event in any one location could cripple our manufacturing operations. Furthermore, all of our manufacturing activities are conducted in the United States, thus lessening the risk that offshore events could interfere with our manufacturing operations. We make significant investments in research and development, or R&D, at all three of our facilities in order to maintain and enhance our position in the medical device industry.We have created and maintained a culture of controlling costs, and we regularly invest in modern manufacturing technologies. We have been successful in consistently generating cash from operations, thus enabling us to expand our operations. Over the past 23 years, we have grown our existing businesses and, in doing so, we have succeeded in increasing revenues from $51.4 million in 2000 to $169.3 million in 2023 and increasing net income from $2.8 million in 2000 to $19.4 million in 2023. We plan to continue focusing on internal growth and over the past two years have significantly expanded one of our manufacturing facilities to support that growth. During this 23-year period, we have explored various acquisition opportunities but have elected not to proceed with them, focusing instead on organic growth. However, we believe that we can continue growing organically and, at the same time, make acquisitions that will enhance our growth, and we are continuing to seek such opportunities. Marketing We market components to other equipment manufacturers for incorporation in their products and sell finished devices to physicians, hospitals, clinics, and other treatment centers. We sell our products through a sales force which consists of direct sales personnel, independent sales representatives, and distributors. Our sales managers also work closely with major customers in designing and developing products to meet customer requirements. Our net revenues from sales to customers outside the United States totaled approximately 37 percent of our net revenues for both 2017 and 2016 and 35 percent of our net revenues for 2015. In 2015, we saw a reduction in the percentage of our international sales that was driven in large part by a customer’s decision to build a new facility in the United States. Our international sales are made to various manufacturers and through distributors in over 60 countries. Additional information about our revenues from customers in and outside of the United States over the past three years is set forth in Part II, Item 8 of this Form 10-K.
We offer customer service, training and education, and technical support such as field service, spare parts, maintenance, and repair for certain of our products. We periodically advertise our products in trade journals, routinely attend and participate in industry trade shows throughout the United States and internationally, and sponsor scientific symposia as a means of disseminating product information. We also have supportive literature on the benefits of our products. Our medicalWe proudly own and non-medical products are manufactured atoperate our own manufacturing facilities in Florida, Alabama, and Texas. The facilities in Alabama and Florida both utilize plastic injection molding and specialized assembly as their primary manufacturing processes. Our other manufacturing processes consist of the assembly of standard and custom component parts, including the assembly of electronic components, and the testing of completed products. We are subject to the Quality System Regulation, or QSR, of the United States Food and Drug Administration, or FDA, which requires manufacturers of medical devices to adhere to certain design testing, quality control, documentation and other quality assurance procedures during the manufacturing process. We devote significant attention to quality assurance.assurance and regulatory compliance. Our quality assurance measures begin with the suppliers which participate in our supplier quality assurance program. These measures continue at the manufacturing level where many components are assembled in a clean room environment designed and maintained to reduce product exposure to particulate matter. Products are tested throughout the manufacturing process for adherence to specifications. Most finished products are then shipped to outside processors for sterilization by radiation or ethylene oxide gas. After sterilization, the products are quarantined and tested before they are shipped to customers. Skilled workers are required for the manufacturing of our products, and we believe that additional workers with these skills are readily available in the areas where our plants are located.
Our medical device operations are EN ISO13485:2012ISO 13485:2016 certified and are subject to Federal Drug Administration, or FDA, jurisdiction. Our non-medical device operations are ISO9001-2008 certified. A well-targeted research and development, or R&D program is an essential part of our activities, and we are currently engaged in a number of R&D projects. The objective of this program is to develop new products in our current product lines, improve current products, and develop new product lines. The Company expects to continue additional R&D in 20172024 in all these fields. Our consolidated R&D expenditures for 2017, 2016 and 2015 were $5,799,000, $6,574,000 and $6,346,000, respectively.
aspects of this program.Sources and Availability of Raw Materials The principal raw materials that we use in our products are resins. Our ability to operate profitably is dependent, in part, on the availability and pricing of these resins. The resins we use are derived from petroleum and natural gas, and the prices fluctuate substantially as a result of changes in petroleum and natural gas prices, demand, and the capacity of the companies that produce these resins to meet market needs. Instability in the world markets for petroleum and natural gas could adversely affect the availability and pricing of these resins. We contract with various suppliers to provide the component parts necessary to assemble our products. Substantially all of these components are available from a number of different suppliers, although certain components are purchased from single sources that manufacture these components using our tooling. We believe that there arewe have satisfactory alternative sourcesbackup plans for single-sourced components, although a sudden disruption in supply from one or more of these suppliers could adversely affect our ability to deliver finished products on time. We own the molds used for production of substantially all our components. Consequently, in the event of supply disruption, we shouldbelieve we would be able to fabricate our own components or contract with another supplier, albeit after a possible delay in the production process. PatentsIntellectual Property We have developed, and License Agreements Our commercial success is dependent,our business depends in part on, significant know-how and proprietary technology. To protect our ability to continue to develop patentable products, to preserve ourknow-how and proprietary technology, we rely on trade secretssecret laws, trademarks, patents, copyrights, confidentiality agreements, and to operate without infringing or violating the proprietary rights of third parties.other contracts. We currently have 530 activeown 496 patents and patent applications pending on products that are either being sold or are in development. We pay royalties to outside parties for three patents. All of these patents and patents pending relate to products currently being sold by us or which we intend to sell in the future, 148 of which relate to fluid delivery products, in evaluation stages.110 of which relate to cardiovascular products, 34 of which relate to ophthalmic products, and 204 of which relate to other products. Our patents expire at various times over the next 2018 years.
In assessing the importance of patents to our business and the impact of the expirations of our patents, we believe it is appropriate to take into account a number of factors, including the following: We have contractual commitments for certain products that extend beyond the expiration dates of our patents. Additionally, many of our products are components in other medical devices, and the cost of those components is generally very small compared to the cost of those medical devices. As a result, substituting alternative components would likely result in the manufacturers of those medical devices and their customers experiencing an elaborate technical and regulatory process that could add significant costs and delays and may not be cost effective, thus making it difficult for our potential competitors to replace our components in those medical devices. We manufacture our own products, and that experience has been and is expected to continue to be, beneficial to us beyond the expiration of our patents. During the life of a patent, we frequently invest in automation to increase quality and reduce cost, and we allocate resources to improving and developing enhancements to our products. Our experience has been that these steps increase the likelihood that we will be able to compete effectively if others try to duplicate our products after our patents expire. We have often been able to sell our products for many years beyond their patent expirations and expect that to continue in the future.We recognize, however, that our future growth depends, in part, on our success in continuing to expand our patent portfolio as older patents expire. Much of our R&D effort is aimed at developing new products that will eventually take the place of our current products. We also have a number of trademark registrations that are generally for fixed but renewable terms. For the above reasons, as well as others, we believe that no single patent, technology, trademark, intellectual property asset, or license is material in relation to our business as a whole. We have developed technical knowledge which, although non-patentable, we consider to be significant in enabling us to compete. However, the proprietary nature of such knowledge may be difficult to protect. We have entered into agreements with key employees prohibiting them from disclosing any of our trade secrets or other confidential information or trade secrets.information. In addition, generally these agreements also provide that inventions or discoveries relating to our business by these individuals will be assigned to us and become our sole property. The medical device industry is characterized by extensive intellectual property litigation, and companies in this industry sometimes use intellectual property litigation to gain a competitive advantage. Intellectual property litigation, regardless of outcome, is often complex and expensive, and the outcome of this litigation is generally difficult to predict. Depending on the product and the nature of the project, we compete on the basis of our ability to provide engineering and design expertise, quality, service, product, and price. As such, successful competitors must have technical strength, responsiveness, and scale. We believe that our expertise and reputation for quality medical products have allowed us to compete favorably with respect to each such factor and to maintain long-term relationships with our customers. In many of our markets, we compete with numerous other companies in the sale of healthcare products. These markets are dominated by established manufacturers that have broader product lines, greater distribution capabilities, substantially greater capital resources, and larger marketing and R&D staffs and facilities than ours. Many of these competitors offer broader product lines within the specific product market and in the general field of medical devices and supplies. Broad product lines give many of our cardiovascular and fluid delivery competitors the ability to negotiate exclusive, long-term medical device supply contracts and, consequently, the ability to offer comprehensive pricing of their competing products. By offering a broader product line in the general field of medical devices and supplies, competitors may also have a significant advantage in marketing competing products to group purchasing organizations, health maintenance organizations, and other managed care organizations that are increasingly seeking to reduce costs through centralization of purchasing functions. Furthermore, innovations in surgical techniques, product design or functions, or medical practices could have the effect of reducing or eliminating market demand for one or more of our products. In addition, our competitors may use price reductions to preserve market share in their product markets. WeFor some customers or prospective customers, we design products for a customer or potential customer prior to entering into long-term development and manufacturing agreements with that customer.those customers or prospective customers. Because these products are somewhat limited in number and normally are only a component of the ultimate product sold by our customers, we are dependent on our ability to meet the quality requirements of our customers and must continually be attentive to the need to manufacture such products at competitive prices and in compliance with strict manufacturing standards. Additionally, we are dependent on our customers’ success in the marketing of the ultimate products sold. We also compete in the market for inflation devices used in marine and aviation equipment. Products
The manufacture and sale ofMedical Device Regulation in the United States In the United States, medical productsdevices are subject to comprehensive regulation by numerous United States and foreign regulatory agencies, principally the FDA. The R&D, manufacturing, promotion, marketing and distribution of medical products in the United States are subject to the provisions ofFDA under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations, and certain other federal and state statutes and regulations. The FDA regulates the regulations promulgated thereunder.development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, recordkeeping, complaint and adverse event reporting, clearance, approval, certification, promotion, marketing, export, import distribution, and service of medical devices in the U.S. to ensure that medical devices distributed domestically are safe and effective for their intended uses. All manufacturers of medical devices must register with the FDA and list all medical devices manufactured by them. The list must be updated annually. Our medical productsdevice subsidiaries and certain of our customers are subject to inspection by the FDA for compliance with such regulations and procedures and our medical productsdevice manufacturing facilities are subject to regulation by the FDA. We are also subject to regulation in certain foreign countries where we sell our products. Some of the regulations in these countries that are applicable to our products are similar to those of the FDA. The FDA has traditionally pursued a rigorous enforcement program to ensure that regulated entities comply with the FDCA. A company not in compliance may face a variety of regulatory actions, including warning letters, product detentions, device alerts, mandatory recalls or field corrections, product seizures, total or partial suspension of production, injunctive actions or civil penalties, and criminal prosecutions of the company or responsible employees, officers, and directors. The FDA promulgates rules, which are available to the public, for the approval of medical devices. The process of obtaining FDA approval for new devices can take several months to several years depending on the type of application required for a particular device. Furthermore, the process of obtaining FDA approval can be expensive and uncertain. Even if granted, FDA approval may include significant limitations on the indicated uses for which a product may be marketed. FDA enforcement policy strictly regulates the promotion of approved medical devices. Product approvals can be withdrawn for failure to comply with regulatory requirements or the occurrence of unforeseen problems following initial marketing. In addition, after a device is placed on the market, numerous FDA and other regulatory requirements continue to apply. These include establishment registration and device listing with the FDA; compliance with medical device reporting regulations requiring that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and compliance with corrections and removal reporting regulations requiring that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health. The FDA and the Federal Trade Commission, or FTC, also regulate the advertising and promotion of our products to ensure that the claims we make are consistent with our regulatory clearances, that scientific data substantiates the claims, and that our advertising is not false or misleading. We are permitted to promote and advertise our products solely for uses within the scope of our intended use statement in our clearances and cannot make unsupported safety and effectiveness claims. A number of enforcement actions have been taken against manufacturers that promote products for “off-label” uses (i.e., uses that are not described in the approved or cleared labeling), including actions alleging that claims submitted to government healthcare programs for reimbursement of products that were promoted for off-label uses are fraudulent in violation of the Federal False Claims Act or other federal and state statutes and that the submission of those claims was caused by off-label promotion. The failure to comply with prohibitions on off-label promotion can result in significant monetary penalties, revocation or suspension of a company’s business license, suspension of sales of certain products, product recalls, civil or criminal sanctions, exclusion from participating in federal healthcare programs, or other enforcement actions. In the United States, allegations of such wrongful conduct could also result in a corporate integrity agreement with the United States government that imposes significant administrative obligations and costs. Many jurisdictions outside the United States have similar regulations.Our manufacturing processes are required to comply with the Quality System Regulation, or QSR. The QSR covers, among other things, the methods used in, and the facilities and controls used for, the design, testing, controlling, documenting, manufacture, packaging, labeling, storage, installation, and servicing of all medical devices intended for human use. Maintenance of extensive records, which demonstrate compliance with the FDA regulation, the manufacturer’s own procedures, specifications, and testing, as well as distribution and post-market experience are required by the QSR. Compliance with the QSR is necessary. Manufacturers must comply with the QSR in order to continue to market cleared or approved product offerings in the U.S. A company’s facilities, records, and manufacturing processes are subject to periodic scheduled or unscheduled inspections by the FDA. Failure to maintain compliance with applicable QSR requirements could result in the shut-down of, or restrictions on, manufacturing operations and the recall or seizure of marketed products. The FDA can take a variety of compliance or enforcement actions if it determines that a manufacturer has failed to comply with applicable regulatory requirements, which may result in sanctions, including the following: •warning letters, fines, injunctions, consent decrees, administrative penalties, and civil or criminal penalties; •recalls, withdrawals, or administrative detention or seizure of our products; •operating restrictions or partial suspension or total shutdown of production; •refusing or delaying requests for marketing clearance under Section 510(k) of the FDCA or pre-market approvals of new products or modified products; •withdrawing 510(k) clearances; •refusal to grant export approvals; or •criminal prosecution. Also, the discovery of previously unknown problems with any marketed products, including unanticipated adverse events or adverse events of increasing severity or frequency could result in restrictions on the device, including the removal from the market. Certain of our aviation and marine safety products are subject to regulation by the United States Coast Guard and the Federal Aviation Administration and similar organizations in foreign countries which regulate the safety of marine and aviation equipment. Medical Device Regulation Outside the United States In order for our devices to be marketed in countries outside the United States, regulatory approvals must be obtained, and extensive product and quality system regulations must be complied with, in those countries. These regulations, including the requirements for approvals or clearance and the time required for regulatory review, vary significantly from country to country. Some countries have regulatory review processes which are substantially longer than similar processes in the United States. Failure to obtain regulatory approval in a timely manner and to meet all local requirements including language and specific safety standards in any foreign country in which we would like for our products to be sold could prevent our products from being marketed in those countries. The regulatory regime in the European Union requires that medical devices may only be placed on the market if they do not compromise safety and health when properly installed, maintained, and used in accordance with their intended purpose. Although some of the more variable national requirements under which medical devices were formerly regulated were substantially replaced by the European Union Medical Devices Directive, or MDD, in 1993, individual nations can still impose unique requirements that may require supplemental submissions. The European Union medical device laws require manufacturers to declare that their products conform to the essential regulatory requirements after which the products may be placed on the market bearing the CE Mark. Manufacturers' quality systems for products in all but the lowest risk classification are also subject to certification and audit by an independent notified body. In May 2017, the European Union implemented a new regulatory scheme for medical devices under the Medical Device Regulation, or MDR, which became fully effective on May 26, 2021 and replaced the MDD. The MDR brought significant new requirements for many medical devices, including enhanced requirements for clinical evidence and documentation, increased focus on device identification and traceability, new definitions and registration of economic operators throughout the distribution chain, and additional post-market surveillance and vigilance. Compliance with the MDR requires re-certification of many of our products to the enhanced standards and has resulted, and will continue to result, in substantial additional expense. The MDR requires that, before placing a device on the market, other than a custom-made device, manufacturers (as well as other economic operators, such as authorized representatives and importers) must register by submitting identification information to an electronic system, unless they have already registered. The information to be submitted also includes the name, address, and contact details of the person or persons responsible for regulatory compliance. The new regulation also requires that, before placing a device on the market, other than a custom-made device, manufacturers must assign a unique identifier to the device and provide it along with other core data to a database. These new requirements aim at ensuring better identification and traceability of the devices. The obligations for registration in electronic system will become applicable at a later date as it is not yet fully functional. Until it becomes functional, the corresponding provisions of the MDD continue to apply for the purpose of meeting the obligations laid down in the provisions regarding exchange of information, including, and in particular, information regarding registration of devices and economic operators. All manufacturers placing medical devices on the market in the European Union must comply with the European Union’s medical device vigilance system, which has been reinforced by the MDR. Under this system, serious incidents and corrective actions must be reported to the relevant authorities of the member states. Manufacturers are required to take corrective actions for technical or medical reasons to prevent or reduce a risk of a serious incident associated with the use of a medical device that is made available on the market. According to the MDR, only devices that are CE marked may be marketed and advertised in the European Union in accordance with their intended purpose. Certain directives concerning misleading and comparative advertising and on unfair commercial practices, although not specific to the advertising of medical devices, also apply to the advertising thereof and contain general rules, for example, requiring that advertisements are evidenced, balanced, and not misleading. European Union member states’ laws related to the advertising and promotion of medical devices, which vary between jurisdictions, may limit or restrict the advertising and promotion of products to the general public and may impose limitations on promotional activities with healthcare professionals. Many member states have adopted specific anti-gift statutes that further limit commercial practices for medical devices, particularly with respect to healthcare professionals and organizations. Additionally, there has been a recent trend of increased regulation of payments and transfers of value provided to healthcare professionals or entities. In many of the other foreign countries in which we market our products, we may be subject to regulations affecting, among other things, product standards and specifications, packaging requirements, labeling requirements, and quality system requirements. Many of the regulations applicable to our devices and products in these countries are similar to those of the FDA. In some regions, the level of government regulation of medical devices is increasing, which can lengthen time to market and increase registration and approval costs. In many countries, our products may have to be qualified before they can be marketed and considered eligible for reimbursement. Foreign Corrupt Practices Act and Similar Anti-Corruption Laws The Foreign Corrupt Practices Act, or FCPA, and similar anti-corruption laws in other jurisdictions, broadly prohibit businesses and their representatives from offering to pay, paying, promising to pay, or authorizing the payment of money or anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage in order to obtain or retain business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring us to maintain books and records, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation, including international subsidiaries, if any, and to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements. The scope of the FCPA includes interactions with certain healthcare professionals in many countries. We operate in parts of the world that have experienced governmental corruption to some degree and in certain circumstances strict compliance with anti-corruption laws may conflict with local customs and practices. Compliance with the FCPA and these other laws may be expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, anti-corruption laws present particular challenges in the medical device industry because in many countries hospitals are operated by the government and doctors and other hospital employees are considered foreign officials. There is no assurance that our policies and procedures will protect us from acts committed by our employees, consultants, sales agents, or distributors in violation of those laws. Noncompliance with the FCPA or any other anti-corruption law could result in fines, penalties, or other adverse consequences and negatively affect our reputation. Healthcare and Environmental Regulations In the United States, healthcare providers, including hospitals and physicians, that purchase medical products for treatment of their patients generally rely on third-party payors, principallyincluding Medicare, Medicaid, and private health insurance plans, to reimburse all or a part of the costs and fees associated with the procedures performed using these products. Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed healthcare systems that control reimbursement for new products and procedures. In most markets, there are private insurance systems as well as government-managed systems. Market acceptance of our products in international markets depends, in part, on the availability and level of reimbursement. Medicare and Medicaid reimbursement for hospitals is generally based on a fixed amount for a patient based upon that patient’s specific diagnosis. Because of this fixed reimbursement method, hospitals may seek to reduce the costs they incur in treating Medicare and Medicaid patients. Frequently, reimbursement is reduced to reflect the availability of a new procedure or technique, and as a result hospitals are generally willing to implement new cost saving technologies before these downward adjustments take effect. Likewise, because the rate of reimbursement for physicians who perform certain procedures has been and may in the future be reduced, physicians may seek greater cost efficiency in treatment to minimize any negative impact of reduced reimbursement. Third-party payors may challenge the prices charged for medical products and services and may deny reimbursement if they determine that a device was not used in accordance with cost-effective treatment methods as determined by the payor, was experimental, or was used for an unapproved application. In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively known as the “Affordable Care Act”) were enacted. Among other provisions, this legislation imposedThe Affordable Care Act made changes that have had a 2.3 percent excise taxsignificant impact on the sale in the United States of certain medical devices by the manufacturer, producer or importer effective after December 31, 2012. The Consolidated Appropriations Act, 2016, signed into law on December 18, 2015 included a two-year moratorium on collection of thehealthcare providers, medical device tax, beginning January 1, 2016 and ending on December 31, 2017. As part of stopgap spending legislation signed into law by President Trump on January 22, 2018 the imposition of the medical device excise tax was delayed for an additional two years until January 1, 2020. During 2015, this excise tax applied to approximately 28 percent of our product revenue generated in the United States,pharmaceutical companies, and for that year, we remitted $600,000 for this excise tax.insurers. The Affordable Care Act also established a payment transparency program, sometimes referred to as the Physician Payments Sunshine Act, that requires medical device and drug manufacturers, including the Company, to report to the Centers for Medicare & Medicaid Services payments or other transfers of value made to physicians, teaching hospitals, and teaching hospitals.certain other providers. The program is intended to provide patients with enhanced transparency as to the financial relationships that physicians, and teaching hospitals, and certain other providers have with medical device and drug manufacturers. Additionally, various healthcare reform proposals have also emerged at the state level. On January 20, 2017, President Trump signed an Executive Order directing federal agencies to exercise all authority and discretion available to them under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. There have also been judicial and congressional challenges to certain aspects of the Affordable Care Act, as well as efforts by the Trump Administration to modify, repeal, or otherwise invalidate all, or certain provisions, of the Affordable Care Act. Since January 2017, President Trump has signed two Executive Orders designedWe cannot predict with certainty what affect further changes to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. The Trump Administration has also announced that it will discontinue the payment of cost-sharing reduction (“CSR”) payments to insurance companies until Congress approves the appropriation of funds for the CSR payments. The loss of the CSR payments is expected to increase premiumswould have on certain policies issued by qualified health plans under the Affordable Care Act. A bipartisan bill to appropriate funds for CSR paymentsour business. Various legislation has been introduced in the Senate, but the future of that bill is uncertain. In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required underadopted since the Affordable Care Act for plans sold through such marketplaces. Because of the Tax Cuts and Jobs Act of 2017, or Tax Act, which was enacted, on December 22, 2017, the Affordable Care Act's individual mandate penalty for not having health insurance coverage will be eliminated startingincluding certain reductions in 2019. Further, each chamber of Congress has put forth multiple bills designedpayments to repeal or repealMedicare providers. Future legislation and replace portions of the Affordable Care Act. Although the majority of these measures have not been enacted by Congress to date, Congress will likely continue to consider other legislation to modify elements of the Affordable Care Act. In addition, the Trump Administration is likely to continue shaping the law significantly through regulations that may impact the health insurance marketplaces, essential health benefits requirements, reimbursement rates, and Medicaid/Medicaid marketplace waivers for state flexibilities. Any regulatory or legislative developments in domestic or foreign markets that eliminate or reduce reimbursement rates for procedures performed with our products could harm our ability to sell our products or cause downward pressure on the prices of our products, either of which would adversely affect our business, financial condition, and results of operations. Further, we anticipate that state legislatures and the private sector will continue to review and assess healthcare reform, including alternative healthcare delivery and payment systems. We cannot predict with certainty what impact the adoption or modification of any such reform measures or market forces may have on our business. We are, directly or indirectly, subject to various federal and state laws governing our relationship with healthcare providers and pertaining to healthcare fraud and abuse, including anti-kickback laws. In particular, the federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual or the furnishing, arranging for or recommending a good or service for which payment may be made in whole or part under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid, and other federal healthcare programs. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. In implementing the statute, theThe Office of Inspector General of the United States Department of Health and Human Services, or OIG, has issued a series of regulations, known as the “safe harbors.harbors,” These safe harbors setsetting forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable element of a safe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG. The Federal False Claims Act, or FCA, imposes civil liability on any person or entity that submits, or causes the submission of, a false or fraudulent claim to the United States government. Damages under the FCA can be significant and consist of the imposition of fines and penalties. The FCA also allows a private individual or entity with knowledge of past or present fraud against the federal government to sue on behalf of the government to recover the civil penalties and treble damages. The United States Department of Justice, or DOJ, on behalf of the government, has previously alleged that the marketing and promotional practices of medical device and drug manufacturers that included the off-label promotion of products or the payment of prohibited kickbacks to doctors violated the FCA resulting in the submission of improper claims to federal and state healthcare entitlement programs such as Medicaid. In certain cases, manufacturers have entered into criminal and civil settlements with the federal government under which they entered into plea agreements, paid substantial monetary amounts, and entered into corporate integrity agreements that require, among other things, substantial reporting and remedial actions going forward. We are also subject to various local, state, federal, and international laws and regulations relating to environmental protection, hazardous substances, and health and safety. These requirements govern, among other things, matters such as safe working conditions, laboratory and manufacturing practices, the handling, storage, use, and disposal of hazardous materials and wastes and, if any, the associated cleanup of properties affected by discharges, releases, or exposure to pollutants, air emissions, wastewater, and occupational and human health and safety. We believe we have been, and we are, in material compliance with all applicable environmental laws and regulations laws and regulations. Product Liability and Insurance The design, manufacture, and marketing of products of the types we produce entail an inherent risk of product liability claims. A problem with one of our products could result in product liability claims or a recall of, or safety alert, or advisory notice relating to, the product. We have product liability insurance in amounts that we believe are adequate. Advisory Board
Clinical Advisors Several physicians and other healthcare professionals serve as our clinical advisors. These clinical advisors have assisted in the identification of the market need for some of our products. Members of our management and scientific and technical staff from time to time consult with these clinical advisors to better understand the technical and clinical requirements of current and future products. We anticipate that these clinical advisors will continue to play a role in our development activities. Certain of the clinical advisors are employed by academic institutions and may have commitments to, or consulting or advisory agreements with, other entities that may limit their availability to advise us. The clinical advisors may also serve as consultants to other medical device companies. Our clinical advisors are not expected to devote more than a small portion of their time in providing services to us. People
At JanuaryHuman Capital Our Employees As of December 31, 2018,2023, we had 528712 employees, all of whom were employed in the United States. Our highly qualified and experienced team, including employees responsible for our sales, marketing, manufacturing, regulatory, finance, and other important functions is critical to our success. During 2023, the number of employees decreased by approximately 10. We also leverage temporary workers to provide flexibility for our business needs. As we grow our business over the next several years, we expect to add additional employees. We continually evaluate our business needs and opportunities and balance in house expertise and capacity with external expertise and capacity. Currently, we manufacture substantially all of our products. Our Culture The success of our human capital management is evidenced by our typically low employee turnover, which is regularly reviewed by our senior management as part of its oversight of our human capital strategy. We have a strong commitment to our communities and are proud to offer jobs with excellent benefits to people often overlooked by too many businesses. We pride ourselves on having a strong, inclusive, and positive culture based on our shared mission and values. Employee Engagement and Benefits We believe that our continued success largely depends upon our ability to attract and retain highly qualified employees. We provide our employees with competitive salaries and bonuses, certain opportunities for equity ownership, development programs that foster continued learning and growth, and an employment package that promotes well-being across all aspects of their lives, including health care, retirement planning, and paid time off. As part of our promotion and retention efforts, we regularly conduct employee surveys to gauge employee engagement and identify areas of focus. Diversity, Inclusion, and Belonging The tenets of diversity, inclusion, and belonging have long been baked into the DNA of our Company. We have always operated our business in the United States, with a highly diverse workforce. We laud the popular focus on diversity in the boardroom—our Board had its first female director 22 years ago, and today, one of our five independent directors is a person of color and one is female. We believe that the focus on diversity and inclusion should be present at all levels of our Company. Over half of our employees have at most a high school degree. We proudly employ individuals who have come from difficult circumstances that all too often have the effect of disqualifying them from being hired at many companies, and we believe that businesses that ignore them often are losing out on exceptional talent. Additionally, we do not have a mandatory retirement age, and many of our employees have tenures with us ranging from 10 to 40 years. We believe that our business benefits from the different perspectives a diverse workforce brings us.Available Information Our website address is www.atrioncorp.com. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K and Proxy Statements, and amendments to these reports,filings, as soon as reasonably practicable after they are filedfiling with or furnished to the Securities and Exchange Commission or SEC.(“SEC”). These filings are also available at www.sec.gov. The contents of these websites are not incorporated in this Form 10-K, and any references to our website are intended to be inactive textual references only.ITEM 1A.
RISK FACTORS. In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our business. OurAny of the risks and uncertainties described below could significantly and negatively affect our business, financial condition, andor results of operations, could be materially adversely affected by any of these risks.as well as our prospects now or in the future. Additional risks and uncertainties that we doare not currently know aboutpresently known to us, or risks that we currently believe areconsider immaterial, or that we have not predicted, maycould also harmimpair our business, financial condition, or results of operations, or adversely affect us. ●
as well as our prospects.Business and Operating Risks Our sales could decline materially if we lose business from one or more of our larger customers or a significant number of our smaller customers. Our sales are generally made under open short-term purchase orders or purchase contracts. Customers with purchase orders could reduce their volumes, or cease purchasing our products, with minimal notice. Customers having purchase contracts may elect not to renew those contracts at expiration or the contracts may be renewed on terms less favorable to us. The loss of, or material reduction in orders by, one or more of our larger customers or a significant number of our smaller customers could have a material adverse effect on our business, financial condition, and results of operations. ●
Our business is dependent on the price and availability of resins and our ability to pass on resin price increases to our customers. The principal raw materials that we use in our products are polyethylene, polypropylene, and polyvinyl chloride resins. Our ability to operate profitably is dependent, in part, on the availability and pricing of these resins. The resins we use are derived from petroleum and natural gas; therefore, prices fluctuate substantially as a result of changes in petroleum and natural gas prices, demand, and the capacity of the companies that produce these products to meet market needs. Instability in the world markets for petroleum and natural gas could adversely affect the prices of these raw materials and their availability. Our ability to maintain profitability depends, in part, upon our ability to pass through to our customers the full amount of any increaseincreases in raw material costs.costs to our customers. If resin prices increase and we are not able to fully pass on the increases to our customers, our results of operations and our financial condition will be adversely affected. ●
TheWe depend on third-party suppliers for raw materials and key components used in our manufacturing processes, and the loss of a key supplier ofthese third-party suppliers or their inability to supply us with adequate raw materials or components could lead to increased costs and lower profit margins. The lossharm our business.We rely on a limited number of a key supplier would force us to purchasesuppliers for raw materials and components for certain of our products. If we experience a shortage in any of these raw materials or components, we will need to identify and qualify new supply sources, which could increase our costs, result in manufacturing delays, and cause delays in the open market, whichdelivery of our products. We may bealso experience a delay in completing validation and verification testing or sterility audits for controlled-environment rooms at higher prices, until we could secure another source and such higher prices may not allow usour manufacturing facilities. If any of those suppliers is unable or unwilling to remain competitive. If we are unable to obtainprovide these raw materials or produce these components or supply them in sufficientthe quantities that we need, and at acceptable prices, we would experience manufacturing delays and may not be able to deliver our products on a timely or cost-effective basis to our customers, or at all, which could reduce our product sales, increase our costs, and harm our business. Although we believe that we could obtain replacement raw materials and components from alternative suppliers, we may be unable to do so on a timely basis, or at all. Losing any of these suppliers could cause a disruption in our production. Establishing additional or replacement suppliers for these materials may take significant time, as certain of these suppliers must be approved by regulatory authorities, which could disrupt our production. Some raw materials and components, including those that are available from multiple sources, are at times subject to industry-wide shortages and significant commodity pricing fluctuations that could materially adversely affect our financial condition and operating results. As a result, we could experience significant delays in manufacturing and delivering our products to customers and increased manufacturing costs. We cannot assure you we can continue obtaining required materials and components that are in short supply within the time frames we require at an affordable cost, or at all. If we cannot secure on a timely basis sufficient quantities of the materials we depend on to manufacture our products. Evenproducts, if we were ableencounter delays or contractual or other difficulties in our relationships with these suppliers, or if we cannot find replacement suppliers at an acceptable cost, then manufacturing our products may be disrupted, which could increase our costs, prevent or impair our development or commercialization efforts, and have a material adverse effect on our business, financial condition, and results of operations. If our supply of components for a new or existing product continues to replace onebe delayed or constrained for any reason, including if an outsourcing partner delayed shipments of completed products to us or additional time is required to obtain sufficient quantities from the original source, or if we have to identify and obtain sufficient quantities from an alternative source, then our raw materialfinancial condition and operating results could be materially adversely affected. In addition, the continued availability of these components at acceptable prices, or at all, can be affected for any number of reasons, including if suppliers through anotherdecide to concentrate on the production of common components or components for other customers instead of components customized to meet our requirements. Although we have entered into agreements for the supply arrangement,of many components, there iscan be no assurance that the terms that we enter into with such alternate supplier will be able to extend or renew these agreements on similar terms, or at all. Raw material and component suppliers may suffer from poor financial conditions that can lead to business failure for the supplier or consolidation within a particular industry, further limiting our ability to obtain sufficient quantities of raw materials or components on commercially reasonable terms. Additionally, we may be unsuccessful in our efforts to negotiate with existing suppliers to obtain cost reductions and avoid unfavorable changes to terms, source less expensive suppliers for certain raw materials or parts, and redesign certain parts to make them less expensive to produce. Any of these occurrences may harm our business, financial condition, and results of operations. We are subject to risks associated with public health crises such as favorablepandemics and epidemics, including the COVID-19 pandemic, which may continue to have a material adverse effect on our business, the nature and extent of future impacts of which are highly uncertain and unpredictable. Although the United States and many other countries have removed or reduced the restrictions taken in response to the COVID-19 pandemic, certain COVID-19 risks remain and the emergence of new variants of the virus may result in new governmental lockdowns, quarantine requirements, or other restrictions to slow the spread of the SARS-CoV-2 virus. This could result in significant reductions in the demand for certain of our products due to reductions in elective and non-essential procedures, reduced capital spending by customers, decreases in research activity, reduced hospital and clinical occupancy, and healthcare system staffing shortages. These measures could also include determinations that our or our suppliers’ facilities are not essential businesses, which could result in closures or other restrictions that significantly disrupt our operations or those of distributors or suppliers in our supply chain. In addition, any such measures could also impact the global economy more broadly, for example by leading to further economic slowdowns. Although COVID-19 case volumes have decreased substantially in the United States and certain other countries, the global outlook remains uncertain as case counts fluctuate and vaccination and booster rates remain relatively low in many parts of the world. Going forward, medical procedure rates may vary by country based on regional infection and vaccination and booster rates, hospital occupancy and staffing levels, transportation limitations, quarantines and other restrictions, and the emergence of new variants of the virus. In addition, the COVID-19 pandemic impacted our global supply chain network, and we may continue to experience significant challenges in our network, including shortages in supply or disruptions or delays in shipments, as well as price increases, of certain materials or components used in our products. The COVID-19 pandemic escalated challenges that existed for global healthcare systems prior to the pandemic, including budget constraints and staffing shortages, particularly shortages of nursing staff, that could impact the future demand for our products and services. As COVID-19 conditions have improved, there have been increases in demand for certain of our products, which may pose challenges to our supply chain and could adversely affect our business. The scope and duration of any future public health crisis, including the potential emergence of new variants of the SARS-CoV-2 virus, the pace at which government restrictions are imposed and lifted, the scope of additional actions taken to mitigate the spread of disease, global vaccination and booster rates, the speed and extent to which global markets and utilization rates for our products fully recover from the disruptions caused by such a public health crisis, and the impact of these factors on our business, financial condition and results of operations, will depend on future developments that are highly uncertain and unpredictable. To the extent the COVID-19 pandemic or other public health crisis adversely affects our business, prospects, operating results, or financial condition, many of the other risks described in this “Risk Factors” section may also be heightened. Our business is dependent on third-party sterilization for many of our products, and the loss or limitation of access to those facilities could adversely affect our business. In 2019, the FDA issued a caution concerning a nationwide shortage of medical devices due to issues with contract sterilizers, and reductions in sterilization capacity caused significant delays in medical device sterilization in this country’s sterilization facilities. Many of our products require sterilization prior to sale, and we utilize third parties for this process. In some instances, only a few facilities are qualified under applicable regulations to conduct this sterilization. If our third-party providers are unable to sterilize our products, whether due to lack of capacity, availability of materials for sterilization, regulatory requirements, or otherwise, we may be unable to transition sterilization to other sites or modalities in a timely or cost-effective manner, or at all, which could adversely affect our operating results and financial condition. The United States Environmental Protection Agency and state environmental regulatory agencies have increased their focus on the use and emission of ethylene oxide in sterilization operations. Additional regulatory requirements associated with the use and emission of ethylene oxide for sterilization may be imposed in the future, both domestically and outside the United States. This increased regulation could require our sterilization service providers to temporarily suspend operations to install additional emissions control technology, limit the use of ethylene oxide, or take other actions which would further reduce the available capacity to sterilize medical devices and healthcare products, and could also result in additional costs. Governmental agencies may also regulate the use and emission of ethylene oxide. If any existing regulatory requirements or any such regulatory actions or rulemaking results in the suspension or interruption of sterilization at medical device sterilizers used by us, or otherwise limit the availability of third-party sterilization capacity, this could interrupt or otherwise adversely impact production of certain of our products. Political and economic conditions could materially and adversely affect our revenue and results of operations. Our business may be affected by a number of factors that are beyond our control such as general geopolitical economic and business conditions, conditions in the financial markets, and changes in the overall demand for our products. A severe or prolonged economic downturn could adversely affect our customers’ financial condition and the levels of business activity of our customers. Uncertainty about current global political or economic conditions could cause businesses to postpone spending in response to tighter credit, negative financial news, or declines in income or asset values, which could have a material negative effect on the demand for our products. There could be additional effects on our business from these economic developments including the insolvency of key suppliers or their inability to obtain credit, the inability of our customers to pay for or obtain credit to finance purchases of our products, and increased pressure to reduce the prices of our products. Turbulence in the United States and international markets and economies could have a material adverse impact on our business, operating results, and financial condition. In addition, if we are unable to anticipate successfully changing economic and political conditions, we may be unable to plan effectively for and respond to those changes, which could materially adversely affect our business, financial condition, and results of operations. International economic, industry, and regulatory conditions constantly change and could materially and adversely affect our business, financial condition, and results of operations. Sales outside the United States accounted for approximately 37 percent of our net sales during the year ended December 31, 2023. We anticipate that sales from international operations will continue to represent a significant portion of our total sales, and we intend to continue our expansion into emerging or faster-growing markets outside the United States. Our sales and profitability from our international operations are subject to risks and uncertainties that could have a material adverse effect on our business, financial condition, and results of operations, many of which we cannot predict, including: | · | multiple non-United States regulatory requirements that are subject to change and could restrict our ability to manufacture and sell our products; | | · | restrictive trade policies, including tariffs, trade protection measures, and import or export licensing requirements imposed by the United States and other countries; | | · | local product preferences and product requirements; | | · | less intellectual property protection in some countries outside the United States than exists in the United States; | | · | different labor regulations and workforce instability; | | · | the expiration and non-renewal of foreign tax rulings; | | · | economic instability and inflation, recession or interest rate fluctuations; and | | · | risks and uncertainties described elsewhere in this Risk Factors section. |
In addition, the United Kingdom’s departure from the European Union, commonly known as “Brexit,” has created uncertainties affecting business operations in the United Kingdom and the European Union and a number of other countries, including with respect to compliance with the regulatory regimes regarding the labeling and registration of the products we sell in those markets. As a result, we could face increased costs, volatility in exchange rates, market instability, and other risks depending on the effects of existing and future agreements between the United Kingdom and the European Union regarding Brexit and future trading relationships. The military conflict between Russia and Ukraine has resulted in the implementation of sanctions by the United States and other governments against Russia and has caused significant volatility in and disruptions to the global markets. The short- and long-term implications of this conflict, which could include but are not limited to further sanctions, uncertainty about economic and political stability, increases in inflation rates and energy prices, supply chain challenges, and adverse effects on currency exchange rates and financial markets, are unpredictable. In addition, the United States government reported that United States sanctions against Russia in response to the conflict could lead to an increased threat of cyberattacks against United States companies. These increased threats could pose risks to the security of our information technology systems, networks, and product offerings, as well as the confidentiality, availability, and integrity of our data. Further, if the conflict develops beyond Ukraine or further intensifies, it could have an adverse effect on our operations in the European Union or other affected areas. The recent crisis related to the Israel-Hamas war is also a source of uncertainty. The conflict could grow and bring about disruption, instability, and volatility in global markets, supply arrangements that we currentlychains, and logistics operations, such as recent shipping disruptions in the Red Sea and surrounding waterways, which could in turn adversely affect our business operations and financial performance. The current domestic and international environment, including volatile trade relations, the conflict between Russia and Ukraine, the Israel-Hamas war, and civil unrest taking place in certain parts of the world have resulted in uncertainty surrounding the future state of the global economy. There is greater uncertainty with respect to potential changes in trade regulations, sanctions, and export controls which also increase volatility in the global economy. We are continuing to monitor the situation in Ukraine and in Israel and Gaza and the state of the global economy as well as assess the potential impact on our business. A significant escalation or that such replacementfurther expansion of the conflicts’ current scope or related disruptions to the global markets could be timely completed. ●
have a material adverse effect on our business, financial condition, and results of operations.Product liability claims could adversely affect our financial condition and results of operations. We may be subject to product liability claims involvingactions asserting claims of personal injury or property damage. Our product liability insurance coverage may not be adequate to cover the cost of defense and the potential award in the event of a claim. A product liability claim, regardless of its merit or outcome, could result in significant legal defense costs. Also, a well-publicized actual or perceived problem with one or more of our products could adversely affect our reputation and reduce the demand for our products. ●
Issues with product quality could have an adverse effect upon our business, subject us to regulatory actions, and cause a loss of customer confidence in us or our products. Our success depends uponon the quality and reliability of our products. Quality management plays an essential role in determining and meeting customer requirements, preventing defects, improving our products, and assuring the safety and efficacy of our products. Our future success depends on our ability to maintain and continuously improve our quality management program. WhileAlthough we have onea quality system that covers the lifecycle of our products, quality and safety issues may occur with respect to any of our products. A quality or safety issue may result in adverse inspection reports, warning letters, product recalls, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, costly litigation, refusal of a government to grant approvals and licenses, restrictions on operations, or withdrawal of existing approvals and licenses. An inability to address a quality or safety issue in an effective and timely manner may also cause negative publicity or a loss of customer confidence in us or our current or future products, which may result in the loss of sales and difficulty in successfully launching new products. Additionally, we have made and continue to make significant investments in assets, including inventory and property, plant, and equipment, which relate to potential new products or modifications to existing products. Product quality or safety issues and costs associated therewith may restrict us from being able to realize the expected returns from these investments potentially resulting in asset impairments in the future. Unaffiliated third party suppliers provide a number of goods and services to our manufacturing and R&D organizations. Third party suppliers are required to comply with our quality standards. Failure of a third party supplier to provide compliant raw materials or supplies could result in delays, service interruptions or other quality related issues that may negatively impactadversely affect our business, results.
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Any losses we incur as a result of our exposure to the credit risk of our customers could harm ourfinancial condition, and results of operations.
We monitor individual customer payment capability in granting credit arrangements, seek to limit credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts. As we have grown our revenue and customer base, our exposure to credit risk has increased. Any material losses as a result of customer defaults could harm, and have an adverse effect on, our business, operating results and financial condition.
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The success of certain of our products depends upon relationships with healthcare professionals. The research, development, marketing, and sales of many of our new and improved products are dependent upon our maintaining working relationships with healthcare professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding our products. If we are unable to maintain our relationships with these professionals and do not continue to receive their advice and input, the development and commercialization of our products could suffer, which could have a material adverse impact on our revenues,business, financial condition, profitability, and cash flows. ●
results of operations. At the same time, companies in the medical device industry are under continued scrutiny by the OIG and the DOJ for improper relationships with physicians and other healthcare providers.Our success is measured in part by our ability to develop patentable products, to preserve our trade secrets, and to operate without infringing or violating the proprietary rights of third parties. Our ability to remain competitive is dependent, in part, upon our ability to protect our intellectual property rights and prevent other companies from using our intellectual property. We seek to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, and confidentiality agreements. However, these measures afford only limited protection and may be challenged, invalidated, or circumvented by third parties. Additionally, these measures may not prevent competitors from duplicating our products or gaining access to our proprietary information and technology. Third parties may copy all or portions of our products or otherwise use our intellectual property without authorization, and we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees, or current employees despite the existence of nondisclosure and confidentiality agreements and other contractual restrictions, all of which could have an adverse effect on our business, financial condition, and results of operations. Others may challenge the validity of any patents issued to us, and we could encounter legal and financial difficulties in enforcing our patent rights against infringers. In addition, there can be no assurance that other technologies cannot or will not be developed or that patents will not be obtained by others which would render our patents less valuable or obsolete. Our patents expire at various times over the next 2018 years. Once patents expire, some customers may not continue to purchase from us, opting for competitive copies instead. IfIn such event, our sales and profits could decline substantially. During the terms of our patents, third parties may develop similar or superior technology independently or by designing around our patents. Additionally, if we do not develop and launch new products prior to the expiration of patents or before the demand for our existing products declines, our sales and profits could decline substantially. be adversely affected.Changes in patent laws or in interpretations of patent laws in the United States and other countries may materially diminish the value of our intellectual property or narrow the scope of our patent protection, Future changes in patent laws or in their interpretation may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future. We have developed technical knowledge which, although non-patentable, we consider to be significant in enabling us to compete. However, the proprietary nature of such knowledge may be difficult to protect. We have entered into agreements with key employees prohibiting them from disclosing any of our trade secrets or other confidential information. In addition, generally these agreements also provide that inventions or discoveries relating to our business by these individuals will be assigned to us and become our sole property. We cannot ensure, however, that the enforceability of these agreements will not be challenged or that our trade secrets will not become known to, or be independently developed by, our competitorsThe medical device industry is characterized by extensive intellectual property litigation, and companies in the medical device industry sometimes use intellectual property litigation to gain a competitive advantage. Intellectual property litigation, regardless of outcome, is often complex and expensive, and the outcome of this litigation is generally difficult to predict. An adverse determination in any such proceeding could subject us to significant liabilities to third parties or require us to seek licenses from third parties or pay royalties that may be substantial. Furthermore, there can be no assurance that necessary licenses would be available to us on satisfactory terms, or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing or selling certain of our products, which could have a material adverse effect on our business, financial condition, and results of operations. ●
International patent protection is uncertain.
Patent law outside the United States is uncertain and is currently undergoing review and revision in many countries. Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as United States laws. We may participate in opposition proceedings to determine the validity of our or our competitors’ foreign patents, which could result in substantial costs and diversion of our efforts.
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New lines of business or new or enhanced products and services may subject us to additional risks. From time to time, weWe may implement new lines of business or offer new or enhanced products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business or new or enhanced products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and new or enhanced products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new or enhanced product or service. Furthermore, any new line of business or new or enhanced product or service could have a significant impact on the effectiveness of our system of internal control. Failure to successfully manage these risks in the development and implementation of new lines of business or new or enhanced products or services could have a material adverse effect on our business, financial condition, and results of operations and financial condition. ●
operations.Some of our competitors have significantly greater resources than we do, and it may be difficult for us to compete against them. In many of our markets, we compete with numerous other companies that have substantially greater financial resources and engage in substantially more R&D activities than we do. Furthermore, innovations in surgical techniques or medical practices could have the effect of reducing or eliminating market demand for one or more of our products. In addition, the trend of consolidation in the medical device industry and among our customers could result in greater competition and pricing pressure. Some of the markets in which we compete are dominated by established manufacturers that have broader product lines, greater distribution capabilities, and substantially larger marketing and R&D staffs and facilities than we do. Many of these competitors offer broader product lines within the specific product market and in the general field of medical devices and supplies. Broad product lines give many of our cardiovascular and fluid delivery competitors the ability to negotiate exclusive, long-term medical device supply contracts and, consequently, the ability to offer comprehensive pricing of their competing products. By offering a broader product line in the general field of medical devices and supplies, competitors may also have a significant advantage in marketing competing products to group purchasing organizations. In addition, our competitors may use price reductions to preserve market share in their product markets. ●
We are subjectAny major disruption or failure of our information technologysystems, or our failure to healthcare fraud and abuse regulations thatsuccessfully implement new technology effectively, could result in significant liability, require us to changeadversely affect our business practices and restrictoperations. We rely onvarious information technology systems to manage our operations inoperations. Over the future. We are subjectlast several years, we have been implementing and continue to various federal, stateimplement modifications and local laws targeting fraudupgrades to our systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and abuse in the healthcare industry, including anti-kickback and false claims laws. Violationsacquiring new systems with new functionalities. The implementation of these laws are punishable by criminal or civil sanctions,solutions and systems is highly dependent on the coordination of numerous software and system providers and internal business teams. We could experience changes in our operational processes and internal controls, which in turn could require significant capital investments and personnel changes, including substantial fines, imprisonmentrecruiting and exclusion from participation in healthcare programs such as Medicare and Medicaid and health programs outside the United States. These laws and regulations are wide ranging and subject to changing interpretations and applications, which could restrict our sales or marketing practices. A violationtraining of qualified personnel. The interdependence of these lawssolutions and systems is key to the successful completion of this project. The failure of any one solution or system could have a material impact on our business processes and information systems, including loss or corruption of data, delayed shipments, decreases in productivity as our personnel and third-party providers implement and become familiar with new systems, increased costs, and lost revenues, which could have an adverse effect on our overall information technology infrastructure. These activities subject us to inherent costs and risks associated with replacing and upgrading these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new or upgraded systems or of integrating new or upgraded systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new or upgraded technology systems may cause disruptions in our business operations and have an adverse effect on our business results ofand operations, financial conditionif not anticipated and cash flow.
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We will be unable to sell our products if we fail to comply with governmental regulations.
To manufacture our products commercially, we must comply with governmental regulations that govern design controls, quality systems and documentation policies and procedures, including continued compliance with QSR. The FDA and equivalent foreign governmental authorities periodically inspect our manufacturing facilities and the manufacturing facilities of our Original Equipment Manufacturer, or OEM, medical device customers. If we or our OEM
medical device customers fail to comply with these manufacturing regulations, including meeting reporting obligations to the FDA, or fail any FDA inspections, marketing or distribution of our products may be prevented or delayed, which would negatively impact our business.
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Our products are subject to product recalls even after receiving regulatory clearance or approval, and any such recalls would negatively affect our financial performance and could harm our reputation.
Any of our products may be found to have significant deficiencies or defects in design or manufacture. The FDA and similar governmental authorities in other countries have the authority to require the recall of any such defective products. A government-mandated or voluntary recall could occur as a result of component failures, manufacturing errors or design defects. We do not maintain insurance to cover losses incurred as a result of product recalls. Any product recall would divert managerial and financial resources and negatively affect our financial performance and could harm our reputation with customers and end-users.
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We may not receive regulatory approvals for new product candidates or for modifications of existing products or approvals may be delayed.
Regulation by governmental authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of our proposed products and in our ongoing research and product development activities. Any failure to receive the regulatory approvals necessary to commercialize our product candidates, or the subsequent withdrawal of any such approvals, would harm our business. Additionally, modification of our existing products may require regulatory approval. The process of obtaining these approvals and the subsequent compliance with federal and state statutes and regulations require spending substantial time and financial resources. appropriately mitigated.If we fail to obtainmaintain proper and effective disclosure controls and procedures and internal control over financial reporting or fail to remediate a material weakness in internal control, our consolidated financial statements could be materially misstated. Our management has identified a material weakness in our internal control over financial reporting and has concluded that, due to such material weakness, our disclosure controls and procedures were not effective as of December 31, 2023. The material weakness in internal control over financial reporting resulted from our controls being inadequate to prevent and detect misstatements of inventory quantities at one of our subsidiaries that could have resulted in us not disclosing a material loss. The material weakness has not been remediated as of February 29, 2024. If not remediated, or if we identify further material weaknesses in our internal control, our failure to establish and maintain or encounter delays in obtaining or maintaining, regulatory approvals, it could adversely affect the marketing of any products we develop or modify, our ability to receive product revenues,effective disclosure controls and our liquidityprocedures and capital resources. ●
We rely on technology to operate our business and any failure of these systems could harm our business.
We rely heavily on communications and information technology systems to conduct our business, enhance customer service and increase employee productivity. Some of these systems are vulnerable to breakdown or other interruption by fire, power loss, system malfunction, computer viruses, cyber-attacks, unauthorized access and other events. Any failure, interruption or breach in security of these systemsinternal control over financial reporting could result in failures or disruptionsmaterial misstatements in our customer relationship management, general ledger, inventory, manufacturingconsolidated financial statements and other systems. There is no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed bya failure to meet our policiesreporting and procedures that are intended to safeguard our systems. The occurrence of any failures, interruptions or security breaches of our information technology systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, and expose us to civil litigation and possible financial liability, anyobligations, each of which could have a material adverse effect on our financial condition and results of operations.operations and investor confidence in our consolidated financial statements.We face cybersecurity risks and may incur increasing costs in an effort to minimize those risks. We utilize systems and websites that allow for the secure storage and transmission of proprietary or confidential information regarding our customers, employees, and others, including personal information. As evidenced by the numerous companies that have suffered serious data security breaches, we may be vulnerable to, and unable to anticipate or detect, data security breaches and data loss, including rapidly evolving and increasingly sophisticated cybersecurity attacks. In addition, data security breaches can also occur as a result of a breach by us or our employees or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. In addition to our own databases, we use third-party service providers to store, process, and transmit confidential or sensitive information on our behalf. Although we contractually require these service providers to implement and use reasonable security measures, we cannot control third parties and cannot guarantee that a data security breach will not occur in the future either at their location or within their systems. A data security breach may expose us to a risk of loss or misuse of this information, and could result in significant costs to us, which may include, among others, fines and penalties, potential liabilities from governmental or third-party investigations, proceedings, or litigation, and diversion of management attention. We could also experience delays or interruptions in our ability to function in the normal course of business, including delays in the fulfillment of customer orders or disruptions in the manufacture and shipment of products. In addition, actual or anticipated attacks may cause us to incur costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation. We are increasingly dependent on the consistent functioning of our information technology and cybersecurity systems along with our information technology dependent product portfolios. If we are exposed to any intrusions, disruptions, corruption, or destruction, or if we fail to maintain the integrity of our systems or products, or the privacy of our data, our business and our reputation could be materially adversely affected. We are increasingly dependent on consistent functioning of our information technology and cybersecurity systems for our infrastructure and software-based products. Our information technology and cybersecurity systems have been and may continue to be subjected to viruses or other malicious codes, unauthorized access attempts, cyber- or phishing-attacks, tampering, or other security breaches. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, regulatory standards, integration of acquisitions, and the increasing need to protect patient, customer, and supplier information. In addition, the EU-wide General Data Protection Regulation imposes stringent data protection requirements and provides for significant penalties for noncompliance. Our products include technologies that support connectivity and decision support infrastructure, which could be subject to intrusion, disruption, or corruption and could impact the quality of care that patients receive or the confidentiality of patient information. In addition, third parties might attempt to hack into our products or systems in an effort to obtain proprietary information. As a result inof the misappropriation or unauthorized disclosureCOVID-19 pandemic, we have faced and may continue to face increased cybersecurity risks due to our reliance on internet technology and the number of confidential information belonging to us, our customers, our suppliers or our employees who are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. If we fail to maintain or protect our information technology and cybersecurity systems and information technology-dependent products effectively, we could lose existing customers or suppliers, have difficulty attracting new customers or suppliers, have problems that adversely impact internal controls, have difficulty preventing, detecting, and controlling fraud, have disputes with customers and suppliers, have regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenues as a result in significant costs andof a data privacy breach, or cyber-based attack, or suffer other adverse consequences. ●
We sell many Any significant breakdown, intrusion, interruption, corruption, or destruction of our products to healthcare providers that rely on Medicare, Medicaid and private health insurance plans to reimburse the costs associated with the procedures performed using our products and these third party payors may deny reimbursement for use of our products.
We are dependent, in part, upon the ability of healthcare providers to obtain satisfactory reimbursement from third-party payors for medical procedures in which our products are used. Third-party payors may deny reimbursement if they determine that a prescribed product has not received appropriate regulatory clearancessystems, as well as any data breaches or approvals, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. Failure by hospitals and other users of our products to obtain reimbursement from third-party payors, or adverse changes in government or private third-party payors’ policies toward reimbursement for procedures utilizing our products,cyber-based attacks, could have a material adverse effect on the Company’s business, financial conditionour business. We have experienced targeted and results of operations. Major third-party payors for medical servicesnon-targeted cybersecurity attacks and incidents in the United Statespast, and other countries continuewe could in the future experience similar attacks. We are continuously investing in our cybersecurity program to trymature current capabilities, in addition to contain healthcare costs. The introduction of cost containment incentives, combined with closer scrutiny of healthcare expenditures by both private health insurers and employers, has resulted in increased discounts and contractual adjustments to charges for services performed. Furtheraccelerating the implementation of legislativenew capabilities to keep pace with the changing threat landscape. To date, no cybersecurity incident or administrative reforms to the United States or international reimbursement systems inattack has had a manner that significantly reduces reimbursement for procedures using our products or denies coverage for such procedures may result in hospitals or physicians substituting lower cost products or other therapies for our products which, in turn, would have an adverse effectmaterial impact on our business, financial condition, andor results of operations. Additionally, uncertainty about whether and how changes may be implemented could also have a negative impact on the demand for our products.
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We face significant uncertainty in our industry due to government health care reform, changes in Medicare, Medicaid and other governmental medical program reimbursements, and we cannot predict with certainty how these reforms will impact our operating results.
Currently, the Trump Administration and the United States Congress are seeking to modify, repeal or otherwise invalidate all or part of Affordable Care Act, and it remains unclear what new framework may emerge as a result of such efforts. Further, regardless of the prevailing political environment in the United States, Medicare, Medicaid, managed care organizations and foreign governments are increasingly seeking to both control health care utilization and to limit reimbursement. Changes in reimbursement programs or their regulations, including retroactive and prospective rate and coverage criteria changes, competitive bidding for certain products and services, and other changes intended to reduce expenditures (domestically or internationally), could adversely affect the portions of our businesses that are dependent on third-party reimbursement or direct governmental payments. Moreover, to the extent that our customers experience reimbursement pressure resulting in lower revenue for them, their demand for our products may decrease. Furthermore, the outcome of the 2018 Congressional elections that will be held in the United States might result in material changes to governmental regulation of various aspects of our business and operations. We devote significant operational and managerial resources to comply with existing laws and regulations. Different interpretations and enforcement policies of existing laws and regulations, the possible repeal of existing laws and regulations, as well as the enactment of new laws and regulations, could require additional operational and managerial resources and could subject ourOur current practices to allegations of impropriety or illegality or could require us to make significant changes to our products and operations. The impact of the above-mentioned items could have a material adverse impact on our business, results of operations and cash flows. Among other provisions, the Affordable Care Act imposed a 2.3 percent excise tax on the sale in the United States of certain medical devices by the manufacturer, producer or importer after December 31, 2012. In December 2015, as part of the Consolidated Appropriations Act, 2016, collection of the medical device excise tax was suspended for 2016 and 2017, and as part of stopgap spending legislation signed by President Trump on January 22, 2018 the imposition of the medical device excise tax was delayed until January 1, 2020. If the excise tax is not repealed or further suspended, the tax will adversely impact future results of operations after the current suspension expires in December 2019.
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Our existing credit agreement contains restrictions that may limit our flexibility in operating our business.
Our existing credit agreement contains, and any future agreements may contain, covenants that could impose significant operating and financial restrictions on us. Although we currently do not have any borrowings under our existing credit agreement, the covenants in those agreements may limit the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.
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We have pledged certain of our assets as collateral under our existingcurrent credit agreement. If we borrow funds under that credit agreement and default on the terms of such credit agreement and the holder of our indebtedness accelerates the repayment of such indebtedness, there can be no assurance that we will have sufficient assets to repay our indebtedness. Our current credit agreement contains, and any future agreements may contain, covenants that could impose significant operating and financial restrictions on us and limit the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs. Under our existingcurrent credit agreement, we are required to satisfy and maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and there can be no assurance that we will meet those ratios. A failure to comply with the covenants contained in the agreement could result in an event of default under such agreement, which, if not cured or waived, could have a material adverse effect on our business, financial condition, and profitability.results of operations. In the event of any default under our existing credit agreement, the holder of our indebtedness thereunder: ●
Will not be required to lend any additional amounts to us;
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Could elect to declare all indebtedness outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit, if applicable; or
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Could require us to apply all of our available cash to repay such indebtedness.
| · | will not be required to lend any additional amounts to us; | | · | could elect to declare all indebtedness outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit, if applicable; or | | · | could require us to apply all of our available cash to repay such indebtedness. |
If we are unable to repay those amounts,our indebtedness, the holder of our indebtedness could proceed against the collateral granted to them to securesecuring that indebtedness. If the indebtedness under our existingcurrent credit agreement were to be accelerated, there can be no assurance that our assets at that time would be sufficient to repay such indebtedness in full. ●
We may not be able to attract and retain skilled people. Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities we engage in can be intense, and we may not be able to hire qualified people or to retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty ofif we are unable to promptly findingfind qualified replacement personnel. ●
A portion of our business relies on distribution agreements and relationships with various third partiesdistributors, and any adverse change in those relationships could result in a loss of revenue and harm that business. We have strategic relationships with, and sell many of our products through, a number of distributors. To the extent that we rely on distributors, our success depends on the efforts of others over whom we may have little or no control. Some of our distributors also sell our competitors’ products, and, if they favor our competitors’ products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective sales, which would cause our results to suffer. The success of the arrangements with these third partiesdistributors depends, in part, on the continued adherence to the terms of our agreements with them. Any disruption in these arrangements may adversely affect our business, financial condition, and results of operations. The actions of distributors in foreign countries may adversely affect our ability to market effectively our products in those countries, particularly if a distributor holds the regulatory authorization in such countries and such actions result in the suspension or revocation of such authorization. In such cases, re-establishing market access or regulatory authorization may be difficult, expensive, orand time consuming. ●
We utilize distributors for a portion of our sales, which subjects us to risks that could harm our business.
We have strategic relationships with a number of distributors for sales of our products. To the extent that we rely on distributors, our success will depend on the efforts of others over whom we may have little or no control. If these strategic relationships are terminated and not replaced, our revenues could be adversely affected. Also, we may be named as a defendant in litigation against our distributors related to sales of our products by them.
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Severe weather, natural disasters, acts of war or terrorism, or other external events could significantly impact our business. We currently conduct all our development, manufacturing, and management at three locations. Severe weather, natural disasters, public health crises, including the occurrence of a contagious disease or illness such as a novel coronavirus, acts of war or terrorism, and other adverse external events at any one or more of these locations could have a significant impact on our ability to conduct business. We have the ability to transfer the production of certain products from a facility affected by such events but doing so would be expensive. Our disaster recovery policies and procedures may not be effective and the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition, and results of operations. The insurance we maintain may not be adequate to cover our losses. ●
Our sales and operations are subject to the risks of doing business internationally.
A substantial portion of our sales occur outside the United States, and we are increasing our presence in international markets. Sales outside the United States subject us to many risks, such as:
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economic or political problems that disrupt foreign healthcare payment systems;
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the imposition of governmental controls;
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less favorable intellectual property or other applicable laws;
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protectionist laws and business practices that favor local competitors;
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the inability to obtain any necessary foreign regulatory or pricing approvals of products in a timely manner;
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changes in tax laws and tariffs;
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receivables may be more difficult to collect; and
Our operations and marketing practices are also subject to regulation and scrutiny by the governments of the other countries in which we operate. In addition, the Foreign Corrupt Practices Act, or FCPA, prohibits United States companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad. In certain countries, the healthcare professionals we regularly interact with may meet the definition of a foreign official for purposes of the FCPA. Additionally, we are subject to other United States laws in our international operations. Failure to comply with domestic or foreign laws could result in various adverse consequences, including possible delay in approval or refusal to approve a product, recalls, seizures, withdrawal of an approved product from the market, and the imposition of civil or criminal sanctions.
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We may lose revenues, market share, and profits due to exchange rate fluctuations related to our international business. Fluctuations in exchange rates may affect the prices that our international customers are willing to pay for our products and may put us at a price disadvantage compared to otherour competitors. Potentially volatile shifts in exchange rates may negatively affect our financial condition and operations. Because payments from our international customers are received primarily in United States dollars, increases in the value of the United States dollar relative to foreign currencies could make our products less competitive or less affordable, and therefore adversely affect our sales in international markets. ●
We may experience fluctuations in our quarterly operating results.
We have historically experienced, and may continue to experience, fluctuations in our quarterly operating results. These fluctuations are due to a number of factors, many of which are outside our control, and may result in volatility of our stock price. Future operating results will depend on many factors, including:
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demand for our products;
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pricing decisions, and those of our competitors, including decisions to increase or decrease prices;
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regulatory approvals for our products;
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timing and levels of spending for R&D, sales and marketing;
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timing and market acceptance of new product introductions by us or our competitors;
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development or expansion of business infrastructure in new clinical and geographic markets;
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tax rates in the jurisdictions in which we operate;
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shipping delays or interruptions;
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timing and recognition of certain R&D milestones and license fees; and
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ability to control our costs;
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Our stock price can be volatile.
Stock price volatility may make it more difficult for our stockholders to sell their common stock when they want and at prices they find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
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actual or anticipated variations in quarterly results of operations;
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recommendations by securities analysts;
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operating and stock price performance of other companies that investors deem comparable to the Company;
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perceptions in the marketplace regarding the Company and our competitors;
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new technology used, or services offered, by competitors;
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trading by funds with high-turnover practices or strategies;
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significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or our competitors;
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failure to integrate acquisitions or realize anticipated benefits from acquisitions;
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changes in government regulations; and
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geopolitical conditions such as acts or threats of terrorism or military conflicts.
Additionally, our public float is small which can result in large fluctuations in stock price during periods with increased selling or buying activity. General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.
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We continue to evaluate expansion through acquisitions of, and investments in, other companies or technologies, which may carry significant risks. If we pursue acquisitions of, or investments in, other companies or technologies, we may: ●
Use cash that we may need in the future to operate our business;
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Incur debt, including on terms that could be unfavorable to us or debt that we might be unable to repay;
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Structure the transaction in a manner that has unfavorable tax consequences, such as a stock purchase that does not permit a step-up in the tax basis for the assets acquired;
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Be unable to realize the anticipated benefits, such as increased revenues, cost savings, or synergies from additional sales;
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Be unable to integrate, upgrade, or replace the purchasing, accounting, financial, sales, billing, employee benefits, payroll, and regulatory compliance functions of an acquisition target;
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Be unable to secure or retain the services of key employees related to the acquisition;
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Be unable to succeed in the marketplace with the acquisition; or
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Assume material unknown liabilities associated with the acquired business.
| · | use cash that we may need in the future to operate our business; | | · | incur debt, including on terms that could be unfavorable to us or debt that we might be unable to repay; | | · | structure the transaction in a manner that has unfavorable tax consequences, such as a stock purchase that does not permit a step-up in the tax basis for the assets acquired; | | · | be unable to realize the anticipated benefits, such as increased revenues, cost savings, or synergies from additional sales; | | · | be unable to integrate, upgrade, or replace the purchasing, accounting, financial, sales, billing, employee benefits, payroll, and regulatory compliance functions of an acquisition target; | | · | be unable to secure or retain the services of key employees related to the acquisition; | | · | be unable to succeed in the marketplace with the acquisition; or | | · | assume material unknown liabilities associated with the acquired business. |
Any of the above risks, should they occur, could materially adversely affect our revenues,business, financial condition, profitability, and cash flows,results of operations, including the inability to recover our investment or cause a write down or write off of such investment, associated goodwill, or assets. ●
If we make divestitures, we could encounter difficulties that harm our business. We may sell a business or product line. Any divestiture may result in significant write-offs, which could have a material adverse effect on our business, financial condition, orand results of operations. Divestitures could also involve additional risks, including difficulties in separation of operations, services, and personnel, the diversion of management’s attention from other operations, and the potential loss of key personnel. ●
Political and economic conditions could materially and adversely affect our revenue and results of operations.
Our business may be affected by a number of factors that are beyond our control such as general geopolitical economic and business conditions, conditions in the financial markets, and changes in the overall demand for our products. A severe or prolonged economic downturn could adversely affect our customers’ financial condition and the levels of business activity of our customers. Uncertainty about current global political or economic conditions could cause businesses to postpone spending in response to tighter credit, negative financial news or declines in income or asset values, which could have a material negative effect on the demand for our products. There could be additional effects on our business from these economic developments including the insolvency of key suppliers or their inability to obtain credit, the inability of our customers to pay for or obtain credit to finance purchases of our products and increased pressure to reduce the prices of our products.
Turbulence in the United States and international markets and economies could have a material adverse impact on our business, operating results and financial condition. In addition, if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, which could materially adversely affect our business and results of operations.
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The full impact that the recently passed Tax Act may have on us is uncertain.
The Tax Act was signed into law on December 22, 2017. The Tax Act made numerous changes to United States corporate tax law and is expected to reduce our effective income tax rate for fiscal year 2018 and future periods. Effective January 1, 2018, the Tax Act lowers the United States corporate tax rate from 35 percent to 21 percent and prompts various other changes to United States corporate tax law. Further, the Tax Act is unclear in certain respects and will require interpretations and implementing regulations by the Internal Revenue Service, as well as state tax authorities, and the Tax Act could be subject to amendments and technical corrections, any of which could lessen or increase the impact of the Tax Act. The accounting treatment of these tax law changes is complex, and some of the changes may affect both current and future periods, and, until the Internal Revenue Service issues regulations under the Tax Act and other guidance, the full impact the Tax Act will have on us is uncertain.
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If we fail to manage our exposure to market risk and credit risk successfully, our financial condition could be adversely impacted. We have exposure to market risk and credit risk in our investment activities. The fair values of our investments vary from time to time depending on economic and market conditions. Fixed income securities expose us to interest rate risk as well as credit risk. Equity securities expose us to equity price risk. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. These and other factors also affect the equity securities owned by us. The outlook of our investment portfolio depends on the future direction of interest rates, fluctuations in the equity securities market, and the amount of cash flows available for investment. Our investments may decline in value in future periods, which could have a material adverse effect on our financial condition. ●
Any losses we incur as a result of our exposure to the credit risk of our customers could harm our results of operations. We monitor individual customer payment capability in granting credit arrangements, seek to limit credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for credit losses. As we have grown our revenue and customer base, our exposure to credit risk has increased. Any material losses as a result of customer defaults could harm, and have an adverse effect on, our business, financial condition, and results of operations. Legal, Regulatory, and Compliance Risks We are subject to healthcare fraud and abuse regulations that could result in significant liability, require us to change our business practices, and restrict our operations in the future. We are subject to various federal, state, and local laws targeting fraud and abuse in the healthcare industry, including anti-kickback and false claims laws. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment, and exclusion from participation in healthcare programs such as Medicare and Medicaid as well as healthcare programs outside the United States. These laws and regulations are wide ranging and subject to changing interpretations and applications, which could restrict our sales or marketing practices. A violation of these laws could have a material adverse effect on our business, financial condition, and results of operations. We and our suppliers may not meet regulatory quality standards applicable to our manufacturing processes, which could have a material adverse effect on our business, financial condition, and results of operations. As a medical device manufacturer, we must register with the FDA and non-U.S. regulatory agencies, and we are subject to periodic inspection by the FDA and similar foreign regulatory agencies for compliance with certain good manufacturing practices, including design controls, product validation and verification, in process testing, quality control, and documentation procedures. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA and foreign regulatory agencies. Some of our suppliers are also required to meet certain standards applicable to their manufacturing processes. We cannot assure you that we or our suppliers comply or can continue to comply with all regulatory requirements. A failure by us or one of our suppliers to achieve or maintain compliance with these requirements or quality standards may disrupt our ability to supply products sufficient to meet demand until compliance is achieved or, with a supplier, until a new supplier has been identified and evaluated. Our or any of our suppliers’ failure to comply with applicable regulations could cause sanctions to be imposed on us, including warning letters, fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension, or withdrawal of approvals or clearances, license revocation, seizures or recalls of products, operating restrictions, and criminal prosecutions, which could harm our business. We cannot assure you that if we need to engage new suppliers to satisfy our business requirements we will be able to locate new suppliers in compliance with regulatory requirements at a reasonable cost and in an acceptable timeframe. Our failure to do so could have a material adverse effect on our business, financial condition, and results of operations. We will be unable to sell our products if we fail to comply with governmental regulations. To manufacture our products commercially, we must comply with governmental regulations that govern design controls, quality systems, and documentation policies and procedures, including continued compliance with the Quality System Regulation. The FDA and similar foreign governmental authorities periodically inspect our manufacturing facilities and the manufacturing facilities of our Original Equipment Manufacturer, or OEM, medical device customers. If we or our OEM medical device customers fail to comply with these manufacturing regulations, including meeting reporting obligations to the FDA or foreign governmental authorities, or fail any FDA or foreign governmental authority inspections, marketing or distribution of our products may be prevented or delayed, which would negatively impact our business. Our products are subject to product recalls even after receiving regulatory clearance or approval, and any such recalls would negatively affect our financial performance and could harm our reputation. Any of our products may be found to have significant deficiencies or defects in design or manufacture. The FDA and similar governmental authorities in other countries have the authority to require the recall of any such defective products. A government-mandated or voluntary recall could occur as a result of component failures, manufacturing errors, or design defects. We do not maintain insurance to cover losses incurred as a result of product recalls. Any product recall would divert managerial and financial resources and negatively affect our financial performance and could harm our reputation with customers and end-users. We may not receive regulatory approvals for new product candidates or for modifications of existing products or approvals may be delayed. Regulation by governmental authorities in the United States and foreign countries is a significant factor in the development, manufacture, and marketing of our proposed products and in our ongoing research and product development activities. Any failure to receive the regulatory approvals necessary to commercialize our product candidates, or the subsequent withdrawal of any such approvals, would harm our business. Additionally, modification of our existing products may require regulatory approval. The process of obtaining these approvals and the subsequent compliance with governmental regulations require spending substantial time and financial resources. If we fail to obtain or maintain, or encounter delays in obtaining or maintaining, regulatory approvals, the marketing of any products we develop or modify, our ability to receive product revenues, and our liquidity and capital resources could be adversely affected. We sell many of our products to healthcare providers that rely on Medicare, Medicaid, and private health insurance plans to reimburse the costs associated with the procedures performed using our products and these third-party payors may deny reimbursement for use of our products. We are dependent, in part, upon the ability of healthcare providers to obtain satisfactory reimbursement from third-party payors for medical procedures in which our products are used. Third-party payors may deny reimbursement if they determine that a product has not received appropriate regulatory clearances or approvals, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary, or inappropriate. Failure by hospitals and other users of our products to obtain reimbursement from third-party payors, or adverse changes in government or private third-party payors’ policies toward reimbursement for procedures utilizing our products, could have a material adverse effect on our business, financial condition, and results of operations. Major third-party payors for medical services in the United States and other countries continue to try to contain healthcare costs. The introduction of cost containment incentives, combined with closer scrutiny of healthcare expenditures by both private health insurers and employers, has resulted in increased discounts and contractual adjustments to charges for services performed. Further implementation of legislative or administrative reforms to the United States or international reimbursement systems in a manner that significantly reduces reimbursement for procedures using our products or denies coverage for such procedures may result in hospitals or physicians substituting lower cost products or other therapies for our products which could have a material adverse effect on our business, financial condition, and results of operations. Additionally, uncertainty about whether and how changes may be implemented could also have a negative impact on the demand for our products. Changes in healthcare legislation and policy may have a material adverse effect on our business, financial condition, and results of operations. A number of legislative initiatives to contain healthcare costs have been and continue to be introduced in the United States. In March 2010, the Affordable Care Act was enacted, which made changes that impacted and may continue to impact significantly the pharmaceutical and medical device industries. Among other things, the Affordable Care Act contains a number of provisions designed to generate the revenues necessary to fund health insurance coverage expansions. The Affordable Care Act also implemented a number of Medicare payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians, and other providers to improve the coordination, quality, and efficiency of certain healthcare services through bundled payment models, and appropriated funding for comparative effectiveness research. The expansion in the government’s role in the United States healthcare industry may result in decreased profits to us, lower reimbursement by payors for our products, and reduced medical procedure volumes, all of which may have a material adverse effect on our business, financial condition, and results of operations. In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted, including aggregate reductions to Medicare payments to providers. It is unclear what effect new quality and payment programs may have on our business, financial condition, and results of operations. Individual states in the United States have also become increasingly aggressive in passing legislation and implementing regulations designed to control product pricing, including price or patient reimbursement constraints and discounts, and require marketing cost disclosure and transparency measures. We believe that additional state and federal healthcare reform measures will be adopted in the future that could have a material adverse effect on our industry generally and on our customers. Any changes in, or uncertainty with respect to, future reimbursement rates could impact our customers’ demand for our products, which could have a material adverse effect on our business, financial condition, and results of operations. Future significant changes in the healthcare systems in the United States or other countries, including changes intended to reduce expenditures along with uncertainty about whether and how changes may be implemented, may have a material adverse effect on our business, financial condition, and results of operations. The enactment of tax reform legislation could materially affect our financial position and results of operations. Legislation or other changes in tax laws could materially affect our financial position and results of operations. In the ordinary course of our business, there are many transactions and calculations in which tax determinations may be uncertain. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge, which could result in additional taxation, penalties, and interest payments. The regulatory environment surrounding information security and privacy is increasingly demanding. The regulatory environment surrounding information security and privacy is increasingly demanding, with frequent imposition of new and changing requirements. In the United States, various laws and regulations apply to the collection, processing, disclosure, and security of certain types of data, including the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the Health Insurance Portability and Accountability Act of 1996, the Gramm Leach Bliley Act, and state laws relating to privacy and data security. Several foreign countries and governmental bodies, including the European Union, also have laws and regulations dealing with the handling and processing of personal information obtained from their residents, which in certain cases are more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure, and security of various types of data, including data that identifies or may be used to identify an individual, such as names, email addresses, and, in some jurisdictions, internet protocol addresses. Such laws and regulations may be modified or subject to new or different interpretations, and new laws and regulations may be enacted in the future. Within the European Union, the General Data Protection Regulation, or GDPR, which became effective in May 2018 and is one of the strictest and most comprehensive privacy laws in the world, is being continuously enforced, and increasingly heavy fines are now being levied on businesses. The GDPR’s extraterritorial scope makes it applicable to our United States-based legal entities whenever our business activities, systems, and products process the personal data of European Union residents. Any failure or perceived failure by us to comply with laws, regulations, policies, or regulatory guidance relating to privacy or data security may result in governmental investigations and enforcement actions, litigation, fines and penalties, or adverse publicity, and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Our sales and operations are subject to the risks of doing business internationally. A substantial portion of our sales occur outside the United States. Sales outside the United States subject us to many risks, including regulatory risks such as: | · | the imposition of governmental controls; | | · | less favorable intellectual property or other applicable laws; | | · | protectionist laws and business practices that favor local competitors; | | · | the inability to obtain any necessary foreign regulatory or pricing approvals of products in a timely manner; and | | · | changes in trade policies, tariffs, and tax laws. |
Our operations and marketing practices are also subject to regulation and scrutiny by the governments of the other countries in which we operate. In addition, we and those acting on our behalf operate in a number of jurisdictions where companies in the medical device industry are exposed to a high risk of potential FCPA violations associated with sales to healthcare professionals and institutions. We participate in transactions with third parties whose corrupt or illegal activities could potentially subject us to liability under the FCPA or local anti-corruption laws, even if we do not explicitly authorize or have actual knowledge of such activities. In addition, we cannot predict the nature, scope, or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted. We are subject to other United States laws in our international operations. Failure to comply with domestic or foreign laws could result in various adverse consequences. If we are found to be liable for FCPA or other violations (either due to our own acts or our inadvertence or due to the acts or inadvertence of others), we could suffer from civil and criminal penalties or other sanctions, including contract cancellations, recalls, seizures, withdrawal of an approved product from the market, debarment, or loss of reputation, any of which could have a material adverse effect on our business, financial condition, and results of operations. Governmental export or import controls could limit our ability to compete in foreign markets and subject us to liability if we violate them. Our products may be subject to United States export controls. Governmental regulation of the import or export of our products, or our failure to obtain any required import or export authorization for our products, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our products may create delays in the introduction of our products in international markets or, in some cases, prevent the export of our products to some countries altogether. Furthermore, United States export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments, and persons targeted by United States sanctions. If we fail to comply with export and import regulations and such economic sanctions, we may be fined, or other penalties could be imposed, including a denial of certain export privileges. Moreover, any new export or import restrictions, new legislation, or shifting approaches in the enforcement or scope of existing regulations, or in the countries, persons, or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell access to our products would likely materially and adversely affect our business, financial condition, and results of operations. Climate Change Risks Climate change, or legal, regulatory, or market measures to address climate change, could adversely affect our business, financial condition, and results of operations. The long-term effects of climate change are difficult to predict and may be widespread. The impacts of climate change may include physical risks (such as rising sea levels or frequency and severity of extreme weather conditions), social and human effects (such as population dislocations or harm to health and well-being), compliance costs and transition risks (such as regulatory or technology changes), shifts in market trends (such as customers putting an increased priority on purchasing products that are sustainably made), and other material effects. Such impacts may disrupt our supply chain and operations by adversely affecting our ability to procure goods or services required for the operation of our business due to impairment of the availability and cost of certain products, materials, commodities, and energy. In addition, the increasing concern over climate change has resulted, and may continue to result, in more regional, national, and global legal and regulatory requirements relating to climate change, including regulating greenhouse gas emissions, alternative energy policies, and sustainability initiatives. If legislation or regulations are enacted or promulgated in the United States or in any other jurisdictions in which we do business that impose more stringent restrictions and requirements than our current legal or regulatory obligations, we may experience disruptions in, or increases in the costs associated with, sourcing, manufacturing, and distributing our products, which may adversely affect our business, financial condition, and results of operations. Any such regulatory changes could significantly affect our operating and financial decisions, including those involving capital expenditures to reduce emissions and comply with other regulatory requirements. Risks Related to Our Stock We may experience fluctuations in our quarterly operating results. We have historically experienced, and may continue to experience, fluctuations in our quarterly operating results. These fluctuations are due to a number of factors, many of which are outside our control and may result in volatility of our stock price. Future operating results will depend on many factors, including: | · | demand for our products; | | · | pricing decisions, and those of our competitors, including decisions to increase or decrease prices; | | · | regulatory approvals for our products; | | · | timing and levels of spending for R&D, sales, and marketing; | | · | timing and market acceptance of new product introductions by us or our competitors; | | · | development or expansion of business infrastructure in new clinical and geographic markets; | | · | tax rates in the jurisdictions in which we operate; | | · | supply chain delays or interruptions; | | · | customer credit holds; | | · | timing and recognition of certain R&D milestones and license fees; and | | · | ability to control our costs; |
Our stock price has been and may continue to be volatile. Stock price volatility may make it more difficult for our stockholders to sell their common stock when they want to and at prices they find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things: | · | actual or anticipated variations in quarterly results of operations; | | · | recommendations by securities analysts; |
| · | operating and stock price performance of other companies that investors deem comparable to the Company; | | · | perceptions in the marketplace regarding the Company and our competitors; | | · | new technology used, or services offered, by competitors; | | · | trading by funds with high-turnover practices or strategies; | | · | significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving the Company or our competitors; | | · | failure to integrate acquisitions or realize anticipated benefits from acquisitions; | | · | our stock repurchase program; | | · | changes in government regulations; and | | · | economic or political instability, natural disasters, public health crises, acts or threats of terrorism, or military conflicts. |
Additionally, our public float is small which can result in large fluctuations in stock price during periods with increased selling or buying activity. General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause our stock price to decrease regardless of operating results. Provisions in our governing documents and Delaware law may discourage or prevent a change of control, which could cause our stock price to decline and prevent attempts by our stockholders to replace or remove our current management. Our certificate of incorporation and bylaws contain provisions that may discourage, delay, or prevent a change in the ownership of the Company or a change in our management. We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15 percent or more of our outstanding common stock. Although a delay or prevention of a change of control transaction or of changes in our Board of Directors could be effective in improving stockholder value, they also carry a risk of causing the market price of our common stock to decline. UNRESOLVED STAFF COMMENTS. ITEM 1C. CYBERSECURITY. We face considerable cybersecurity risk due to constant and relentless efforts by cybercriminals to exploit physical, human, and technological vulnerabilities in order to gain access and control of our networks, data, and intellectual property. Constantly evolving technology and the planning, methodologies, and strategies these attackers utilize to capitalize on vulnerabilities in systems put us at a disadvantage. Although, we have not encountered a cybersecurity threat or incident that resulted in a material impact on our business, operations or financial condition, there is no assurance that we will not experience such an event in the future. We are committed, however, to maintaining vigorous oversight of these risks. We regularly review industry recommendations, best practices, and standards regarding cybersecurity and information technology. NIST (National Institute of Standards and Technology), CIS (Center for Internet Security) and CISA (Cybersecurity and Infrastructure Security Agency) are some of our primary resources for information. We seek to meet or exceed the standards of, and recommendations by, these organizations as well as those of our third-party technology vendors. We require in-depth annual cybersecurity training for all of our end users as well as refresher training throughout the year. We have processes in place to prevent, identify, manage, and mitigate any occurrence timely, and we engage an independent firm to perform annual assessments of our network security and infrastructure. In addition to our existing methods of detection, monitoring, and mitigation of cybersecurity threats and incidents, we implement new technologies, controls, and policies with the goal of protecting our business, employees, investors, customers, and suppliers. Our Board of Directors and our Audit Committee oversee our Company-wide risk management, including cybersecurity risk. More specifically, our Audit Committee reviews with our management, at least annually, emerging cybersecurity developments and threats, the Company's risks relating to cybersecurity, including a review of the state of the Company's cybersecurity and the Company's strategy to mitigate cybersecurity risks. Our internal cybersecurity team consists of our Chief Financial Officer, our Director of Compliance, and our Information Technology department, which includes multiple security certified professionals. Each member of the team has assigned roles related to cybersecurity events. In the event of a cybersecurity attack, members of the cybersecurity team review records and details to determine the depth and materiality of the occurrence. Based on their analysis, appropriate disclosure of the event will be made. ITEM 2.
PROPERTIES. We own three facilities comprising approximately 398,000514,000 square feet, and the 139 acres on which they are situated, in Texas, Alabama, and Florida. Administrative, engineering, manufacturing, and warehouse operations are conducted at each facility, and our corporate headquarters are located at our Texas facility. We have no pending legal proceedings of the type described in Item 103 of Regulation S-K. Executive Officers of the Company
Information about our Executive Officers Name | | Age | | Title | Emile A Battat | 79 | 85 | | Chairman of the Board of the Company and Chairman of the Board of Halkey-Roberts Corporation, or Halkey-Roberts, one of our subsidiaries | | | | | | David A. Battat | 48 | 54 | | President and Chief Executive Officer of the Company, President of Halkey-Roberts and Chairman of the Board of all other subsidiaries | | | | | | Jeffery StricklandCindy Ferguson | 59 | 48 | | Vice President and Chief Financial Officer, Secretary and Treasurer of the Company and Vice President or Secretary-Treasurer of all subsidiaries |
Messrs.Mr. David Battat and StricklandMs. Cindy Ferguson currently serve as officers of the Company and all subsidiaries. Mr. Emile Battat currently serves as an officer of the Company. The officers of the Company and our subsidiaries are elected annually by the respective Boards of Directors of the Company and our subsidiaries at the first meeting of such Boards of Directors held after the annual meetings of stockholders of such entities. The next meetings of the stockholders of the Company and our subsidiaries are expected to be held in May 20182024, and the Boards of Directors of the Company and our subsidiaries are expected to meet promptly thereafter. Accordingly, the terms of office of the current officers of the Company and our subsidiaries are anticipated to expire in May 2018. 2024.There are no arrangements or understandings between any officer and any other person pursuant to which the officer was elected. The only family relationship between any of our executive officers or directors is that Mr. David Battat is the son of Mr. Emile Battat. There have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officers during the past ten years. Brief Account of Business Experience During the Past Five Years Mr. Emile Battat has been a director of the Company since 1987 and has served as Chairman of the Board of the Company since January 1998. He has served as Chairman of the Board of Halkey-Roberts since October 1998. He served as Chief Executive Officer of the Company and Chairman of the Board or President of all subsidiaries from October 1998 until May 2011. Mr. David Battat has been President and Chief Executive Officer of the Company and Chairman of the Board of all subsidiaries with the exception of Halkey-Roberts, Atrion Leasing Company, LLC, and AlaTenn Pipeline Company, LLC, since May 2011. He has been President of Halkey-Roberts since January 2006. He also serves as President of Atrion Leasing Company, LLC and AlaTenn Pipeline Company, LLC. He served as the Company’s President and Chief Operating Officer from May 2007 until May 2011 and from February 2005 until December 2005 he served as Vice President - Business Development and General Counsel at Halkey-Roberts. Mr. StricklandMs. Ferguson has served as Vice President and Chief Financial Officer, Secretary and Treasurer of the Company since February 1, 1997 and has served as awell as Vice President and Secretary or Treasurer of all the Company’s subsidiaries since January 1997. Mr. Strickland was employed byMarch 4, 2023. From June 14, 2021 until March 4, 2023, Ms. Ferguson served as the Company’s Corporate Controller. Prior to joining the Company, or our subsidiariesMs. Ferguson spent 17 years with Texas Instruments Incorporated in various accounting and finance roles. During her last three years at Texas Instruments, she served as the Corporate Accounting Director, managing approximately 75 people around the world, including general accounting teams supporting legal entity accounting in the United States and over 25 other positions from September 1983 through January 1997. countries. She also managed the consolidation of accounting results and the public reporting of those results. PART II MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDMATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock is traded on the NASDAQThe Nasdaq Global Select Market (Symbol ATRI). As of February 13, 2018,8, 2024, we had 12687 record holders, and approximately 4,80015,180 beneficial owners, of our common stock. The high and low sales prices as reported by NASDAQ for each quarter of 2016 and 2017We are shown below. | Year Ended December 31, 2016: | | | | First Quarter | $415.00 | $350.00 | | Second Quarter | $442.50 | $385.00 | | Third Quarter | $490.45 | $393.96 | | Fourth Quarter | $522.05 | $418.00 |
| Year Ended December 31, 2017: | | | | First Quarter | $512.10 | $454.00 | | Second Quarter | $688.95 | $459.50 | | Third Quarter | $691.95 | $605.70 | | Fourth Quarter | $694.00 | $612.10 |
We pay regularcurrently paying quarterly cash dividends on our common stock. We have increased ourstock and expect to continue paying quarterly cash dividend paymentsdividends in September of each of the past fourteen years. The quarterly dividend was increased to $.90 in September of 2015, $1.05 in September 2016 and to $1.20 in September 2017. We paid cash dividends totaling $8.3 million to our stockholders in 2017.
future.During the year ended December 31, 2017,2023, we did not sell any equity securities that were not registered under the Securities Act of 1933 and during1933. We have an ongoing authorization, approved by our Board of Directors in 2015, 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. During the fourth quarter of 2017ended December 31, 2023, we did not purchaserepurchase any shares of our common stock. The As of December 31, 2023, we had repurchased a total of 121,247shares under the 2015 program, leaving 128,753 shares of our common stock performance graph set forththat may yet be repurchased under the 2015 program. This program has no expiration date but may be terminated by the Board of Directors at any time.We issue restricted stock units (“RSUs”) as part of our equity incentive plans. In our Consolidated Financial Statements, we treat shares of common stock withheld for tax purposes on behalf of our employees in our 2018 Annual Report to Stockholders is incorporated by reference herein and is included in Exhibit 13.1 to this Form 10-K. However, the stock performance graph is not to be deemed to be “soliciting material” or to be “filed”connection with the SEC or subject tovesting of RSUs as common stock repurchases because they reduce the liabilitiesnumber of Section 18shares that would have been issued upon vesting. These withheld shares of common stock are not considered common stock repurchases under the Securities Exchange Act of 1934. In addition, the stock performance graph shall not be deemed incorporated by reference by any statement that incorporates this Form 10-K by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference. ITEM 6.
SELECTED FINANCIAL DATA.
Selected Financial Data
(In thousands, except per share amounts)
| | | | | | | | Operating Results for the Year ended December 31, | | Revenues | $146,595 | $143,487 | $145,733 | $140,762 | $131,993 | | Operating income | 41,274 | 39,126 | 42,510 | 40,817 | 37,944 | | Net income | 36,593 | 27,581 | 28,925 | 27,808 | 26,582 | | Depreciation and amortization | 8,677 | 8,953 | 8,823 | 8,723 | 8,592 | | Per Share Data: | | | | | | | Net income per diluted share | $19.71 | $14.85 | $15.47 | $14.08 | $13.18 | | Cash dividends per common share | $4.50 | $3.90 | $3.30 | $2.78 | $2.40 | | Average diluted shares outstanding | 1,857 | 1,857 | 1,870 | 1,975 | 2,017 | | Financial Position at December 31, | | | | | | | Total assets | $203,780 | $181,942 | $164,336 | $171,514 | $172,066 | | Long-term debt | - | - | - | - | - |
our May 2015 program.ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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 ophthalmologyophthalmic markets. Our other medical and non-medical products include valves and inflation devices used in marine and aviation safety products. In 2017,2023, approximately 37 percent of our sales were outside the United States. Our products are used in a wide variety of applications by numerous customers. We encounter competition in all of our markets and compete primarily on the basis of product quality, price, engineering, customer service, and delivery time. Our business strategy is to provide hospitals, physicians, and other healthcare providers with the tools they need to improve the lives of the patients they serve. To do so, we provide a broad selection of products in the areas of our expertise. We have diverse product lines serving primarily the fluid delivery, cardiovascular, and ophthalmic markets, and this diversity has served us well as we encounter changing market conditions. R&D efforts are focused on improving current products and developing highly-engineered products that meet customer needs and serve niche markets with meaningful sales potential. Proposed new products may be subject to regulatory clearance or approval prior to commercialization and the time period for introducing a new product to the marketplace can be unpredictable. We also focus on controlling costs by investing in modern manufacturing technologies and controlling purchasing processes. We have been successful in consistently generating cash from operations and have used that cash to reduce or eliminate indebtedness, to fund capital expenditures, to make investments, to repurchase stock, and to pay dividends. Our strategic objective is to further enhance our position in our served markets by: ●
Focusing on customer needs;
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Expanding existing product lines and developing new products;
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Maintaining a culture of controlling cost; and
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Preserving and fostering a collaborative, entrepreneurial management structure.
| · | Focusing on customer needs; | | · | Expanding existing product lines and developing new ones; | | · | Investing in our future growth, while balancing the need to sensibly control cost; and | | · | Preserving and fostering a collaborative, entrepreneurial management structure. |
For the year ended December 31, 2017,2023, we reported revenues of $146.6$169.3 million, operating income of $41.3$22.6 million and net income of $36.6$19.4 million. Our net income was $36.6$19.4 million, or $19.82$11.02 per basic anddiluted share, in 2023 compared to $35.0 million, or $19.59 per basic and $19.71$19.56 per diluted share in 2017 compared to $27.6 million, or $15.12 per basic and $14.85 per diluted share, in 2016 and net income of $28.9 million, or $15.67 per basic and $15.47 per diluted share, in 2015.2022. Revenues were $146.6$169.3 million in 20172023 compared with $143.5$183.5 million in 2016 and $145.7 million in 2015. The two percent revenue increase in 2017 over 2016 was generally attributable to higher sales volumes. Our 2016 revenues were negatively impacted by the strong U. S. dollar in our international markets and lower sales prices in certain markets as compared to 2015 revenues. 2022.Annual revenues by product linesline were as follows (in thousands): | | | | | | | | | | | Fluid Delivery | $65,053 | $60,889 | $60,630 | | Cardiovascular | 48,073 | 47,064 | 46,463 | | Ophthalmology | 13,537 | 15,427 | 18,253 | | Other | 19,932 | 20,107 | 20,387 | | Total | $146,595 | $143,487 | $145,733 |
| | 2023 | | | 2022 | | | | | | | | | Fluid Delivery | | $ | 71,144 | | | $ | 84,084 | | Cardiovascular | | | 69,750 | | | | 67,632 | | Ophthalmology | | | 8,678 | | | | 5,849 | | Other | | | 19,754 | | | | 25,941 | | Total | | $ | 169,326 | | | $ | 183,506 | |
Consolidated revenues of $169.3 million in 2023 were 8 percent lower than revenues in 2022. The decrease was primarily related to lower sales volumes compared to 2022, including a 24 percent decrease in Other revenues and a 15 percent decrease in Fluid Delivery revenues, partially offset by a 48 percent increase in Ophthalmic revenues. Our cost of goods sold was $75.8$106.9 million in 2017,2023 compared with $107.6 million in 2022. The slight decrease in 2023 is primarily due to lower sales volumes and higher manufacturing costs. Gross profit in 2023 was $62.4 million compared with $75.9 million in 2016 and $74.8 million in 2015. A favorable product sales mix, improved manufacturing efficiencies and the impact of continued cost improvement projects were the primary contributors to the decrease in cost of goods sold in 2017 compared to 2016. Increased compensation costs, depreciation and repair costs partially offset by reduced utilities and reduced supplies were the primary contributors to the increase in cost of goods sold in 2016 over 2015. Gross profit in 2017 was $70.8 million compared with $67.6 million in 2016 and $71.0 million in 2015.2022. Our gross profit was 4837 percent of revenues in 2017, 472023 compared with 41 percent of revenues in 2016 and 49 percent of revenues in 2015. The increase in gross profit percentage in 2017 from 2016 was primarily related to increased revenues and a favorable product sales mix.2022. The decrease in gross profit percentage in 20162023 from 20152022 was related to higher manufacturing costs.Operating expenses were $39.8 million in 2023 and $36.2 million in 2022. R&D expenses increased $1.2 million from 2022, primarily related to reduced sales, lower sales prices and increased manufacturing costs. Operating expenses were $29.5 million in 2017 and $28.5 million in both 2016 and 2015. R&D expenses decreased $775,000 in 2017 as compared with 2016 primarily as a result of decreased costs for outside services and supplies.services. R&D expenses consist primarily of salaries and other related expenses of our R&D personnel as well as costs associated with regulatory matters. In 2017,2023, selling expenses increased $640,000 as$0.1 million compared with 20162022 primarily asfor commissions, partially offset by a result of increased commissions,decrease in outside services, compensation and travel costs.services. Selling expenses consist primarily of salaries, commissions, and other related expenses for sales and marketing personnel, marketing, advertising, and promotional expenses. General and Administrative, or G&A, expenses increased $1.1$2.3 million in 20172023 as compared to 20162022 primarily as a result of increasedhigher compensation and compensation related costs and increased outside services partially offset by reduced depreciation, amortization and travel costs.services. G&A expenses consist primarily of salaries and other related expenses of administrative, executive, and financial personnel, and outside professional fees.
R&D expenses increased $228,000 in 2016 as compared to 2015 primarily as a result of increased costs for supplies and travel partially offset by reduced outside services. In 2016, selling expenses increased $568,000 as compared with 2015 primarily as a result of increased travel, outside services, compensation and trade shows. G&A expenses decreased $763,000 in 2016 as compared to 2015 primarily as a result of reduced compensation and benefits.
Our operating income for 20172023 was $41.3$22.6 million compared with $39.1$39.7 million in 2016 and $42.5 million in 2015.2022. Operating income was 2813 percent of revenues in 2017, 272023 compared to 22 percent of revenues for 2016in 2022. Interest and 29 percent of revenues for 2015. An increase in 2017 gross profit partially offset by increased operating expenses was the major contributor to the increase in operatingdividend income for 2017 as compared to the previous year. The decrease in 2016 gross profit2023 was the major contributor to the decrease in operating income for 2016 as compared to the previous year Investment income for 2017 was $1.1$0.8 million compared with $448,000$1.0 million in 20162022. The slight decrease in interest and $771,000dividend income was due to lower interest income received on cash and investments compared to prior year.Other investment income was a $0.9 million loss in 2015. Increased levels of investments,2023 compared to a $0.2 million loss in 2022. The increased interest rates and increased dividends on our equity investments were the primary reason for the increase in 2017. Lower interest rates were the primary reason for the reductions in 2016. Other income (expense) in 2015 isloss during 2023 was primarily related to a $2.4 million impairment lossgreater unrealized losses on oneequity securities resulting from changes in the market values of our long-term corporate bonds which experienced a significant decline in market value in 2015. In 2016 after the issuer declared bankruptcy, we sold this bond that was previously intended to be held to maturity. We recorded an additional net loss of $311,000 to other income (expense) on this bond in 2016 prior to and including its sale.
investments.Income tax expense in 20172023 totaled $5.7$3.0 million compared with $11.7$5.6 million in 2016 and $11.9 million in 2015. The effective tax rates for 2017, 2016 and 2015 were 13.6 percent, 29.8 percent and 29.2 percent, respectively. The Tax Cuts and Jobs Act, enacted in December 2017, reduced the corporate federal income tax rate in the United States from 35% to 21% effective for us on January 1, 2018. This rate reduction reduced our net deferred tax liability, including adjustments to our net state deferred tax liabilities, by $4.1 million as of December 31, 2017. Based upon this tax law enactment, we recorded a corresponding benefit in our income tax provision of $4.1 million for the fourth quarter and the full year of 2017. Also, in the fourth quarter of 2017 we recorded a valuation allowance of $609,000 to reduce our deferred tax assets which partially offset the benefit recorded in our income tax provision from the tax law change in 2017. During 2016 we adopted ASU 2016-09, Stock Compensation (Topic 718) Improvements to Employee Share Based Payment Accounting and recorded excess tax benefits related to employee stock compensation of $5.8 million and $687,000 for the years ended December 31 2017 and 2016, respectively. The adoption was on a prospective basis and therefore had no impact on years prior to 2016.2022. The effective tax rate was 13.2 percent for 2015 benefitted from tax credits totaling $2.3 million2023 and 13.8 percent for our R&D expenditures. This amount included an adjustment for recalculation of our R&D tax credits from prior years resulting from a regulation issued by the Treasury Department which favorably impacted the benefits provided to the Company under these rules. Benefits from R&D tax credits totaled $1.0 million in 2017, $1.1 million in 2016 and $2.3 million in 2015. Benefits from tax incentives for domestic production totaled $600,000 in 2017, $1.2 million in 2016 and $1.4 million in 2015. Charges from changes in uncertain tax positions totaled $865,000 in 2017. Benefits from changes in uncertain tax positions totaled $120,000 in 2016.2022. We expect our effective tax rate for 20182024 to be approximately 21.014 percent. Accounting For a comparison of our results of operations for stock based awards could create volatility inyears 2022 and 2021, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our effective tax rate depending uponAnnual Report on Form 10-K for the extent of exercise or vesting activity. year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission on February 27, 2023.Liquidity and Capital Resources As of December 31, 20172023, we had a $75.0$25.0 million revolving credit facility with a money centermoney-center bank pursuant to which the lender is obligated to make advances until February 28, 2022. This credit facility, entered into on February 28, 2017, replaced a $40.0 million revolving credit facility with the same bank which was in place for several years prior to that date.December 21, 2026. The credit facility is secured by substantially all of our inventories, equipment, and accounts receivable. Interest under the credit facility is assessed at 30-day, 60-day, or 90-day LIBOR,Adjusted Term SOFR, as selected by us, plus .8751.0 percent, (2.35 percent at December 31, 2017) and is payable monthly. Pursuant to the credit facility, we are obligated to pay a commitment fee applicable to the unused portion of the facility ranging from 0.30% to 0.45% per annum, payable in arrears on the last business day of each calendar quarter. We had no outstanding borrowings under the credit facility at December 31, 20172023 or the prior credit facility at December 31, 2016.2022. Our ability to borrow funds under the credit facility from time to time is contingent onupon 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 December 31, 2017,2023, we were in compliance with all of these covenants. At December 31, 2017,2023, we had a total of $74.7$14.4 million in cash and cash equivalents, short-term investments, and long-term investments, an increasea decrease of $20.7$20.1 million from December 31, 2016. The principal contributor2022. This decrease was primarily due to this increase was positive cash flows resulting from operations. lower net income and capital spending of $22.3 million during 2023.Cash flows provided by operations of $47.0$20.0 million in 20172023 were primarily comprised of net income plus the net effect of non-cash expenses.expenses offset by an increase in inventory as we strategically purchased raw materials in a tight supply environment. At December 31, 2017,2023, we had working capital of $105.6$102.1 million, including $30.1$3.6 million in cash and cash equivalents and $35.5$2.7 million in short-term investments. The $20.6$0.8 million increase in working capital during 20172023 was primarily related to increasesa decrease in cash and short-term investments. The increase in cash and short-term investments was primarily a result of operational results partially offset by purchases of property, plant and equipment and payment of dividends.accounts payable. Working capital items consisted primarily of cash, accounts receivable, short-term investments, inventories, and other current assets minus accounts payable and other current liabilities. Capital expenditures for property, plant, and equipment totaled $9.6$22.3 million in 2017,2023, compared with $10.6$33.7 million in 2016 and $9.3 million in 2015.2022. These expenditures were primarily for machinery and equipment. Weequipment and also included payments to complete the expansion at one of our facilities that began in 2021. This project cost about $27.0 million and was completed in 2023. Purchases of investments totaled $5.6 million in 2023, compared to $35.7 million in 2022. Proceeds from maturities of investments totaled $22.1 million in 2023 and $53.9 million in 2022. Since we have completed our building expansion, we expect 20182024 capital expenditures, primarily for machinery and equipment, to be greater thanconsistent with years prior to the average of the levels expended during each of the past three years. expansion project.We paid cash dividends totaling $8.3$15.3 million $7.1in 2023 and $14.6 million and $6.1 million during 2017, 2016 and 2015, respectively.in 2022. We expect to fund future dividend payments with cash flows from operations. We purchased $1.7 million of treasury stock totaling $1.3 millionduring 2023 and $30.7$25.8 million during 2016 and 2015, respectively. No treasury stock was purchased in 2017. The table below summarizes debt, lease and other2022.Our current contractual obligations outstanding at December 31, 2017: | | | | Contractual Obligations | | | | | | | | | Purchase Obligations | $1,474 | $1,474 | $- | $- | | Total | $1,474 | $1,474 | $- | $- |
are normal for our line of business and mainly consist of purchase orders for raw materials. These obligations will be funded through funds generated through operations and require no additional funding. We believe our cash, cash equivalents, short-term investments and long-term investments, cash flows from operations, and available borrowings of up to $75.0$25.0 million under our credit facility will be sufficient to fund our cash requirements for at least the foreseeable future. We believe our strong financial position would allow us to access equity or debt financing should that be necessary. Additionally, we expectCOVID-19 Impact We believe the impact of COVID-19 on our cashbusiness has largely diminished at this time; however, uncertainties continue, particularly around disruptions to the global economy, supply chains, and cash equivalents and investments, as a whole,healthcare systems. Even with the public health actions that have been taken to date, the disease may pose future risks with the emergence of new variants. We will continue to increase in 2018. monitor COVID-19 as well as resulting legislative and regulatory changes to manage our response and assess and seek to mitigate potential adverse impacts on our business.Off-Balance Sheet Arrangements We have no off-balance sheet financing arrangements. We experience the effects of inflation primarily in the prices we pay for labor, materials, and services. Over the last three years, we have experienced the effects of moderate inflation in these costs. At times, wecosts, and in the last 12 months have been able to offset a portion ofseen these increased costs by increasing the sales pricesincrease significantly. We have implemented price increases on many of our products. However,products in an effort to mitigate the effect of higher costs, but competitive pressures have not allowed for full recovery of these cost increases. increased costs. If these inflationary pressures continue, our business, financial condition, and results of operations will be adversely affected in 2024.New Accounting Pronouncements In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-09,Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.ASU 2016-09 was effective for fiscal years beginning after December 15, 2016. Under this guidance all excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee stock compensation are recognized within income tax expense. The Company early adopted this guidance using the prospective transition method in the second quarter of 2016 effective January 1, 2016. As a result of our adoption of this guidance, an excess tax benefit of $687,000 was recorded in 2016 resulting from the vesting of restricted stock and restricted stock units. In 2017 we recorded an excess tax benefit of $5,782,000 resulting from the exercise of employee stock options and the vesting of restricted stock and restricted stock units. The excess tax benefits recorded in 2017 and 2016 were included in our consolidated statements of cash flows under operating activity rather than under financing activity as was done in prior years. There were no restatements to 2015. This guidance could create future volatility in our effective tax rate depending upon the extent of exercise or vesting activity in our stock based awards.
In November 2015, the FASB issued ASU 2015-17,Balance Sheet Classification of Deferred Taxes(ASU 2015-17) which requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this guidance. ASU 2015-17 was effective for annual and interim periods beginning after December 15, 2016. We adopted this ASU in the first quarter of 2017 on a retrospective basis. As of December 31, 2016, “Deferred Income Taxes” of $651,000 were reclassified from an asset account in Current Assets to a liability account in “Other Liabilities and Deferred Credits.”
In May 2014, the FASB issued 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. ASU 2014-09 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. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We conducted and completed a comprehensive review of contracts and their associated business terms and conditions and performed detailed analysis on the impact of this standard to our current contracts. Based on our evaluation, we adopted the new standard on January 1, 2018, using the full retrospective method and expect no material change to our financial statements and internal controls over financial reporting as a result. Because accounting for revenue under contracts will not materially change for us under the new standard, prior period financial statements will not require adjustment.
In January 2016, the FASB issued ASU 2016-01,Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Changes to the current 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 relates to our available-for-sale equity investment and will result 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 Accumulated Other Comprehensive Loss in the shareholders’ equity section of the balance sheet to Retained Earnings. We do not anticipate that the adoption of ASU 2016-01 will have a material impact on our financial statements.
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). Atrion elected to early adopt this new standard as of January 1, 2018, using the modified retrospective approach as required. We have concluded that the adoption of this new standard will not have a material impact on our financial statements.
From time to time new accounting pronouncements applicable to us are issued by the FASB,Financial Accounting Standards Board (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 may require additional disclosure, but will not have a material impact on our consolidated financial statements upon adoption. Critical Accounting Policies EstimatesThe discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In the preparation of these financial statements, we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. We believe the following discussion addresses our most criticalsignificant accounting policies and estimates, which are those that are most important to the portrayal of our financial condition and results and require management's most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different assumptions and conditions. From time to time, we accrue legal costs associated with certain litigation. In making determinations of likely outcomes of litigation matters, we consider the evaluation of legal counsel knowledgeable about each matter, case law and other case-specific issues. We believe these accruals are adequate to cover the legal fees and expenses associated with litigating these matters. However, the time and cost required to litigate these matters as well as the outcomes of the proceedings may vary significantly from what we have projected.
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 are required to estimate our provision for income taxes and uncertain tax positions in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheet. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is more likely than not, do not establish a valuation allowance. In the event that actual results differ from these estimates, the provision for income taxes could be materially impacted. We assess the impairment of our long-lived identifiable assets, excluding goodwill which is tested for impairment as explained below, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. This review is based upon projections of anticipated future cash flows. Although we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows or changes in our business plan could materially affect our evaluations. No such changes are anticipated at this time.
We assess goodwill for impairment pursuant to Accounting Standards Codification, or ASC, 350, Intangibles—GoodwillDuring 2023, 2022 and Other , which requires that goodwill be assessed on an annual basis, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, by applying a qualitative assessment on goodwill impairment to determine whether it is necessary to perform the two-step goodwill impairment test.We assess the total carrying value for each of our investments on a quarterly basis for changes in circumstances or the occurrence of events that suggest our investment may not be recoverable. If an investment is considered impaired, we must determine whether the impairment is other than temporary. If it is determined to be other than temporary, the impairment must be recognized in our financial statements.
During 2017, 2016 and 2015,2021, none of our criticalsignificant accounting estimates with the exception of the previously mentioned impairment loss on one of our long-term corporate bonds, required significantmaterial adjustments. We did not note any material events or changes in circumstances indicating that the carrying value of long-lived assets were not recoverable.
Quantitative and Qualitative Disclosures About Market Risks We are not exposed to material fluctuations in currency exchange rates that would result in realized gains or losses being reflected in the consolidated statements of income because the payments from our international customers are received primarily in United States dollars. However, fluctuations in exchange rates may affect the prices that our international customers are willing to pay and may put us at a price disadvantage compared to other customers.competitors. Increases in the value of the United States dollar relative to foreign currencies could make our products less competitive or less affordable and therefore adversely affect our sales in international markets. Market Risk and Credit Risk The Company’sOur cash and cash equivalentsdeposits are held in accounts with financial institutions that we believe are creditworthy. Certain of these accounts at times may exceed federally-insured limits. We have not experienced any credit losses in suchthose accounts and do not believe we are exposed to any significant credit risk on these funds. We have investments in taxable corporate bondsmoney market funds, and commercial paper and in certificates of deposit.bonds. 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.disruptions as compared with cash deposits. We have also invested a portion of our available funds in common stockequity securities and mutual funds. The value of these securities fluctuates due to changes in the equity and credit markets along with other factors. In times of economic weakness, the market value and liquidity of these assets may decline and may negatively impact our financial condition. Forward-looking Statements Statements in this Management’s Discussion and Analysis and elsewhere in this Form 10-K 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 2018 effective tax rate the impact of the restrictive covenants infor 2024, our credit facility on our liquidity and capital resources, our earnings in 2018, our 20182024 capital expenditures, funding future dividend payments with cash flows from operations, availability of equity and debt financing, our ability to meet our cash requirements for the foreseeable future, the impact on our consolidated financial statement of recently issued accounting standards when we adopt those standards, and increases in 2018 in cash, cash equivalentsthe effect that the COVID-19 pandemic may have on our business and investments.operations. 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 may again 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 pandemic; the impact of global and regional economic and credit market conditions on healthcare spending; the risk that the COVID-19 virus will again disrupt global economies and may cause 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 personnelpersonnel; 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 Form 10-K 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See Management’s Discussion and Analysis of Financial Condition and Results of Operations. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Opinion on the consolidated financial statements We have audited the accompanying consolidated balance sheets of Atrion Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 20172023 and 2016, and2022, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2023, and the related notes and the schedulefinancial statement schedules included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 27, 201829, 2024 expressed an unqualifiedadverse opinion. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. / s/ GRANT THORNTON LLPWe have served as the Company’s auditor since 2002. 29, 2024ATRION CORPORATION CONSOLIDATED STATEMENTS OF INCOME For the yearyears ended December 31, 2017, 20162023, 2022, and 2015 | | | | | | | (In thousands, except per share amounts) | | | | | | | Revenues | $146,595 | $143,487 | $145,733 | | Cost of Goods Sold | 75,841 | 75,857 | 74,752 | | Gross Profit | 70,754 | 67,630 | 70,981 | | | | | | | Operating Expenses: | | | | | Selling | 7,251 | 6,611 | 6,043 | | General and administrative | 16,430 | 15,319 | 16,082 | | Research and development | 5,799 | 6,574 | 6,346 | | | 29,480 | 28,504 | 28,471 | | | | | | | Operating Income | 41,274 | 39,126 | 42,510 | | | | | | | Investment Income | 1,065 | 448 | 771 | | Other Income (Expense), net | 1 | (308) | (2,411) | | Income before Provision for Income Taxes | 42,340 | 39,266 | 40,870 | | | | | | | Provision for Income Taxes | (5,747) | (11,685) | (11,945) | | | | | | | Net Income | $36,593 | $27,581 | $28,925 | | | | | | | Net Income Per Basic Share | $19.82 | $15.12 | $15.67 | | | | | | | Weighted Average Basic Shares Outstanding | 1,846 | 1,824 | 1,846 | | | | | | | Net Income Per Diluted Share | $19.71 | $14.85 | $15.47 | | | | | | | Weighted Average Diluted Shares Outstanding | 1,857 | 1,857 | 1,870 | | | | | | | Dividends Per Common Share | $4.50 | $3.90 | $3.30 |
2021 | | 2023 | | | 2022 | | | 2021 | | | | (In thousands, except per share amounts) | | | | | | | | | | | | Revenues | | $ | 169,326 | | | $ | 183,506 | | | $ | 165,009 | | Cost of goods sold | | | 106,938 | | | | 107,602 | | | | 95,637 | | Gross profit | | | 62,388 | | | | 75,904 | | | | 69,372 | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | Selling | | | 9,926 | | | | 9,782 | | | | 8,061 | | General and administrative | | | 23,192 | | | | 20,935 | | | | 19,597 | | Research and development | | | 6,691 | | | | 5,500 | | | | 5,672 | | | | | 39,809 | | | | 36,217 | | | | 33,330 | | | | | | | | | | | | | | | Operating income | | | 22,579 | | | | 39,687 | | | | 36,042 | | | | | | | | | | | | | | | Interest and dividend income | | | 806 | | | | 988 | | | | 843 | | Other investment income (loss) | | | (900 | ) | | | (150 | ) | | | 1,477 | | Other income | | | 39 | | | | 92 | | | | 67 | | Interest expense | | | (149 | ) | | | - | | | | - | | Income before provision for income taxes | | | 22,375 | | | | 40,617 | | | | 38,429 | | | | | | | | | | | | | | | Provision for income taxes | | | (2,964 | ) | | | (5,609 | ) | | | (5,374 | ) | | | | | | | | | | | | | | Net income | | $ | 19,411 | | | $ | 35,008 | | | $ | 33,055 | | | | | | | | | | | | | | | Net income per basic share | | $ | 11.02 | | | $ | 19.59 | | | $ | 18.22 | | | | | | | | | | | | | | | Weighted average basic shares outstanding | | | 1,761 | | | | 1,787 | | | | 1,814 | | | | | | | | | | | | | | | Net income per diluted share | | $ | 11.02 | | | $ | 19.56 | | | $ | 18.18 | | | | | | | | | | | | | | | Weighted average diluted shares outstanding | | | 1,761 | | | | 1,790 | | | | 1,818 | | | | | | | | | | | | | | | Dividends per common share | | $ | 8.70 | | | $ | 8.20 | | | $ | 7.40 | |
The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the year endedBALANCE SHEETSAs of December 31, 2017, 20162023 and 2015
| | | | | | | | | | | | | | Net Income | $36,593 | $27,581 | $28,925 | | | | | | Other Comprehensive (Loss) Income, net of tax: Unrealized (Loss) Gain on investments, net of tax benefits of $68 and $408 in 2017 and 2016, respectively, and net of tax expense of $283 in 2015 | (741) | (757) | 528 | | | | | | | Comprehensive Income | $35,852 | $26,824 | $29,453 |
2022Assets: | | 2023 | | | 2022 | | | | (In thousands) | | | | | | | | | Current assets: | | | | | | | Cash and cash equivalents | | $ | 3,565 | | | $ | 4,731 | | Short-term investments | | | 2,691 | | | | 21,152 | | Accounts receivable, net of allowance for credit losses of $58 and $71 in 2023 and 2022, respectively | | | 23,029 | | | | 23,951 | | Inventories | | | 82,307 | | | | 65,793 | | Prepaid expenses and other current assets | | | 3,173 | | | | 3,770 | | Total current assets | | | 114,765 | | | | 119,397 | | | | | | | | | | | Long-term investments | | | 8,165 | | | | 8,669 | | | | | | | | | | | Property, plant and equipment | | | 286,445 | | | | 270,642 | | Less: accumulated depreciation | | | 161,098 | | | | 146,888 | | | | | 125,347 | | | | 123,754 | | | | | | | | | | | Other assets and deferred charges: | | | | | | | | | Patents and licenses, net of accumulated amortization of $12,768 and $12,655 in 2023 and 2022, respectively | | | 1,072 | | | | 1,185 | | Goodwill | | | 9,730 | | | | 9,730 | | Other | | | 1,746 | | | | 1,977 | | | | | 12,548 | | | | 12,892 | | | | | | | | | | | Total assets | | $ | 260,825 | | | $ | 264,712 | |
The accompanying notes are an integral part of these consolidated financial statements. ATRION CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 2017 and 2016
| Assets: | | | | | | | | | | | Current Assets: | | | | Cash and cash equivalents | $30,136 | $20,022 | | Short-term investments | 35,468 | 24,080 | | Accounts receivable, net of allowance for doubtful accounts of $28 and $71 in 2017 and 2016, respectively | 17,076 | 17,166 | | Inventories | 29,354 | 29,015 | | Prepaid expenses and other current assets | 3,199 | 3,181 | | Total Current Assets | 115,233 | 93,464 | | | | | | Long-term investments | 9,136 | 9,945 | | | | | | | | | | Property, Plant and Equipment | 167,080 | 160,413 | | Less accumulated depreciation and amortization | 100,711 | 95,148 | | | 66,369 | 65,265 | | | | | | | | | | Other Assets and Deferred Charges: | | | | Patents and licenses, net of accumulated amortization of $12,062 and $11,911 in 2017 and 2016, respectively | 1,778 | 1,929 | | Goodwill | 9,730 | 9,730 | | Other | 1,534 | 1,609 | | | 13,042 | 13,268 | | | | | | | | | | Total Assets | $203,780 | $181,942 |
Liabilities and Stockholders’ Equity: | | 2023 | | | 2022 | | | | (In thousands) | | | | | | | | | Current liabilities: | | | | | | | Accounts payable | | $ | 6,628 | | | $ | 12,074 | | Accrued liabilities | | | 5,887 | | | | 5,950 | | Accrued income and other taxes | | | 106 | | | | 74 | | Total current liabilities | | | 12,621 | | | | 18,098 | | | | | | | | | | | Line of credit | | | - | | | | - | | | | | | | | | | | Other liabilities and deferred credits: | | | | | | | | | Deferred income taxes | | | 2,371 | | | | 3,888 | | Other | | | 2,944 | | | | 3,185 | | | | | 5,315 | | | | 7,073 | | | | | | | | | | | Total liabilities | | | 17,936 | | | | 25,171 | | | | | | | | | | | Commitments and contingencies | | | | | | | | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | Common stock, par value $0.10 per share, authorized 10,000 shares, issued 3,420 shares | | | 342 | | | | 342 | | Additional paid-in capital | | | 67,331 | | | | 66,347 | | Retained earnings | | | 381,754 | | | | 377,682 | | Treasury shares, 1,660 shares in 2023 and 1,659 shares in 2022, at cost | | | (206,538 | ) | | | (204,830 | ) | Total stockholders’ equity | | | 242,889 | | | | 239,541 | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 260,825 | | | $ | 264,712 | |
The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED BALANCE SHEETS As ofSTATEMENTS OF CASH FLOWSFor the year ended December 31, 20172023, 2022 and 2016 | Liabilities and Stockholders’ Equity: | | | | | | | | | | | Current Liabilities: | | | | Accounts payable | $3,929 | $4,028 | | Accrued liabilities | 4,947 | 4,635 | | Accrued income and other taxes | 746 | 410 | | Total Current Liabilities | 9,622 | 9,073 | | | | | | | | | | Line of credit | -- | -- | | | | | | | | | | Other Liabilities and Deferred Credits: | | | | Deferred income taxes | 7,312 | 8,753 | | Other | 2,458 | 1,128 | | | 9,770 | 9,881 | | | | | | Total Liabilities | 19,392 | 18,954 | | | | | | Commitments and Contingencies | | | | | | | | Stockholders’ Equity: | | | | Common stock, par value $.10 per share, authorized 10,000 shares, issued 3,420 shares | 342 | 342 | | Additional paid-in capital | 48,730 | 37,448 | | Accumulated other comprehensive loss | (1,215) | (474) | | Retained earnings | 268,194 | 239,946 | | Treasury shares, 1,584 shares in 2017 and 1,596 shares in 2016, at cost | (131,663) | (114,274) | | Total Stockholders’ Equity | 184,388 | 162,988 | | | | | | | | | | Total Liabilities and Stockholders’ Equity | $203,780 | $181,942 |
2021 | | 2023 | | | 2022 | | | 2021 | | | | (In thousands) | | Cash flows from operating activities: | | | | | | | | | | Net income | | $ | 19,411 | | | $ | 35,008 | | | $ | 33,055 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 15,098 | | | | 13,812 | | | | 12,885 | | Deferred income taxes | | | (1,517 | ) | | | (3,194 | ) | | | (3,686 | ) | Stock-based compensation | | | 1,531 | | | | 1,730 | | | | 2,312 | | Net change in unrealized gains and losses on investments | | | 900 | | | | 89 | | | | (1,472 | ) | Net change in accrued interest, premiums, and discounts on investments | | | (118 | ) | | | 119 | | | | 632 | | Other | | | - | | | | - | | | | 22 | | | | | 35,305 | | | | 47,564 | | | | 43,748 | | Changes in operating assets and liabilities: | | | | | | | | | | | | | Accounts receivable | | | 922 | | | | (2,928 | ) | | | (4,579 | ) | Inventories | | | (16,514 | ) | | | (15,015 | ) | | | (480 | ) | Prepaid expenses and other current assets | | | 347 | | | | (673 | ) | | | 423 | | Other non-current assets | | | 480 | | | | 640 | | | | 11 | | Accounts payable and accrued liabilities | | | (326 | ) | | | (1,247 | ) | | | (656 | ) | Accrued income and other taxes | | | 32 | | | | (196 | ) | | | (165 | ) | Other non-current liabilities | | | (240 | ) | | | 644 | | | | 496 | | Cash flows from operating activities | | | 20,006 | | | | 28,789 | | | | 38,798 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Property, plant and equipment additions | | | (22,319 | ) | | | (33,736 | ) | | | (15,828 | ) | Purchase of investments | | | (5,648 | ) | | | (35,676 | ) | | | (23,158 | ) | Proceeds from sale of investments | | | 1,683 | | | | 245 | | | | 793 | | Proceeds from maturities of investments | | | 22,147 | | | | 53,884 | | | | 40,189 | | Cash flows from investing activities | | | (4,137 | ) | | | (15,283 | ) | | | 1,996 | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Shares tendered for employees’ withholding taxes on stock-based compensation | | | (57 | ) | | | (633 | ) | | | (585 | ) | Purchase of treasury stock | | | (1,667 | ) | | | (25,786 | ) | | | (16,988 | ) | Dividends paid | | | (15,311 | ) | | | (14,620 | ) | | | (13,407 | ) | Proceeds from draw on line of credit | | | 25,607 | | | | 607 | | | | - | | Repayment of draw on line of credit | | | (25,607 | ) | | | (607 | ) | | | - | | Cash flows from financing activities | | | (17,035 | ) | | | (41,039 | ) | | | (30,980 | ) | | | | | | | | | | | | | | Net change in cash and cash equivalents | | | (1,166 | ) | | | (27,533 | ) | | | 9,814 | | | | | | | | | | | | | | | Cash and cash equivalents, beginning of year | | | 4,731 | | | | 32,264 | | | | 22,450 | | Cash and cash equivalents, end of year | | $ | 3,565 | | | $ | 4,731 | | | $ | 32,264 | | | | | | | | | | | | | | | Cash paid for: | | | | | | | | | | | | | Income taxes, net of refunds | | $ | 3,536 | | | $ | 9,876 | | | $ | 7,744 | | Non-cash financing activities: | | | | | | | | | | | | | Non-cash effect of stock option exercises | | $ | - | | | $ | 4,007 | | | $ | 6,012 | |
The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS STOCKHOLDERS’ EQUITYFor the year ended December 31, 2017, 20162023, 2022, and 2015 | | | | | | | | | Cash Flows From Operating Activities: | | | | | Net income | $36,593 | $27,581 | $28,925 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | Depreciation and amortization | 8,677 | 8,953 | 8,823 | | Deferred income taxes | (1,374) | (247) | (1,431) | | Stock-based compensation | 1,602 | 1,566 | 1,841 | | Impairment of investment | -- | 345 | 2,413 | | Net change in accrued interest, premiums, and discounts on investments | (195) | (37) | 100 | | Other | 49 | -- | 17 | | | 45,352 | 38,161 | 40,688 | | Changes in operating assets and liabilities: | | | | | Accounts receivable | 88 | (546) | 371 | | Inventories | (339) | 756 | (1,749) | | Prepaid expenses and other current assets | (18) | (247) | 1,786 | | Other non-current assets | 75 | (673) | (103) | | Accounts payable and accrued liabilities | 213 | (324) | (492) | | Accrued income and other taxes | 336 | 81 | (128) | | Other non-current liabilities | 1,330 | 195 | 54 | | | 47,037 | 37,403 | 40,427 | | | | | | | Cash Flows From Investing Activities: | | | | | Property, plant and equipment additions | (9,677) | (10,639) | (9,323) | | Purchase of investments | (69,193) | (30,799) | (168) | | Proceeds from sale of investments | -- | 210 | -- | | Proceeds from maturities of investments | 58,000 | 5,000 | 13,400 | | | (20,870) | (36,228) | 3,909 | | | | | | | Cash Flows From Financing Activities: | | | | | Shares tendered for employees’ withholding taxes on stock-based compensation | (7,735) | (1,112) | (154) | | Tax benefit related to stock-based compensation | -- | -- | 156 | | Purchase of treasury stock | -- | (1,276) | (30,698) | | Dividends paid | (8,318) | (7,111) | (6,069) | | | (16,053) | (9,499) | (36,765) | | | | | | | Net change in cash and cash equivalents | 10,114 | (8,324) | 7,571 | | | | | | | Cash and cash equivalents, beginning of year | 20,022 | 28,346 | 20,775 | | Cash and cash equivalents, end of year | $30,136 | $20,022 | $28,346 | | | | | | | Cash paid for: | | | | | Income taxes, net of refunds | $4,959 | $10,750 | $12,900 | | | | | | | Non-cash financing activities: | | | | | Non-cash effect of stock option exercises | $10,237 | $- | $- |
2021(in thousands) | | Common stock | | | Treasury stock | | | Additional | | | | | | | | | | Shares outstanding | | | Amount | | | Shares | | | Amount | | | paid-in capital | | | Retained earnings | | | Total | | Balances, December 31, 2020 | | | 1,826 | | | $ | 342 | | | | 1,594 | | | $ | (151,127 | ) | | $ | 53,527 | | | $ | 337,700 | | | $ | 240,442 | | Net income | | | | | | | | | | | | | | | | | | | | | | | 33,055 | | | | 33,055 | | Stock-based compensation transactions | | | 4 | | | | | | | | (4 | ) | | | (5,844 | ) | | | 7,647 | | | | | | | | 1,803 | | Shares surrendered in stock transactions | | | (1 | ) | | | | | | | 1 | | | | (585 | ) | | | | | | | | | | | (585 | ) | Purchase of treasury stock | | | (28 | ) | | | | | | | 28 | | | | (16,988 | ) | | | | | | | | | | | (16,988 | ) | Dividends | | | | | | | | | | | | | | | | | | | | | | | (13,431 | ) | | | (13,431 | ) | Balances, December 31, 2021 | | | 1,801 | | | $ | 342 | | | | 1,619 | | | $ | (174,544 | ) | | $ | 61,174 | | | $ | 357,324 | | | $ | 244,296 | | Net income | | | | | | | | | | | | | | | | | | | | | | | 35,008 | | | | 35,008 | | Stock-based compensation transactions | | | 4 | | | | | | | | (4 | ) | | | (3,867 | ) | | | 5,173 | | | | | | | | 1,306 | | Shares surrendered in stock transactions | | | (1 | ) | | | | | | | 1 | | | | (633 | ) | | | | | | | | | | | (633 | ) | Purchase of treasury stock | | | (43 | ) | | | | | | | 43 | | | | (25,786 | ) | | | | | | | | | | | (25,786 | ) | Dividends | | | | | | | | | | | | | | | | | | | | | | | (14,650 | ) | | | (14,650 | ) | Balances, December 31, 2022 | | | 1,761 | | | $ | 342 | | | | 1,659 | | | $ | (204,830 | ) | | $ | 66,347 | | | $ | 377,682 | | | $ | 239,541 | | Net income | | | | | | | | | | | | | | | | | | | | | | | 19,411 | | | | 19,411 | | Stock-based compensation transactions | | | 1 | | | | | | | | (1 | ) | | | 16 | | | | 984 | | | | | | | | 1,000 | | Shares surrendered in stock transactions | | | | | | | | | | | | | | | (57 | ) | | | | | | | | | | | (57 | ) | Purchase of treasury stock | | | (2 | ) | | | | | | | 2 | | | | (1,667 | ) | | | | | | | | | | | (1,667 | ) | Dividends | | | | | | | | | | | | | | | | | | | | | | | (15,339 | ) | | | (15,339 | ) | Balances, December 31, 2023 | | | 1,760 | | | $ | 342 | | | | 1,660 | | | $ | (206,538 | ) | | $ | 67,331 | | | $ | 381,754 | | | $ | 242,889 | |
The accompanying notes are an integral part of these consolidated financial statements. ATRION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the year ended December 31, 2017, 2016 and 2015
(In thousands)
| | | | | | | | | | | | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | | | | Balances, January 1, 2015 | 1,913 | $342 | 1,507 | $(81,173) | $33,940 | $(245) | $196,706 | $149,570 | | | | | | | | | | | | Net income | | | | | | | 28,925 | 28,925 | | Other comprehensive income | | | | | | 528 | | 528 | | Tax benefit from stock-based compensation | | | | | 156 | | | 156 | | Stock-based compensation transactions | 1 | | (1) | 37 | 1,849 | | | 1,886 | | Shares surrendered in stock transactions | (1) | | 1 | (154) | | | | (154) | | Purchase of treasury stock | (89) | | 89 | (30,698) | | | | (30,698) | | Dividends | | | | | | | (6,115) | (6,115) | | Balances, December 31, 2015 | 1,824 | 342 | 1,596 | (111,988) | 35,945 | 283 | 219,516 | 144,098 | | | | | | | | | | | | Net income | | | | | | | 27,581 | 27,581 | | Other comprehensive loss | | | | | | (757) | | (757) | | Stock-based compensation transactions | 7 | | (7) | 102 | 1,503 | | | 1,605 | | Shares surrendered in stock transactions | (3) | | 3 | (1,112) | | | | (1,112) | | Purchase of treasury stock | (4) | | 4 | (1,276) | | | | (1,276) | | Dividends | | | | | | | (7,151) | (7,151) | | Balances, December 31, 2016 | 1,824 | 342 | 1,596 | (114,274) | 37,448 | (474) | 239,946 | 162,988 | | | | | | | | | | | | Net income | | | | | | | 36,593 | 36,593 | | Other comprehensive loss | | | | | | (741) | | (741) | | Stock-based compensation transactions | 46 | | (46) | 583 | 11,282 | | | 11,865 | | Shares surrendered in stock transactions | (34) | | 34 | (17,972) | | | | (17,972) | | Dividends | | | | | | | (8,345) | (8,345) | | Balances, December 31, 2017 | 1,836 | $342 | 1,584 | $(131,663) | $48,730 | $(1,215) | $268,194 | $184,388 |
The accompanying notes are an integral part of this statement.
Atrion Corporation
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies Atrion Corporation and its subsidiaries (“we,” “our,” “us,” “Atrion”“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. Certain prior-year balances have been reclassified in order to conform to the current year presentation.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 cash deposits in the bank as well as money market accountsfunds and debt securities with maturities at the time of purchase of 90 days or less. Cash deposits in the bank include amounts in operating accounts, savings accounts, and money market accounts.Our investments consist of taxable corporate bonds and commercial paper,government bonds, mutual funds, certificates of deposit 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 securities at fair value, based on quoted market prices, with unrealized gains and to the extent deemed temporary, unrealized losses recorded in stockholders’ equity as accumulated other comprehensive income (loss). We report trading securities at fair value with unrealized gains and losses recordedchanges in fair value recognized in other investment income (loss) in the Consolidated StatementStatements of Income. We consider as current assets our mutual fund investments and 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.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
The components of the Company’s cash and cash equivalents and our short and long-term investments as of December 31, 20172023 and 20162022 are as follows (in thousands): | | | | | Cash and cash equivalents: | | | | Cash deposits | $12,730 | $10,724 | | Money market funds | 17,406 | 9,298 | | Total cash and cash equivalents | $30,136 | $20,022 | | Short-term investments: | | | | Mutual funds (trading) | $222 | -- | | Commercial paper (held-to-maturity) | 31,220 | -- | | Certificates of deposit (held-to-maturity) | 4,020 | $24,000 | | Corporate bonds (held-to-maturity) | 6 | 80 | | Total short-term investments | $35,468 | $24,080 | | Long-term investments: | | | | Corporate bonds (held-to-maturity) | $5,000 | $5,000 | | Equity securities (available-for-sale) | 4,136 | 4,945 | | Total long-term investments | $9,136 | $9,945 | | Total cash, cash equivalents and short and long-term investments | $74,740 | $54,047 |
| | December 31, 2023 | | | December 31, 2022 | | Cash and cash equivalents: | | | | | | | Cash deposits | | $ | 2 | | | $ | 603 | | Money market funds | | | 3,563 | | | | 2,380 | | Commercial paper | | | - | | | | 1,748 | | Total cash and cash equivalents | | $ | 3,565 | | | $ | 4,731 | | Short-term investments: | | | | | | | | | Commercial paper (held-to-maturity) | | $ | - | | | $ | 12,227 | | Bonds (held-to-maturity) | | | 2,552 | | | | 8,597 | | Equity securities (available for sale) | | | 139 | | | | 330 | | Allowance for credit losses | | | -- | | | | (2 | ) | Total short-term investments | | $ | 2,691 | | | $ | 21,152 | | Long-term investments: | | | | | | | | | Equity securities (available-for-sale) | | $ | 4,354 | | | $ | 5,139 | | Bonds (held-to-maturity) | | | 3,575 | | | | 3,180 | | Mutual funds (available for sale) | | | 236 | | | | 350 | | Allowance for credit losses | | | - | | | | - | | Total long-term investments | | $ | 8,165 | | | $ | 8,669 | | Total cash, cash equivalents and short and long-term investments | | $ | 14,421 | | | $ | 34,552 | |
Accounts Receivables ReceivableAccounts receivable are recorded at the original sales price to the customer. We maintain an allowance for doubtful accountscredit losses to reflect estimated losses resulting from the failure of customers to make required payments. On an ongoing basis, the collectabilityThe allowance for credit losses is updated periodically to reflect our estimate 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 appropriate Company personnel and with the customers directly.collectability. Accounts are written off when we determine the receivable will not be collected. 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): | | | | | | | Raw materials | $13,545 | $12,984 | | Work in process | 6,647 | 6,230 | | Finished goods | 9,162 | 9,801 | | Total inventories | $29,354 | $29,015 |
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
| | December 31, | | | | 2023 | | | 2022 | | Raw materials | | $ | 37,770 | | | $ | 33,329 | | Work in process | | | 17,462 | | | | 13,618 | | Finished goods | | | 27,075 | | | | 18,846 | | Total inventories | | $ | 82,307 | | | $ | 65,793 | |
Accounts Payable We reflect disbursements as trade accounts payable until such time as payments are presented to our bank for payment. AtDisbursements totaling approximately $1.3 million at December 31, 20172023 and 2016, disbursements totaling approximately $411,000 and $624,000, respectively,$887 thousand at December 31, 2022, had not been presented for payment to our bank. As of December 31, 2022, there were expenditures of $5.7 million related to property, plant, and equipment included in our accounts payable and accrued liabilities balance. Income Taxes We account for income taxes utilizing Accounting Standards Codification (ASC 740), Income Taxes, or ASC 740. ASC 740 requiresusing the asset and liability method for the recording of deferred income taxes, whereby deferredtaxes. Deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statement and the tax basesbasis of assets and liabilities, as measured at current enacted tax rates. When appropriate, we evaluate the need for a valuation allowance to reduce deferred tax assets. ASC 740 also requiresBefore any benefit is recorded, we determine that it is “more likely than not” that 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 towill 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. OurAny uncertain tax positions are recorded aswithin “Other non-current liabilities.”liabilities” in the accompanying consolidated balance sheets. We classify interest expense on underpayments of income taxes and accrued penalties related to unrecognized tax benefits in the income tax provision.
During the year ended December 31, 2016, we made quarterly payments in excess of federal income taxes due of approximately $920,000. This amount is recorded in Prepaid expenses and other current assets on our Consolidated Balance Sheets.
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): | | | | | | | | | Land | $5,511 | $5,260 | — | | Buildings | 32,461 | 32,321 | | | Machinery and equipment | 129,108 | 122,832 | | | Total property, plant and equipment | $167,080 | $160,413 | |
| | December 31, | | | Useful | | | | 2023 | | | 2022 | | | Lives | | Land | | $ | 5,511 | | | $ | 5,511 | | | | — | | Buildings | | | 66,192 | | | | 60,984 | | | 30-40 yrs. | | Machinery and equipment | | | 214,742 | | | | 204,147 | | | 3-15 yrs. | | Total property, plant and equipment | | $ | 286,445 | | | $ | 270,642 | | | | | |
Depreciation expense of $8,526,000, $8,689,000was $15.0 million in 2023, $13.7 million in 2022, and $8,478,000 was recorded for the years ended December 31, 2017, 2016 and 2015, respectively.$12.8 million in 2021. Depreciation expense is recorded in either cost of goods sold or operating expenses based on the associated assets’ usage. 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.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
Goodwill represents the excess of cost over the fair value of tangible and identifiable intangible net assets acquired. Annualis reviewed for impairment testing for goodwill is performed in the fourth quarter of each year, or when events or changes in circumstances indicate a change in value may have occurred, 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, 2017 and 2016 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): | | | | | | | Accrued payroll and related expenses | $3,943 | $3,661 | | Accrued vacation | 273 | 265 | | Other accrued liabilities | 731 | 709 | | Total accrued liabilities | $4,947 | $4,635 |
| | December 31, | | | | 2023 | | | 2022 | | Accrued payroll and related expenses | | | $4,096 | | | | 4,718 | | Accrued vacation | | | 367 | | | | 408 | | Other accrued liabilities | | | 1,424 | | | | 824 | | Total accrued liabilities | | | $5,887 | | | | 5,950 | |
Revenues We recognize revenue when obligations under the terms of an accepted 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’ or patients’ 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 2023, 2022, and 2021 is as follows (in thousands): | | Year ended December 31, | | | | 2023 | | | 2022 | | | 2021 | | United States | | $ | 106,356 | | | $ | 109,740 | | | $ | 96,925 | | European Union | | | 25,145 | | | | 30,311 | | | | 28,657 | | All other regions | | | 37,825 | | | | 43,455 | | | | 39,427 | | Total | | $ | 169,326 | | | $ | 183,506 | | | $ | 165,009 | |
A summary of revenues by product line for 2023, 2022 and 2021 is as follows (in thousands): | | Year ended December 31, | | | | 2023 | | | 2022 | | | 2021 | | | | | | | | | | | | Fluid Delivery | | $ | 71,144 | | | $ | 84,084 | | | $ | 77,753 | | Cardiovascular | | | 69,750 | | | | 67,632 | | | | 56,919 | | Ophthalmology | | | 8,678 | | | | 5,849 | | | | 6,332 | | Other | | | 19,754 | | | | 25,941 | | | | 24,005 | | Total | | $ | 169,326 | | | $ | 183,506 | | | $ | 165,009 | |
More than 98 percent of our total revenue in the periods presented herein is pursuant to shipments initiated by an accepted purchase order, which 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. Our payment terms vary by the type and location of our customers and the products or services offered, and payment is generally required after receipt by the customer. For certain products or services and customer types, we require payment before the products or services are delivered to the customer. We apply 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 when evaluating certain aged receivables for collectability issues and to determine changes necessary to our customers, providedallowance for credit losses. If circumstances change, our estimates of the collectability of amounts could be changed by a material amount. We have elected to recognize the cost of shipping as an arrangement exists,expense in cost of sales when control over the fee is fixed and determinable and collectability is reasonably assured. All risks and rewards of ownership passproduct has transferred to the customer upon shipment. Net sales represent gross sales invoiced to customers, less certain related charges, including discounts, returns and other allowances. Revenues are recorded exclusive of sales and similar taxes. Returns, discounts and other allowances have been insignificant historically. Shipping and Handling Policy
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 defects 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 and 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 contain multiple performance obligations including embedded leases. We treat agreements with an embedded lease component as a single performance obligation and recognize revenue under revenue guidelines 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 rental payments are recognized on a straight line basis over the lease term. 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 would potentially obscure more useful and important information. Leases to Customers The lease assets from our sales-type leases are recorded in our accounts receivable in the accompanying consolidated balance sheets, and the balance totaled $256 thousand as of December 31, 2023 and $356 thousand as of December 31, 2022. Our equipment treated as leases to customers is included in Property, Plant, and Equipment on our consolidated balance sheets. Due to the immaterial amount of revenue and assets from our lessor activity, all shippingother lessor disclosures have been omitted. Leased Property and handling costs incurred related to products sold are reported as cost of goods sold. ResearchEquipmentAs a lessee, we had seven leases in total for equipment 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 stock-based compensation plans covering certain of our officers, directors and key employees. As explained in detail in Note 8,facilities used internally during 2023, which we account for as operating leases. At December 31, 2023, our right-of-use asset balance was $206 thousand and our lease liability at December 31, 2023 for these leases was $240 thousand. The monthly expense of $51 thousand for these operating leases, which are our only lessee arrangements, is immaterial and therefore all other lessee disclosures have been omitted.Liability-classified awards The Company classifies certain stock-based compensation utilizingawards that can or will be settled in cash as liability awards. The fair value of a liability-classified award is determined on a quarterly basis beginning at the grant date until final vesting. Changes in the fair value recognition provisions of ASC 718, Compensation-Stock Compensation, or ASC 718. Atrion Corporation
Notesliability-classified awards are recorded to Consolidated Financial Statements – (continued)
general and administrative expense over the vesting period of the award.New Accounting Pronouncements In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09,Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.ASU 2016-09 was effective for fiscal years beginning after December 15, 2016. Under this guidance all excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee stock compensation are recognized within income tax expense. The Company early adopted this guidance using the prospective transition method in the second quarter of 2016 effective January 1, 2016. As a result of our adoption of this guidance, an excess tax benefit of $687,000 was recorded in 2016 resulting from the vesting of restricted stock and restricted stock units. In 2017 we recorded an excess tax benefit of $5,782,000 resulting from the exercise of employee stock options and the vesting of restricted stock and restricted stock units. The excess tax benefits recorded in 2017 and 2016 were included in our consolidated statements of cash flows under operating activity rather than under financing activity as was done in prior years. There were no restatements to 2015. This guidance could create future volatility in our effective tax rate depending upon the extent of exercise or vesting activity in our stock based awards.
In November 2015, the FASB issued ASU 2015-17,Balance Sheet Classification of Deferred Taxes(ASU 2015-17) which requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this guidance. ASU 2015-17 was effective for annual and interim periods beginning after December 15, 2016. We adopted this ASU in the first quarter of 2017 on a retrospective basis. As of December 31, 2016, “Deferred Income Taxes” of $651,000 were reclassified from Current Assets to “Other Liabilities and Deferred Credits” in the accompanying Consolidated Balance Sheets.
In May 2014, the FASB issued 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. ASU 2014-09 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. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We conducted and completed a comprehensive review of contracts and their associated business terms and conditions and performed detailed analysis on the impact of this standard to our current contracts. Based on our evaluation, we adopted the new standard on January 1, 2018, using the full retrospective method and expect no material change to our financial statements and our internal controls over financial reporting as a result. Because accounting for revenue under contracts will not materially change for us under the new standard, prior period financial statements will not require adjustment.
In January 2016, the FASB issued ASU 2016-01,Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Changes to the current 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 relates to our available-for-sale equity investment and will result in unrecognized gains and losses from this investment being reflected in our income statement starting 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 Accumulated Other Comprehensive Loss in the shareholders’ equity section of the balance sheet to Retained Earnings. We do not anticipate that the adoption of ASU 2016-01 will have a material impact on our financial statements.
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). Atrion elected to early adopt this new standard as of January 1, 2018, using the modified retrospective approach as required. We have concluded that the adoption of this new standard will not have a material impact on our financial statements.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
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 may require additional disclosures but will not have a material impact on our consolidated financial statements upon adoption. 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, 20172023 and 2016,2022, we held certain investments in corporate bonds, and commercial paper,money market funds, mutual funds, certificates of deposit, and certain equity securities. These investments, with the exception of mutual funds,securities that are all considered Level 2 assets and therequired to be measured for disclosure purposes at 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 reportedon a recurring basis. The fair valuevalues of these investments is based on observable quoted prices from active markets. and their tier levels are shown in Note 2.The carrying values of our other financial instruments including cash and cash equivalents, money market accounts, 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 equivalentsdeposits 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, 2017, 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 corporatemoney market funds, bonds, and commercial paper and in certificates of deposit.equity securities. 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. disruptions as compared with cash deposits.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, 2017 and 2016, weWe had allowances for doubtful accountscredit losses of approximately $28,000$58 thousand at December 31, 2023 and $71,000, respectively.$71 thousand, at December 31, 2022. The carrying amount of the receivables approximates their fair value. OneWe had one customer which accounted for 15.5% of accounts receivable as of December 31, 2017. This was the only customer that exceeded 10% of our accounts receivable at December 31, 2017 and no customer exceeded 10%11% of our accounts receivable as of December 31, 2016. Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
As of December 31, 20172023 and 2016,2022, we held certain investments that were required to be measured for disclosure purposesin bonds, money market accounts, mutual funds, and equity securities. The bonds are considered held-to-maturity and are recorded at amortized cost in the accompanying consolidated balance sheets. The money market accounts, equity securities, and mutual funds are recorded at fair value on a recurring basis.in the accompanying consolidated balance sheets. These investments wereare considered Level 1 or Level 2 investments as detailed in the table below. 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): | | | | | | | | | | | | As of December 31, 2017: | | | | | | | Short-term Investments: | | | | | | | Certificates of deposit | 2 | $4,020 | $-- | $(3) | $4,017 | | 2 | $31,220 | $26 | $(38) | $31,208 | | 2 | $6 | $-- | $-- | $6 | | 1 | $219 | $3 | $-- | $222 | | | | | | | | | | | | | | 2 | $5,000 | $-- | $(75) | $4,925 | | 2 | $5,675 | $-- | $(1,539) | $4,136 | | | | | | | | | | | | | | | | | | | | 2 | $24,000 | $9 | $-- | $24,009 | | 2 | $80 | $-- | $-- | $80 | | | | | | | | 2 | $5,000 | $-- | $(287) | $4,713 | | 2 | $5,675 | $-- | $(730) | $4,945 |
| | | | | | | | Gross Unrealized | | | | | | | | Level | | | Cost | | | Gains | | | Losses | | | Fair Value | | As of December 31, 2023: | | | | | | | | | | | | | | | | Money market funds | | | 1 | | | $ | 3,563 | | | $ | - | | | $ | - | | | $ | 3,563 | | Bonds | | | 2 | | | $ | 6,127 | | | $ | 1 | | | $ | (82 | ) | | $ | 6,046 | | Mutual funds | | | 1 | | | $ | 279 | | | $ | - | | | $ | (43 | ) | | $ | 236 | | Equity securities | | | 2 | | | $ | 6,054 | | | $ | - | | | $ | (1,561 | ) | | $ | 4,493 | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2022: | | | | | | | | | | | | | | | | | | | | | Money market funds | | | 1 | | | $ | 2,380 | | | $ | - | | | $ | - | | | $ | 2,380 | | Commercial paper | | | 2 | | | $ | 13,975 | | | $ | 1 | | | $ | (9 | ) | | $ | 13,967 | | Bonds | | | 2 | | | $ | 11,777 | | | $ | - | | | $ | (353 | ) | | $ | 11,424 | | Mutual funds | | | 1 | | | $ | 466 | | | $ | - | | | $ | (116 | ) | | $ | 350 | | Equity securities | | | 2 | | | $ | 6,054 | | | $ | - | | | $ | (585 | ) | | $ | 5,469 | |
The above certificates of deposit and commercial paper represents investmentsequity securities represent an investment in multiple issuerstwo companies at December 31, 2017,2023 and are classified as held-to-maturity securities. The above equity investment represents an investment in one company at December 31, 2017 and is classified as available for sale. The above long-term corporate bond represents an investment in one issuer at December 31, 2017. The carrying value of our investments is reviewed quarterly for changes in circumstances or the occurrence of events that suggest an investment may not be recoverable. The unrealized loss for the long-term corporateAs of December 31, 2023, we had four bond is attributable to a rise in interest rates which resulted in a lower market price for that security. This investment has beeninvestments in a loss position for more than 12 months due to the rise in interest rates. As of December 31, 2017 there were no changes in circumstances or events that would suggest our investments may not be recoverable. As a result, we recorded no impairment expense related to our investments during 2017. In 2015, one of our bonds experienced a significant decline in market value over a 12-month period due to a changed outlook for the issuer resulting from a major economic decline in its industry. In the fourth quarter of 2015, we determined, based upon disclosures by the issuer, that more likely than not, we would be required to sell or exchange the bond before recovery of its amortized cost. Therefore, we recorded an impairment loss on this bond of $2.4 million in 2015, reducing the carrying value of the bond to its market value at December 31, 2015. In 2016 after the issuer declared bankruptcy, we sold this bond that was previously intended to be held to maturity. We recorded an additional net loss of $311,000 on this bond in 2016 prior to and including its sale. These losses in 2015 and 2016 are reported as other income (loss) in the accompanying Consolidated Statements of Income. Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
months.At December 31, 2017,2023, the length of time until maturity of the corporate bondbonds we currently own was 41.5 months and the length of time until maturity of the certificates of deposit and commercial paper ranged from less thanone to 24 months. We utilize a month to 11.2 months. Our accumulated other comprehensive losslifetime “expected credit loss” measurement objective for the recognition of credit losses for held-to-maturity securities at the time the financial asset is comprised solelyoriginated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. As of unrealizedDecember 31, 2023 and 2022, our allowance for credit losses onwas immaterial.The following table summarizes the amortized cost of our above equity investments, net of tax. held-to-maturity bonds at December 31, 2023, aggregated by credit quality indicator (in thousands):Held-to-Maturity Bonds | Credit Quality Indicators | | Fed Govt. Bonds/Notes | | | Municipal Bonds | | | Corporate Bonds | | | Total | | AA/A | | $ | 82 | | | $ | - | | | $ | 2,265 | | | $ | 2,347 | | BBB | | | - | | | | - | | | | 3,780 | | | | 3,780 | | TOTAL | | $ | 82 | | | $ | - | | | $ | 6,045 | | | $ | 6,127 | |
(3) Patents and Licenses Purchased patentsPatents and licenseslicense 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): | | Weighted Average Original Life (years) | | | Weighted Average Original Life (years) | | | 15.67 | $13,840 | $12,062 | 15.67 | $13,840 | $11,911 |
December 31, 2023 | | | December 31, 2022 | | Weighted Average Original Life (years) | | | Gross Carrying Amount | | | Accumulated Amortization | | | Weighted Average Original Life (years) | | | Gross Carrying Amount | | | Accumulated Amortization | | | 15.67 | | | $ | 13,840 | | | $ | 12,768 | | | | 15.67 | | | $ | 13,840 | | | $ | 12,655 | |
Aggregate amortization expense for patents and licenses was $151,000, $264,000$113 thousand for 2023 and $345,000$117 thousand for 2017, 2016 and 2015, respectively.2022. Estimated future amortization expense for each of the years set forth below ending December 31 is as follows (in thousands): | 2018 | $119 | | 2019 | $119 | | 2020 | $119 | | 2021 | $119 | | 2022 | $117 |
2024 | | $ | 113 | | 2025 | | $ | 112 | | 2026 | | $ | 112 | | 2027 | | $ | 108 | | 2028 | | $ | 108 | |
(4) Line of Credit As of December 31, 20172022, we had a $75.0 million revolving credit facility with a money centermoney-center bank pursuant to which the lender iswas obligated to make advances until February 28, 2022. This2024. On December 21, 2023, this credit facility entered into on February 28, 2017, replaced a $40.0 millionwas amended and restated to, among other things, change the revolving credit facility withamount to $25.0 million and extend the same bank which was in placedate for several years prioradvances to that date.December 21, 2026. The credit facility is secured by substantially all our inventories, equipment, and accounts receivable. InterestThe interest rate on borrowings under thethis credit facility is assessed at 30-day, 60-day, or 90-day LIBOR,Adjusted Term SOFR, as selected by us, plus .875 percent (2.35 percent at December 31, 2017) and is payable monthly.interest expense was immaterial in 2023. We had no outstanding borrowings under the credit facility at December 31, 20172023 or the prior credit facility at December 31, 2016.2022. Our ability to borrow funds under the credit facility from time to time is contingent onupon 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 December 31, 2017,2023, we were in compliance with all of thesethe covenants. The items comprising Provision for Income Taxes are as follows (in thousands): | | | | | | | | Current — Federal | $6,244
| $10,706 | $11,848 | | — State | 877
| 1,226 | 1,528 | | | 7,121 | 11,932 | 13,376 | | | | | | | Deferred — Federal | (1,542) | (92) | (1,364) | | — State | 168 | (155) | (67) | | | (1,374) | (247) | (1,431) | | Provision for Income Taxes | $5,747 | $11,685 | $11,945 |
| | Year ended December 31, | | | | 2023 | | | 2022 | | | 2021 | | Current — Federal | | $ | 3,568 | | | $ | 8,030 | | | $ | 7,445 | | — State | | | 913 | | | | 773 | | | | 1,615 | | | | | 4,481 | | | | 8,803 | | | | 9,060 | | | | | | | | | | | | | | | Deferred — Federal | | | (1,260 | ) | | | (3,021 | ) | | | (3,349 | ) | — State | | | (257 | ) | | | (173 | ) | | | (337 | ) | | | | (1,517 | ) | | | (3,194 | ) | | | (3,686 | ) | Provision for income taxes | | $ | 2,964 | | | $ | 5,609 | | | $ | 5,374 | |
Temporary differences and carryforwards which have given rise to deferred tax assets and liabilities as of December 31, 20172023 and 20162022 are as follows (in thousands): | | | | Deferred tax liabilities (assets): | | | | Property, plant and equipment | $6,787 | $9,550 | | Patents and goodwill | 1,740 | 2,833 | | Benefit plans | (854) | (1,819) | | Inventories | (282) | (519) | | Capital loss carryover | (572) | (954) | | Other | (116) | (338) | | | 6,703 | 8,753 | | Plus: Valuation allowance | 609 | -- | | Total deferred tax liabilities | $7,312 | $8,753 |
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
| | 2023 | | | 2022 | | Deferred tax assets | | | | | | | Capitalized R&D | | $ | 3,081 | | | $ | 2,275 | | Inventories | | | 1,370 | | | | 730 | | Benefit plans | | | 900 | | | | 1,421 | | Total deferred tax assets | | | 5,351 | | | | 4,426 | | Valuation allowance | | | - | | | | - | | Net deferred tax assets | | | 5,351 | | | | 4,426 | | Deferred tax liabilities | | | | | | | | | Property, plant, and equipment | | | (5,802 | ) | | | (6,334 | ) | Patents and goodwill | | | (1,771 | ) | | | (1,745 | ) | Other | | | (149 | ) | | | (235 | ) | Total deferred tax liabilities | | | (7,722 | ) | | | (8,314 | ) | Net deferred tax assets (liabilities) | | $ | (2,371 | ) | | $ | (3,888 | ) |
Total income tax expense differs from the amount that would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below (in thousands): | | | | | | | | Income tax expense at the statutory federal income tax rate | $14,819 | $13,743 | $14,304 | | Increase (decrease) resulting from: | | | | | State income taxes | 662 | 730 | 882 | | Section 199 manufacturing deduction | (630) | (1,165) | (1,383) | | R&D tax credits | (983) | (1,070) | (2,254) | | Excess tax benefit from stock compensation | (5,782) | (687) | -- | | Impact from tax law rate change | (4,053) | -- | -- | | Change in valuation allowance | 609 | -- | -- | | Uncertain tax positions | 865 | (120) | (9) | | Other, net | 240 | 254 | 405 | | Provision for Income Taxes | $5,747 | $11,685 | $11,945 |
The Tax Cuts and Jobs Act, of 2017, enacted in December 2017, reduced the corporate federal income tax rate in the United States from 35% to 21% effective on January 1. 2018. This rate reduction reduced our net deferred tax liability, including adjustments to our net state deferred tax liabilities, by $4.1 million as of December 31, 2017. Based upon this tax law enactment, we recorded a corresponding benefit in our income tax provision of $4.1 million for the three months and year ended December 31, 2017. Also, in the fourth quarter of 2017 we recorded a deferred tax valuation allowance of $609,000 primarily related to deferred tax assets for a $2.7 million capital loss carryover deduction which may not be realized by its expiration date in 2021. This charge partially offset the benefit recorded in our income tax provision as a result of the Tax Cuts and Jobs Act. | | Year ended December 31, | | | | 2023 | | | 2022 | | | 2021 | | Income tax expense at the statutory | | | | | | | | | | | | | federal income tax rate | | $ | 4,699 | | | $ | 8,530 | | | $ | 8,070 | | Increase (decrease) resulting from: | | | | | | | | | | | | | State income taxes | | | 500 | | | | 438 | | | | 1,027 | | R&D tax credits | | | (1,475 | ) | | | (1,332 | ) | | | (1,703 | ) | Foreign-derived intangible income deduction | | | (1,331 | ) | | | (2,133 | ) | | | (2,091 | ) | Excess tax benefit from stock compensation | | | 3 | | | | (97 | ) | | | (185 | ) | Settlements | | | 350 | | | | - | | | | - | | Compensation subject to 162(m) | | | 288 | | | | 262 | | | | 270 | | Other, net | | | (70 | ) | | | (59 | ) | | | (14 | ) | Provision for income taxes | | $ | 2,964 | | | $ | 5,609 | | | $ | 5,374 | |
We will continue to evaluate the tax reform impacts noting that the ultimate impact of tax reform may differ from the amounts recorded due to changes in our interpretations and assumptions, as well as additional regulatory guidance that may be issued. 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. The Company adopted ASU-2016-09 (see Note 1) effective January 1, 2016 eliminating the requirement for excess tax benefits to be recorded as additional paid-in capital when realized. An excess tax benefit in the amount of $156,000 was recognized as additional paid-in capital during 2015, resulting from the vesting of restricted stock and restricted stock units. With the adoption of ASU 2016-09, excess tax benefits of $5,782,000 and $687,000 were recognized as a component of income tax expense in 2017 and 2016, respectively.
We recorded tax credits for our R&D expenditures totaling $2.3 million in 2015. This amount included an adjustment for recalculation of our R&D tax credits from prior years resulting from a regulation issued by the Treasury Department which favorably impacted the benefits provided to the Company under these rules.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
A reconciliation of the beginning and ending balances of the total amounts of grosshad no unrecognized tax benefits as required by ASC 740 is as follows (in thousands):
Gross unrecognized tax benefits at January 1, 2015 | $129
| Increase in tax positions for prior years | 122
| Increase in tax positions for current year | 0
| Lapse in statutes of limitation | (131)
| Gross unrecognized tax benefits at December 31, 2015 | $120
| Decrease in tax positions for prior years | (120)
| Increase in tax positions for current year | 0
| Lapse in statutes of limitation | 0
| Gross unrecognized tax benefits at December 31, 2016 | $0
| Increase in tax positions for prior years | 865
| Increase in tax positions for current year | 0
| Lapse in statutes of limitation | 0
| Gross unrecognized tax benefits at December 31, 2017 | $865
|
As of December 31, 2017 all of the unrecognized tax benefits, which were comprised of uncertain tax positions, would impact the effective tax rate if recognized. Unrecognized tax benefits that are affected by statutes of limitation that expire within the next 12 months are immaterial.
2023, 2022, or 2021.We are subject to United States federal income tax as well as to income tax of multiple state jurisdictions. We have concluded all United States federal income tax matters, for years through 2013. An audit of our federal income tax returns for 2011, 2012 and 2013 was completed in 2016 with no changes. Allas well as all material state and local income tax matters, have been concluded for the years through 2013. 2018. During the year ended December 31, 2023, the Internal Revenue Service audit of the Company’s federal income tax return for tax year 2018 was closed without material adjustments.On August 16, 2022, the “Inflation Reduction Act” (H.R. 5376) was signed into law in the United States. We do not currently expect the Inflation Reduction Act to have a material impact on our financial results, including on our annual estimated effective tax rate or on our liquidity. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The liability for unrecognizedThere was no net interest benefit included in our tax benefits included accrued interest of $1,000 at December 31, 2017. Tax expense for the yearyears ended December 31, 2017 included a net interest charge of $1,000. There were no tax expenses2023, 2022, or tax benefits for interest and penalties in 2016. A net interest benefit of $9,000 was included in 2015. 2021.(6) Stockholders’ Equity Our Board of Directors has at various times authorized repurchases of our stock in open-market or privately-negotiated transactions at such times and at such prices as management or the Board of Directors may from time to time determine. On August 16, 2011, our Board of Directors adopted a stock repurchase program pursuant to which we repurchased 200,000 shares of our common stock from time to time in open market or privately-negotiated transactions, which was the maximum number of shares that could be repurchased. On May 21, 2015, our Board of Directors adopted a new stock repurchase program authorizing the repurchase of up to 250,000 shares of our common stock in open marketopen-market or privately-negotiated transactions. This program has no expiration date but may be terminated by the Board of Directors at any time. As of December 31, 2017,2023, there remained 231,765128,753 shares available for repurchase under this program. There were no stock repurchases during 2017.As of December 31, 2022, there remained 131,622 shares available for repurchase under this program. We repurchased 3,427a total of 2,869 shares of our common stock during 2023 and 89,45242,568 shares during 2016 and 2015, respectively. in 2022 in open-market transactions.We have increased our quarterly cash dividend paymentsrate in September of each of the past three years. The quarterly dividend rate was increased to $.90$1.95 per share in September 2015,2021, to $1.05$2.15 per share in September 20162022, and to $1.20$2.20 per share in September 2017.2023. Holders of our stock units earned non-cash dividend equivalents of $27,000$28 thousand in 2017, $40,0002023, $30 thousand in 20162022 and $46,000$24 thousand in 2015. Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
2021.(7) Income Per Share The following is the computation of basic and diluted net income per share: | | | | | | | | | (In thousands, except per share amounts) | | Net Income | $36,593 | $27,581 | $28,925 | | | | | | | Weighted average basic shares outstanding | 1,846 | 1,824 | 1,846 | | Add: Effect of dilutive securities | 11 | 33 | 24 | | Weighted average diluted shares outstanding | 1,857 | 1,857 | 1,870 | | | | | | | Net Income per share | | | | | Basic | $19.82 | $15.12 | $15.67 | | Diluted | $19.71 | $14.85 | $15.47 |
As required by ASC 260,Earnings per Share, unvested | | Year ended December 31, | | | | 2023 | | | 2022 | | | 2021 | | | | (In thousands, except per share amounts) | | Net Income | | $ | 19,411 | | | $ | 35,008 | | | $ | 33,055 | | | | | | | | | | | | | | | Weighted average basic shares outstanding | | | 1,761 | | | | 1,787 | | | | 1,814 | | Add: Effect of dilutive securities | | | -- | | | | 3 | | | | 4 | | Weighted average diluted shares outstanding | | | 1,761 | | | | 1,790 | | | | 1,818 | | | | | | | | | | | | | | | Net Income per share | | | | | | | | | | | | | Basic | | $ | 11.02 | | | $ | 19.59 | | | $ | 18.22 | | Diluted | | $ | 11.02 | | | $ | 19.56 | | | $ | 18.18 | |
Nonvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and, therefore, are included in the computation of basic income per share pursuant to the two-class method. 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. Securities representing 148Potentially dilutive securities have been excluded when their inclusion would be anti-dilutive. We excluded 111 shares of common stock for the year ended December 31, 20172023, no shares were excluded fromfor the computationyear ended December 31, 2022, and two shares of weighted average diluted shares outstanding because their effect would have been anti-dilutive. Therecommon stock were no anti-dilutive shares excluded fromfor the computation of weighted average diluted shares outstanding in 2016 and 2015. year ended December 31, 2021.(8) Stock Plans Stock-based CompensationAt December 31, 2017,2023, we had threeone stock-based compensation plans which areplan described more fully below. We account for our plans under ASC 718, and the disclosures that follow are based on applying ASC 718. Our Amended and Restated 20062021 Equity Incentive Plan, or 20062021 Plan, provides for awards to key employees, non-employee directors, and consultants of incentive and nonqualified stock options, restricted stock, restricted stock units, deferred stock units, stock appreciation rights, performance shares, and other stock-based awards. Under the 20062021 Plan, 200,000100,000 shares, in the aggregate, of common stock have beenare reserved for awards. The purchase price of shares issued on the exercise of options mustis required to be at least equal to the fair market value of such shares on the date of grant. The options granted become exercisable and expire as determined by the Compensation Committee. As of December 31, 2017, there remained 24,373 shares reserved for future stock-based awards under the 2006 Plan. In May 2007, we adopted our Deferred Compensation Plan for Non-Employee Directors (as amended, the “Deferred Compensation Plan”), and 2,500 shares of our common stockThere were initially reserved for issuance thereunder. This plan allows our non-employee directors to elect to receive stock units in lieu of all or part of the cash fees they are receiving for their services as directors. On the first business day of each calendar year, each participating non-employee director is credited with a number of stock units determined on the basis of the foregone cash fees and the closing price of our common stock on the next preceding date on which shares of our stock were traded. The stock units are converted to shares of our common stock on a one-for-one basis at a future date as elected in advance by the director, but no later than the January following the year in which the director ceases to serve on the Board of Directors, and the shares are delivered to the director. As of December 31, 2017, there remained 1,548 shares of common stock reserved for issuance upon the conversion of stock units which may be credited in the future to non-employee directors. Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
In May 2007, we also adopted our Non-Employee Director Stock Purchase Plan, (as amended, the “Director Stock Purchase Plan”), and 2,500 shares of our common stock were initially reserved for issuance thereunder. Under this plan, our non-employee directors may elect to receive on the first business day of the calendar year fully-vested stock and restricted stock in lieu of some or all of their fees payable to them during such year. The foregone fees are converted into shares of fully-vested stock and restricted stock on the first business day of such calendar year based on the closing price of our common stock on the next preceding date on which shares of our stock were traded. The restricted stock vests in equal amounts on the first day of the next three succeeding calendar quarters provided the non-employee director is then serving on our Board of Directors. As of December 31, 2017, there remained 1,126 shares reserved for issuance under such plan.
A summary of stock option transactions forduring the year ended December 31, 2017 is presented below:
| Options | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | | Outstanding at December 31, 2016 | 50,000 | $204.76 | | | Granted | 20,000 | $501.03 | | | Exercised | (50,000) | $204.76 | | | Outstanding at December 31, 2017 | 20,000 | $501.03 | 5.3 years | | Exercisable at December 31, 2017 | -- | -- | -- |
All nonvested2023. There was one option exercised during the year ended December 31, 2022. There were no outstanding options outstandingremaining at December 31, 2017 are expected to vest.2023 or 2022. None of our grants includes performance-based or market-based vesting conditions. We estimate the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. Our Black-Scholes valuation uses a volatility factor based on our historical stock trading history, a risk-free interest rate based on the implied yield currently available on U.S. Treasury securities with an equivalent term, and a dividend yield based on our dividend history. Our expected life assumption represents the period that our stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
There were no options granted in 2016 and 2015. The fair value for the options granted in 2017 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: | | 2017 | 2016 | 2015 | | Risk-free interest rate | 2.13% | -- | -- | | Dividend yield | 0.85% | -- | -- | | Volatility factor | 25.45% | -- | -- | | Expected life | 5 years | -- | -- |
The weighted average grant date fair value of the options granted in 2017 was $130.35. The total intrinsic value of options exercised during 2017 was $16.5 million. The total intrinsic value of options outstanding at December 31, 2017 was $2.6 million. There were no exercisable options at December 31, 2017.
During 2017, we granted two awards of restricted stock under the 2006 Plan. Under the terms of our restricted stock awards, the restrictions usually lapse over a five-year period. Both awards include restrictions on transfer for a two-year period following vesting. During the vesting period, holders of restricted stock have voting rights and earn dividends, but the shares may not be sold, assigned, transferred, pledgedgrants or otherwise encumbered. Nonvested shares are generally forfeited on termination of employment unless otherwise provided in the participant’s employment agreement or the termination is in connection with a change in control. We calculated the weighted average fair value per share of the restricted stock awarded in 2017 using the market value of our common stock on the date of the grant with a discount for post-vesting restrictions of 11.2%. We estimated this discount using the Chaffe protective put method. A summary of changes in nonvested restricted stock for the year ended December 31, 2017 is presented below:
| Nonvested Shares | | Shares | Weighted Average Award Date Fair Value Per Share | | Restricted stock at December 31, 2016 | | 1,500 | $ 228.08 | | Granted in 2017 | | 5,900 | $ 445.47 | | Vested in 2017 | | (1,500) | $ 228.08 | | Restricted stock at December 31, 2017 | | 5,900 | $ 445.47 |
All shares of nonvested restricted stock outstanding at December 31, 2017 are expected to vest. The total fair value of restricted stock vested during 2017, 2016 and 2015 was $803,000, $1,177,000 and $1,086,000, respectively.
2023 or 2022.During 2017,2023, restricted stock units were awardedgranted to certain employees under the 2006 Plan.employees. All of our restricted stock units are convertible to shares of stock on a one-for-one basis when the restrictions lapse, which is generally after a five-year period. Nonvested restricted stock units are generally forfeited onupon termination of employment unless the termination is in connection with a change in control. During the vesting period, holders of all restricted stock units earn dividends in the form of additional units. During 2017,2023, one non-employeenonemployee director elected to receive stock units in lieu of a portion of his cash fees for his services as a member of the Board of Directors. Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
A summary of changes in stock units for the year ended December 31, 2017,2023, is presented below: | Nonvested Stock Units | | Weighted Average Award Date Fair Value Per Unit | | Weighted Average Award Date Fair Value Per Unit | | Nonvested at December 31, 2016 | 9,388 | $258.69 | -- | | | 1,420 | $616.41 | 11 | $535.07 | | (4,608) | $230.90 | (11) | $535.07 | | Nonvested at December 31, 2017 | 6,200 | $361.28 | -- | |
Nonvested Stock Units | | Restricted Stock Units | | | Weighted Average Award Date Fair Value Per Unit | | | Director’s Stock Units | | | Weighted Average Award Date Fair Value Per Unit | | Nonvested at December 31, 2022 | | | 2,730 | | | $ | 690.50 | | | | -- | | | | | Granted & Added | | | 2,223 | | | $ | 465.44 | | | | 46 | | | $ | 538.89 | | Forfeited | | | (330 | ) | | $ | 713.77 | | | | -- | | | | | | Vested | | | (358 | ) | | $ | 644.23 | | | | (46 | ) | | $ | 538.89 | | Nonvested at December 31, 2023 | | | 4,265 | | | $ | 575.29 | | | | -- | | | | | |
All nonvested restricted stock units at December 31, 20172023 are expected to vest. The total intrinsic value of allthese outstanding stock units which were not convertible at December 31, 2017,2023, including 468561 stock units held for the accounts of non-employee directors, was $4,205,000.$1.8 million. The total fair value of directors’ stock units was $25 thousand for units that vested during 2017, 2016,2023 and 2015$4 thousand for units vested in each of the years ended December 31, 2022 and 2021. During 2020, we granted 3,865 restricted stock units outside of the plans to three employees that will be settled in cash and are treated as liability-classified awards. The grant-date fair value per unit for these awards was $6,000, $10,000$646.90. No grants of this type were made outside the plans prior to 2020. These units vest 20 percent each year over a five-year period beginning in 2021. Changes in the fair value of these awards are recorded to G&A expense over the vesting period of the award. The liability recorded for these units is adjusted to the current market value at the end of each reporting period. During 2023, we paid cash of $295 thousand to pay out remaining units to a retired employee, and $5,000, respectively. Stockwe paid $368 thousand to settle the 20 percent vesting to the two remaining employees. We paid cash of $524 thousand to settle the 20 percent vesting in 2022 and $485 thousand to settle the 20 percent vesting in 2021. At December 31, 2023, our recorded liability for the remaining units was $123 thousand. The intrinsic value of these units at December 31, 2023 was $471 thousand including accrued amounts for dividend equivalents.The total value of stock awards that vested immediately wereto nonemployee directors awarded under the 2006 Plan to non-employee directors totaling $312,000plans was $516 thousand in value2023, $492 thousand in 20172022, and $240,000$432 thousand in value in each2021. These awards vested immediately at the time of 2016 and 2015. the grants. Compensation related to stock awards, restricted stock and restricted stock units that are treated as equity-classified awards is based on the fair market value of the stock on the date of the award. These fair values are then amortized on a straight-line basis over the requisite service periods of the entire awards, which is generally the vesting period. Compensation related to stock options is based on the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. For the years ended December 31, 2017, 2016 and 2015, weWe recorded stock-based compensation expense as a G&A expense in the amount of $1,602,000, $1,566,000$1.531 million for the year ended December 31, 2023, $1.730 million for the year ended December 31, 2022, and $1,841,000, respectively,$2.312 million for the year ended December 31 2021, for all of the above mentionedabove-mentioned stock-based compensation arrangements. The total tax benefit recognized in the income statement from stock-based compensation arrangements was $319 thousand for the yearsyear ended December 31, 2017, 20162023, $461 thousand for the year ended December 31, 2022, and 2015, was $6,342,000, $1,235,000 and $644,000, respectively. The 2017 and 2016 tax benefit$1.203 million for the year ended December 31, 2021. These amounts include $5,782,000 and $687,000, respectively, of excess tax benefits within income tax expense as a result of the adoption of ASU 2016-09. Excess tax benefits of $156,000 were recognized during 2015 as additional paid-in capital and is shown as a financing activity in our consolidated statements of cash flows for sucheach year. Unrecognized compensation cost information for our various stock-based compensation typesawards is shown below as of December 31, 2017: | | Unrecognized Compensation Cost | Weighted Average Remaining Years in Amortization Period | | Stock options | $2,246,000 | 4.3 | | Restricted stock | 2,264,000 | 4.3 | | Restricted stock units | 1,114,000 | 3.8 | | Total | $5,624,000 | |
2023 (in thousands): | | Unrecognized Compensation Cost | | | Weighted Average Remaining Years in Amortization Period | | Restricted stock units | | $ | 1,418 | | | | 3.2 | | Restricted stock units (to be settled in cash) | | | 471 | | | | 1.5 | | Total | | $ | 1,889 | | | | | |
We have a policy of utilizinguse treasury shares to satisfy stock option exercises, stock unit conversions, and restricted stock awards that are equity-classified awards. Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
(9) Industry Segment and Geographic Information We operate in one reportable industry segment: developing and manufacturing products primarily for medical applications andapplications. We have no foreign operating subsidiaries. We have other product lines which include pressure relief valves and inflation systems, which are sold primarily to the aviation and marine industries. Due to the similarities in product technologies and manufacturing processes, these products are managed as part of our medical products segment. Our revenues from sales to customers outside the United States totaled approximately 37 percent of our net revenues in 2017 and 2016, and 352023, 40 percent in 2015.2022, and 41 percent in 2021. We have no assets located outside the United States. A summary of revenues by geographic area, based on shipping destination, for 2017, 2016 and 2015 is as follows (in thousands):
| | | | | | | | United States | $93,082 | $91,092 | $94,840 | | Germany | 8,172 | 6,396 | 7,156 | | Other countries less than 5% of revenues | 45,341 | 45,999 | 43,737 | | Total | $146,595 | $143,487 | $145,733 |
A summary of revenues by product line for 2017, 2016 and 2015 is as follows (in thousands):
| | | | | | | | | | | Fluid Delivery | $65,053 | $60,889 | $60,630 | | Cardiovascular | 48,073 | 47,064 | 46,463 | | Ophthalmology | 13,537 | 15,427 | 18,253 | | Other | 19,932 | 20,107 | 20,387 | | Total | $146,595 | $143,487 | $145,733 |
(10) Employee Retirement and Benefit Plans We sponsor a defined contribution 401(k) plan for all employees. Each participant may contribute certain amounts of eligible compensation. We make a matching contribution to the plan. Our contributions under this plan were $720,000, $667,000$1.167 million in 2023, $1.061 million in 2022, and $645,000$980 thousand in 2017, 2016 and 2015, respectively. 2021.The Company adoptedhas a Nonqualified Deferred Compensation Plan effective September 1, 2017, for certain key management or highly-compensated employees. The plan allows for the deferral of salary and bonus compensation until retirement or other specified payment events occur. Employees’ deferred compensation amounts are deemed to be invested in certain investment funds, indexes, or vehicles selected by our Compensation Committee and designated by each participant and their deferral balances are adjusted for earnings based upon the performance of these deemed investments. Our deferred compensation obligation under the plan was $2.570 million at December 31, 2017 was $426,0002023 and is$2.355 million at December 31 2022. These amounts are reflected in “Other Liabilities and Deferred Credits” in the accompanying Consolidated Balance Sheets. Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
consolidated balance sheets.(11) Commitments and Contingencies From time to time and in the ordinary course of business, we may be subject to various claims, charges, and litigation. In some cases, the claimants may seek damages, as well as other relief, which, if granted, could require significant expenditures. We accrue the estimated costs of settlement or damages when a loss is deemed probable and such costs are estimable, and accrue for legal costs associated with a loss contingency when a loss is probable and such amounts are estimable. Otherwise, these costs are expensed as incurred. If the estimate of a probable loss or defense costs is a range and no amount within the range is more likely, we accrue the minimum amount of the range. As of December 31, 2017, the Company2023, we had no ongoing litigation or arbitration for such matters. We had a dispute which was favorably settled in the third quarter of 2007. This settlement was amended in December 2008. The amended settlement agreement provides that we may receive annual payments from 2009 through 2024. We have not recorded $3.5$0.5 million in potential future payments under this settlement as of December 31, 20172023 due to the uncertainty of payment. payment.We have arrangements with three of our executive officers pursuant to which the termination of their employment under certain circumstances would result in lump sum payments to them. Termination under such circumstances at December 31, 20172023, could have resulted in payments aggregating $5.1$5.4 million. At December 31, 2017,2023, the Company had purchaselease obligations totaling $0.2 million with certain supplierslessors for the purchase of inventory for 2018. These contracts were commitments to purchase inventory used in the production of the Company’s products totaling $1.5 million. (12) Quarterly Financial Data (Unaudited):
| QuarterEnded | | | | | | (In thousands, except per share amounts) | | 03/31/17 | $38,504 | $11,327 | $9,950 | $5.42 | $5.36 | | 06/30/17 | 36,164 | 10,175 | 10,026 | 5.44 | 5.40 | | 09/30/17 | 37,903 | 11,479 | 7,971 | 4.30 | 4.29 | | 12/31/17 | 34,024 | 8,293 | 8,646 | 4.67 | 4.66 | | | | | | | | | 03/31/16 | $36,215 | $10,465 | $6,945 | $3.81 | $3.76 | | 06/30/16 | 36,143 | 10,074 | 7,450 | 4.09 | 4.02 | | 09/30/16 | 37,835 | 10,976 | 7,614 | 4.17 | 4.10 | | 12/31/16 | 33,294 | 7,611 | 5,571 | 3.05 | 3.00 |
The quarterly information presented above reflects, in the opinion of management, all adjustments necessary for a fair presentation of the results for the interim periods presented.
equipment and facilities.ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Evaluation of disclosure 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 December 31, 2017.2023. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, were not effective as of December 31, 2017. There were no changes2023 as a result of the material weakness in our internal controls described below. Management’s report on internal control over financial reporting for the fourth fiscal quarter ended December 31, 2017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. A system of internal control may become inadequate over time because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our managementManagement assessed the effectiveness of our internal control over financial reporting as of December 31, 20172023, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control-Integrated Framework. Framework. Based on this assessment, our management concluded that, as of December 31, 2017, ouridentified a material weakness in internal control over financial reporting, was effective. as of December 31, 2023, and, based on such material weakness, concluded that we did not maintain effective internal control over financial reporting. Specifically, the material weakness is related to inventory counts and resulted from our failure to appropriately perform cycle count procedures at one of our subsidiaries.A material weakness is a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. This material weakness identified above did not result in any material errors. Remediation efforts To remediate the material weakness identified above, we are planning, initiating, and implementing control and procedure improvements including, but not limited to: | · | Instituting additional preventive controls, enhancing review controls, and providing additional training to control owners charged with the responsibility of safeguarding inventory. | | · | Improved documentation ensuring proper knowledge transfer upon personnel changes. | | · | Review and update physical organization of inventory to improve segregation and identification procedures. |
We anticipate these improvements will address the material weakness. However, management will not consider the material weakness remediated until the enhanced controls operate effectively for a sufficient period of time and testing of the controls is satisfied. We will monitor the effectiveness of the designed controls and refine the remediation plan as appropriate. After giving full consideration to the material weakness identified and additional analysis performed to ensure our consolidated financial statements included in this Annual Report on Form 10-K were prepared in accordance with accounting principles generally accepted in the United States, management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations, and cash flows for the year ended December 31, 2023. Attestation report of independent registered public accounting firm The effectiveness of our internal control over financials reporting has been audited by Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated financial statementsas stated in its report included in thisherein. This Report and, as part of its audit, has issued the following attestation reportcontains an adverse opinion on the effectiveness of our internal control over financial reporting. ReportChanges in internal control over financial reporting Except for the identification of Independent Registered Public Accounting Firm the material weakness described above, there were no changes in our internal control over financial reporting for the fourth fiscal quarter ended December 31, 2023, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Atrion Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2017,2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”). In our opinion, because of the effect of the material weakness described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. A material weakness has been identified related to inventory count controls resulting from the Company’s failure to appropriately perform cycle count procedures at one of their subsidiaries. This material weakness has been identified and included in management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements and schedule of the Company as of and for the year ended December 31, 2017,2023. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report dated February 27, 201829, 2024 which expressed an unqualified opinion on those financial statements and schedule. statements.Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Reportreport on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. There was no information required to be disclosed in a report on Form 8-K during the three months ended December 31, 20172023 that was not reported. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. PART III DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Certain information required by Part III is omitted from this Form 10-K and is incorporated herein by reference to our definitive proxy statement for our 20182024 annual meeting of stockholders which we intend to file pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after December 31, 2017. The information for this item relating to our directors is incorporated by reference from our definitive proxy statement to be filed in connection with our 20182024 annual meeting of stockholders. The information required by this item relating to executive officers is set forth in Part I of this report. The information required by Item 405 of Regulation S-K is incorporated by reference from our definitive proxy statement to be filed in connection with our 20182024 annual meeting of stockholders. We have adopted a Code of Business Conduct that applies to all of our directors, officers, and employees. The Code of Business Conduct will be provided to any person, without charge, upon request addressed to: Corporate Secretary, Atrion Corporation, One Allentown Parkway, Allen, Texas 75002. The information required by this item is incorporated by reference from our definitive proxy statement to be filed in connection with our 20182024 annual meeting of stockholders. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information contained in the section entitled “Securities Ownership” in our definitive proxy statement to be filed in connection with our 20182024 annual meeting of stockholders is incorporated herein by reference. Equity Compensation Plan Information The following table provides certain information about securities authorized for issuance under our equityPlansEquity incentive compensation plans as of December 31, 2017: | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights(a) | Weighted-average exercise price of outstanding options, warrants and rights(b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(c) | Equity compensation plan approved by security holders (1) | 26,200 | $501.03(2) | 24,373 | Equity compensation plans not approved by security holders(3) | 468 | - | 2,674(4) | | Total | 26,668 | $501.03 | 27,047 |
(1)
Consists ofunder which shares of ourthe Company's common stock authorized for issuance under our 2006 Plan. The number of shares available for issuance under this plan is subject to equitable adjustment by the Compensation Committee of the Board of Directors in the event of any change in our capitalization, including, without limitation, a stock dividend or stock split. For more information regarding this plan, see Note 8 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this Form 10-K.
(2)
The stock units awarded under our 2006 Plan are excluded from the calculation of the weighted average exercise price.
(3)
Consists of our Deferred Compensation Plan and our Director Stock Purchase Plan. For more information regarding these plans, see Note 8 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this Form 10-K.
(4)
The Deferred Compensation Plan and the Director Stock Purchase Plan do not provide for a specified limit on the number of shares of our common stock that may be issued thereunder. The 2,674 shares shown as available for future issuance (1,548 shares under the Deferred Compensation Plan and 1,126 shares under the Director Stock Purchase Plan) reflect the number of shares initially reserved, in the aggregate, for issuance under those plans less the number of shares of our common stock issued or to be issued with respect to stock units that have been credited to non-employee directors' stock unit accounts under the Deferred Compensation Plan and our stock that has been purchased under the Director Stock Purchase Plan on or before December 31, 2017.
issued: Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | Equity compensation plans | | | | | | | | | | approved by security holders(1) | | | 4,265 | | | | — | | | | 93,366 | | Equity compensation plans not | | | | | | | | | | | | | approved by security holders | | | — | | | | — | | | | — | | Total | | | 4,265 | | | | — | | | | 93,366 | |
(1) | Consists of shares of our common stock authorized for issuance under our 2006 Equity Plan and our 2021 Equity Plan. The number of shares available for issuance under those plans is subject to equitable adjustment in the event of any change in our capitalization. No additional awards will be made under the 2006 Equity Plan. | (2) | Stock units awarded under our 2006 Equity Plan and 2021 Equity Plan are excluded from the calculation of the weighted average exercise price. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information required by this item is incorporated by reference from our definitive proxy statement to be filed in connection with our 20182024 annual meeting of stockholders. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this item is incorporated by reference from our definitive proxy statement to be filed in connection with our 20182024 annual meeting of stockholders.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following documents are filed as a part of this report on Form 10-K:
1. Financial Statements of the Company:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statement of Changes in Stockholders Equity
2. Financial Statement Schedules:
Schedule II – Consolidated Valuation and Qualifying Accounts
| | | Balance at Beginning of Period | Additions Charged to Expense | | | | Allowance for Doubtful Receivables | | | | | | 2017 | $71 | $14 | $(57) | $28 | | 2016 | $50 | $42 | $(21) | $71 | | 2015 | $22 | $33 | $(5) | $50 | | | | | | | | Deferred Income Tax Valuation Allowance | | | | | | 2017 | $- | $609 | $- | $609 | | 2016 | $- | $- | $- | $- | | 2015 | $- | $- | $- | $- |
All other financial statement schedules have been omitted since the required information is included in the consolidated financial statements or the notes thereto or is not applicable or required.
3. Exhibits. Reference as made to Item 15(b) of this report on Form 10-K.
Exhibit
Numbers
(a) | Description
The following documents are filed as a part of this report on Form 10-K: |
| (1) | Financial Statements of the Company: | 3a | | Report of Independent Registered Public Accounting Firm (PCAOB ID: 248) | | | Consolidated Statements of Income | | | Consolidated Balance Sheets | | | Consolidated Statements of Cash Flows | | | Consolidated Statement of Changes in Stockholders’ Equity | | | | | (2) | Financial Statement Schedules: | | | | | | Schedule II – Consolidated Valuation and Qualifying Accounts |
| | December 31, (Thousands) | | | | Balance at Beginning of Period | | | Additions Charged to Expense | | | Deductions from Reserve | | | Ending Balance | | | | | | | | | | | Allowance for credit losses | | | | | | | | | | | | | 2023 | | $ | 71 | | | $ | 21 | | | $ | (34 | ) | | $ | 58 | | 2022 | | $ | 69 | | | $ | 45 | | | $ | (43 | ) | | $ | 71 | | 2021 | | $ | 41 | | | $ | 32 | | | $ | (4 | ) | | $ | 69 | | | | | | | | | | | | | | | | | | | Deferred income tax valuation allowance | | | | | | | | | | | | | | | | | 2023 | | $ | - | | | $ | - | | | $ | - | | | $ | - | | 2022 | | $ | 36 | | | $ | - | | | $ | (36 | ) | | $ | - | | 2021 | | $ | 580 | | | $ | - | | | $ | (544 | ) | | $ | 36 | |
| All other financial statement schedules have been omitted since the required information is included in the consolidated financial statements or the notes thereto or is not applicable or required. |
| (3) | The exhibits listed below on the Exhibit Index are filed or incorporated by reference as part of this Form 10-K. |
Exhibit Index Exhibit Numbers | | Description | 3.1 | | Certificate of Incorporation of Atrion Corporation, dated December 30, 1996(1) incorporated by reference to Appendix B to the Definitive Proxy Statement of Atrion Corporation filed January 10, 1997. | 3b3.2 | | Bylaws of Atrion Corporation (as last amended and restated on August 14, 2013)(2)May 22, 2023)incorporated by reference to Exhibit 3.1 to Atrion Corporation Form 8-K filed May 25, 2023. | 10a*4.1 | | Description of Atrion Corporation Short-Term Incentive Compensation Plan(3)Corporation’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. + | 10b*10.1* | Severance Plan for Chief Financial Officer(4)
| 10c* | incorporated by reference to Exhibit 10.2 to Atrion Corporation Form 10-Q filed May 8, 2019. | 10d*10.2* | | Second Amended and Restated EmploymentChange in Control Agreement for Chairman(6)President and Chief Executive Officer incorporated by reference to Exhibit 10.1 to Atrion Corporation Form 10-Q filed May 8, 2019. | 10e*10.3* | Second Amendment to Amended and Restated Employment | Change in Control Agreement for Chairman(7)Chief Financial Officer incorporated by reference to Exhibit 10.6 to Atrion Corporation Form 8-K filed December 28, 2023. | 10f*10.4* | | Amended and Restated Atrion Corporation 2006 Equity Incentive Plan (as last amended on August 14, 2017)(8) incorporated by reference to Exhibit 10.2 to Atrion Corporation Form 10-Q filed November 8, 2017. | 10g*10.5* | Form of Award Agreement for Incentive Stock Option Award under Amended and Restated Atrion Corporation 2006 Equity Incentive Plan(9)
| 10h* | Form of Award Agreement for Non-Qualified Stock Option Award under Amended and Restated Atrion Corporation 2006 Equity Incentive Plan(10)
| 10i* | Form of Award Agreement for Common Stock Award under Amended and Restated Atrion Corporation 2006 Equity Incentive Plan(11)
| 10j* | Form of Award Agreement for Restricted Stock Award under Amended and Restated Atrion Corporation 2006 Equity Incentive Plan(12)
| 10k* | incorporated by reference to Exhibit 10.6 to Atrion Corporation Form 10-Q filed August 4, 2011. | 10l*10.6* | | Atrion Corporation 2021 Equity Incentive Plan effective May 21, 2021 incorporated by reference to Appendix A Definitive Proxy Statement of Atrion Corporation filed on April 7, 2021. | 10.7* | | Form of Common Stock PurchaseAward Agreement under Atrion Corporation 2021 Equity Incentive plan incorporated by reference to Exhibit 10.2 to Atrion Corporation Form 10-Q filed August 9, 2021. | 10.8* | | Form of Restricted Stock Unit Award Agreement under Atrion Corporation 2021 Equity Incentive Plan (as amendedincorporated by reference to Exhibit 10.1 to Atrion Corporation Form 10-Q filed November 8, 2021. | 10.9* | | First Amendment to Atrion Corporation 2021 Equity Incentive Plan + | 10.10* | | First Amended and restatedRestated Restricted Stock Unit Award Agreement between the Company and Emile A Battat dated as of December 2, 2008)(14)29, 2020 incorporated by reference to Exhibit 10m to Atrion Corporation Form 10-K filed March 1, 2021. | 10m*10.11* | | First Amended and Restated Restricted Stock Unit Award Agreement between the Company and David A. Battat dated as of December 29, 2020 incorporated by reference to Exhibit 10n to Atrion Corporation Form of Stock Purchase Election Form – Non-Employee Directors Stock Purchase Plan(15)10-K filed March 1, 2021. | 10n*10.12* | | Atrion Corporation Short-Term Incentive Compensation Plan (as last amended on March 12, 2018) incorporated by reference to Exhibit 10.1 to Atrion Corporation form 10-Q filed May 9, 2018. | 10.13* | | Atrion Corporation 2023 Annual Incentive Compensation Plan incorporated by reference to Exhibit 10.1 to Atrion Corporation 8-K filed May 25, 2023. | 10.14* | | Deferred Compensation Plan for Non-Employee Directors (as amended and restated as of December 2, 2008)(16) incorporated by reference to Exhibit 10n to Atrion Corporation Form 10-K filed March 13, 2009. | 10o*10.15* | | Form of Deferred Fee Election Form – Deferred Compensation Plan for Non-Employee Directors(17) incorporated by reference to Exhibit 10.1 to Atrion Corporation Form S-8 filed June 27, 2007 | 10p*10.16* | Amended and Restated Change in Control Agreement for President and Chief Executive Officer(18)
| 10q* | incorporated by reference to Exhibit 10v to Atrion Corporation Form 10-K filed March 12, 2012. | 10r10.17 | | Amended and Security Agreement dated November 12, 1999 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, Inc., Atrion Leasing Company, Inc., Atrion International, Inc. and SouthTrust Bank, National Association.(20) | 10s | Amendment to Loan and SecurityRestated Credit Agreement dated as of December 26, 2001 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC, Atrion International, Inc. and SouthTrust Bank, National Association.(21)
|
10t | Third Amendment to Loan and Security Agreement dated as of September 1, 2005 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC and Wachovia Bank, National Association.(22)
| 10u | Fourth Amendment to Loan and Security Agreement dated as of July 1, 2008 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC and Wachovia Bank, National Association.(23)
| 10v | Fifth Amendment to Loan and Security Agreement dated as of September 30, 2008 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC and Wachovia Bank, National Association.(24)
| 10w | Sixth Amendment to Loan and Security Agreement and Loan Increase Agreement dated as of October 1, 2011 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC and Wells Fargo Bank, National Association.(25)
| 10x | Sixth Amendment to Line of Credit Promissory Note dated as of October 1, 2011 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC and Wells Fargo Bank, National Association.(26)
| 10y | Seventh Amendment to Loan and Security Agreement and Loan Increase Agreement dated as of June 11, 2015(27)
| 10z | Seventh Amendment to Line of Credit Promissory Note dated as of June 11, 2015(28)
| 10aa | Credit Agreement dated as of February 28, 201721, 2023 by and between Atrion Corporation, as Borrower, and Wells Fargo Bank, National Association, as Lender(29)
incorporated by reference to Exhibit 10.2 to Atrion Corporation Form 8-K filed December 28, 2023. | 10ab10.18 | | Amended and Restated Revolving Note dated as of December 21, 2023 by Atrion Corporation, as Borrower, in favor of Wells Fargo Bank, National Association, as Lender incorporated by reference to Exhibit 10.2 to Atrion Corporation Form 8-K filed December 28, 2023. | 10.19 | | Reaffirmation Agreement dated as of December 21, 2023 by and among Atrion Corporation, certain Subsidiaries of Atrion Corporation and Wells Fargo Bank, National Association as Lender incorporated by reference to Exhibit 10.3 to Atrion Corporation Form 8-K filed December 28, 2023. |
10.20 | | Guaranty Agreement dated as of February 28, 2017 made by certain Subsidiaries of Atrion Corporation in favor of Wells Fargo Bank, National Association, as Lender(30) incorporated by reference to Exhibit 10.2 to Atrion Corporation Form 8-K filed March 3, 2017. | 10ac10.21 | | Collateral Agreement dated as of February 28, 2017 among Atrion Corporation, certain Subsidiaries of Atrion Corporation and Wells Fargo Bank, National Association, as lender.(31)lender incorporated by reference to Exhibit 10.3 to Atrion Corporation Form 8-K filed March 3, 2017. | 10ad10.22* | | Nonqualified Deferred Compensation Plan(32) incorporated by reference to Exhibit 10.1 to Atrion Corporation Form 10-Q filed November 8, 2017. | 13.121 | Stock Performance Graph(33)
| 21 | 2022. + | 23 | | Consent of Grant Thornton LLP(33) .+ | 31.1 | | Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer(33)Officer. + | 31.2 | | Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer(33)Officer. + | 32.1 | | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes – Oxley Act Of 2002(33)2002. + | 32.2 | | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes – Oxley Act Of 2002(33)2002. + | 97 | | Atrion Corporation Policy for the Recovery of Erroneously Awarded Compensation + | 101.INS** | | XBRL Instance Document | 101.SCH** | | XBRL Taxonomy Extension Schema Document | 101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase Document | 101.DEF** | | XBRL Taxonomy Extension Definition Linkbase Document | 101.LAB** | | XBRL Taxonomy Extension Label Linkbase Document | 101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase Document |
(1)
Incorporated by reference to Appendix B to the Definitive Proxy Statement of the Company filed January 10, 1997.
(2)
Incorporated by reference to Exhibit 3.1 to the Form 8-K of Atrion Corporation filed August 20, 2013.
(3)
Incorporated by reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed October 29, 2013.
(4)
Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion Corporation filed May 12, 2000.
(5)
Incorporated by reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed November 6, 2006.
(6)
Incorporated by reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed May 27, 2011.
(7)
Incorporated by reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed May 25, 2016.
(8)
Incorporated by reference to Exhibit 10.2 to Form 10-Q of Atrion Corporation filed on November 8, 2017.
(9)
Incorporated by reference to Exhibit 10.2 to Form 10-Q of Atrion Corporation filed August 4, 2011.
(10)
Incorporated by reference to Exhibit 10.3 to Form 10-Q of Atrion Corporation filed August 4, 2011.
(11)
Incorporated by reference to Exhibit 10.4 to Form 10-Q of Atrion Corporation filed August 4, 2011.
(12)
Incorporated by reference to Exhibit 10.5 to Form 10-Q of Atrion Corporation filed August 4, 2011.
(13)
Incorporated by reference to Exhibit 10.6 to Form 10-Q of Atrion Corporation filed August 4, 2011.
(14)
Incorporated by reference to Exhibit 10l to Form 10-K of Atrion Corporation filed March 13, 2009.
(15)
Incorporated by reference to Exhibit 10.1 to the Form S-8 of Atrion Corporation filed June 27. 2007 (File No. 333-144085).
(16)
Incorporated by reference to Exhibit 10n to Form 10-K of Atrion Corporation filed March 13, 2009.
(17)
Incorporated by reference to Exhibit 10.1 to the Form S-8 of Atrion Corporation filed June 27. 2007 (File No. 333-144086).
(18)
Incorporated by reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed October 31, 2014.
(19)
Incorporated by reference to Exhibit 10v to Form 10-K of Atrion Corporation filed March 12, 2012.
(20)
Incorporated by reference to Exhibit (b)(i) to Schedule 13E-4 of Atrion Corporation filed November 17, 1999.
(21)
Incorporated by reference to Exhibit (b)(3) to Schedule TO-I of Atrion Corporation filed March 18, 2003.
(22)
Incorporated by reference to Exhibit 10.3 to Form 10-Q of Atrion Corporation filed November 2, 2011.
(23)
Incorporated by reference to Exhibit 10.5 to Form 10-Q of Atrion Corporation filed November 2, 2011.
(24)
Incorporated by reference to Exhibit 10.7 to Form 10-Q of Atrion Corporation filed November 2, 2011.
(25)
Incorporated by reference to Exhibit 10.8 to Form 10-Q of Atrion Corporation filed November 2, 2011.
(26)
Incorporated by reference to Exhibit 10.9 to Form 10-Q of Atrion Corporation filed November 2, 2011.
(27)
Incorporated by reference to Exhibit 10.2 to Form 10-Q of Atrion Corporation filed August 4, 2015.
(28)
Incorporated by reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed August 4, 2015.
(29)
Incorporated by reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed March 3, 2017.
(30)
Incorporated by reference to Exhibit 10.2 to Form 8-K of Atrion Corporation filed March 3, 2017.
(31)
Incorporated by reference to Exhibit 10.3 to Form 8-K of Atrion Corporation filed March 3, 2017.
(32)
Incorporated by reference to Exhibit 10.1 to Form 10-Q filed November 8, 2017.
* Management Contract or Compensatory Plan or Arrangement ** XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. In accordance with Rule 406T of Regulation S-T, the XBRL information in Exhibit 101 of this Form 10-K shall not be subject to the liability of Section 18 of the Securities Exchange Act of 1934 and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing. ITEM 16. FORM 10-K SUMMARY. None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 | | | | | | | | | By: | By: | /s/David A. Battat | | | | David A. Battat President and Chief Executive Officer | | | | | David A. Battat | | | | Dated: February 29, 2024 | | | President and Chief
Executive Officer
| |
Dated: February 27, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature | | Title | | Date | | | | | | | | | | | /s/ David A. Battat | | President and Chief Executive | | February 27, 201829, 2024 | David A. Battat | | Officer (Principal Executive Officer) | | | | | | | | | | | | | /s/ Jeffery StricklandCindy Ferguson | | Vice President, Chief Financial Officer and | | February 27, 201829, 2024 | Jeffery StricklandCindy Ferguson | | Secretary-Treasurer (Principal Financial | | | | | and Accounting Officer) | | | | | | | | | | | | | /s/ Emile A Battat | | Chairman | | February 27, 201829, 2024 | Emile A Battat | | | | | | | | | | /s/ Hugh J. Morgan, Jr. | | Director | | February 27, 201829, 2024 | Hugh J. Morgan, Jr. | | | | | | | | | | | | | | | /s/ Roger F. Stebbing | | Director | | February 27, 2018 | Roger F. Stebbing | | | | | | | | | | | | | | | /s/ John P. Stupp, Jr. | | Director | | February 27, 201829, 2024 | John P. Stupp, Jr. | | | | | | | | | | | | | | | /s/ Ronald N. Spaulding | | Director | | February 27, 201829, 2024 | Ronald N. Spaulding | | | | | | | | | | | | | | | /s/ Preston G. Athey | | Director | | February 27, 201829, 2024 | Preston G. Athey | | | | | | | | | | /s/ Jeannette Bankes | | Director | | February 29, 2024 | Jeannette Bankes | | | | |
Exhibit Index
Exhibit
Numbers
| Description
63 | | Certificate of Incorporation of Atrion Corporation, dated December 30, 1996(1)
| | Bylaws of Atrion Corporation (as last amended on August 14, 2013)(2)
| | Atrion Corporation Short-Term Incentive Compensation Plan(3)
| | Severance Plan for Chief Financial Officer(4)
| | Amended and Restated Employment Agreement for Chairman(5)
| | First Amendment to Amended and Restated Employment Agreement for Chairman(6)
| | Second Amendment to Amended and Restated Employment Agreement for Chairman(7)
| | Amended and Restated Atrion Corporation 2006 Equity Incentive Plan (as last amended on August 14, 2017)(8)
| | Form of Award Agreement for Incentive Stock Option Award under Amended and Restated Atrion Corporation 2006 Equity Incentive Plan(9)
| | Form of Award Agreement for Non-Qualified Stock Option Award under Amended and Restated Atrion Corporation 2006 Equity Incentive Plan(10)
| | Form of Award Agreement for Common Stock Award under Amended and Restated Atrion Corporation 2006 Equity Incentive Plan(11)
| | Form of Award Agreement for Restricted Stock Award under Amended and Restated Atrion Corporation 2006 Equity Incentive Plan(12)
| | Form of Award Agreement for Restricted Stock Units Award under Amended and Restated Atrion Corporation 2006 Equity Incentive Plan(13)
| | Non-Employee Directors Stock Purchase Plan (as amended and restated as of December 2, 2008)(14)
| | Form of Stock Purchase Election Form – Non-Employee Directors Stock Purchase Plan(15)
| | Deferred Compensation Plan for Non-Employee Directors (as amended and restated as of December 2, 2008)(16)
| | Form of Deferred Fee Election Form – Deferred Compensation Plan for Non-Employee Directors(17)
| | Amended and Restated Change in Control Agreement for President and Chief Executive Officer(18)
| | Form of Indemnification Agreement for Directors and Executive Officers(19)
| | Loan and Security Agreement dated November 12, 1999 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, Inc., Atrion Leasing Company, Inc., Atrion International, Inc. and SouthTrust Bank, National Association.(20)
| | Amendment to Loan and Security Agreement dated as of December 26, 2001 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC, Atrion International, Inc. and SouthTrust Bank, National Association.(21)
|
| Third Amendment to Loan and Security Agreement dated as of September 1, 2005 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC and Wachovia Bank, National Association.(22)
| | Fourth Amendment to Loan and Security Agreement dated as of July 1, 2008 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC and Wachovia Bank, National Association.(23)
| | Fifth Amendment to Loan and Security Agreement dated as of September 30, 2008 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC and Wachovia Bank, National Association.(24)
| | Sixth Amendment to Loan and Security Agreement and Loan Increase Agreement dated as of October 1, 2011 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC and Wells Fargo Bank, National Association.(25)
| | Sixth Amendment to Line of Credit Promissory Note dated as of October 1, 2011 among Atrion Corporation, Atrion Medical Products, Inc., Halkey-Roberts Corporation, Quest Medical, Inc., AlaTenn Pipeline Company, LLC, Atrion Leasing Company, LLC and Wells Fargo Bank, National Association.(26)
| | Seventh Amendment to Loan and Security Agreement and Loan Increase Agreement dated as of June 11, 2015(27)
| | Seventh Amendment to Line of Credit Promissory Note dated as of June 11, 2015(28)
| | Credit Agreement dated as of February 28, 2017 by and between Atrion Corporation, as Borrower, and Wells Fargo Bank, National Association, as Lender(29)
| | Guaranty Agreement dated as of February 28, 2017 made by certain Subsidiaries of Atrion Corporation in favor of Wells Fargo Bank, National Association, as Lender(30)
| | Collateral Agreement dated as of February 28, 2017 among Atrion Corporation, certain Subsidiaries of Atrion Corporation and Wells Fargo Bank, National Association, as lender.(31)
| | Nonqualified Deferred Compensation Plan(32)
| | Stock Performance Graph(33)
| | Subsidiaries of Atrion Corporation as of December 31, 2017(33)
| | Consent of Grant Thornton LLP(33)
| | Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer(33)
| | Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer(33)
| | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes – Oxley Act Of 2002(33)
| | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes – Oxley Act Of 2002(33)
| 101.INS** | XBRL Instance Document | 101.SCH** | XBRL Taxonomy Extension Schema Document | 101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document | 101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document | 101.LAB** | XBRL Taxonomy Extension Label Linkbase Document | 101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document |
Notes
(1)
Incorporated by reference to Appendix B to the Definitive Proxy Statement of the Company filed January 10, 1997.
(2)
Incorporated by reference to Exhibit 3.1 to the Form 8-K of Atrion Corporation filed August 20, 2013.
(3)
Incorporated by reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed October 29, 2013.
(4)
Incorporated by reference to Exhibit 10b to Form 10-Q of Atrion Corporation filed May 12, 2000.
(5)
Incorporated by reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed November 6, 2006.
(6)
Incorporated by reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed May 27, 2011.
(7)
Incorporated by reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed May 25, 2016.
(8)
Incorporated by reference to Exhibit 10.2 to Form 10-Q of Atrion Corporation filed on November 8, 2017.
(9)
Incorporated by reference to Exhibit 10.2 to Form 10-Q of Atrion Corporation filed August 4, 2011.
(10)
Incorporated by reference to Exhibit 10.3 to Form 10-Q of Atrion Corporation filed August 4, 2011.
(11)
Incorporated by reference to Exhibit 10.4 to Form 10-Q of Atrion Corporation filed August 4, 2011.
(12)
Incorporated by reference to Exhibit 10.5 to Form 10-Q of Atrion Corporation filed August 4, 2011.
(13)
Incorporated by reference to Exhibit 10.6 to Form 10-Q of Atrion Corporation filed August 4, 2011.
(14)
Incorporated by reference to Exhibit 10l to Form 10-K of Atrion Corporation filed March 13, 2009.
(15)
Incorporated by reference to Exhibit 10.1 to the Form S-8 of Atrion Corporation filed June 27. 2007 (File No. 333-144085).
(16)
Incorporated by reference to Exhibit 10n to Form 10-K of Atrion Corporation filed March 13, 2009.
(17)
Incorporated by reference to Exhibit 10.1 to the Form S-8 of Atrion Corporation filed June 27. 2007 (File No. 333-144086).
(18)
Incorporated by reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed October 31, 2014.
(19)
Incorporated by reference to Exhibit 10v to Form 10-K of Atrion Corporation filed March 12, 2012.
(20)
Incorporated by reference to Exhibit (b)(i) to Schedule 13E-4 of Atrion Corporation filed November 17, 1999.
(21)
Incorporated by reference to Exhibit (b)(3) to Schedule TO-I of Atrion Corporation filed March 18, 2003.
(22)
Incorporated by reference to Exhibit 10.3 to Form 10-Q of Atrion Corporation filed November 2, 2011.
(23)
Incorporated by reference to Exhibit 10.5 to Form 10-Q of Atrion Corporation filed November 2, 2011.
(24)
Incorporated by reference to Exhibit 10.7 to Form 10-Q of Atrion Corporation filed November 2, 2011.
(25)
Incorporated by reference to Exhibit 10.8 to Form 10-Q of Atrion Corporation filed November 2, 2011.
(26)
Incorporated by reference to Exhibit 10.9 to Form 10-Q of Atrion Corporation filed November 2, 2011.
(27)
Incorporated by reference to Exhibit 10.2 to Form 10-Q of Atrion Corporation filed August 4, 2015.
(28)
Incorporated by reference to Exhibit 10.1 to Form 10-Q of Atrion Corporation filed August 4, 2015.
(29)
Incorporated by reference to Exhibit 10.1 to Form 8-K of Atrion Corporation filed March 3, 2017.
(30)
Incorporated by reference to Exhibit 10.2 to Form 8-K of Atrion Corporation filed March 3, 2017.
(31)
Incorporated by reference to Exhibit 10.3 to Form 8-K of Atrion Corporation filed March 3, 2017.
(32)
Incorporated by reference to Exhibit 10.1 to Form 10-Q filed November 8, 2017.
* Management Contract or Compensatory Plan or Arrangement
** XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. In accordance with Rule 406T of Regulation S-T, the XBRL information in Exhibit 101 of this Form 10-K shall not be subject to the liability of Section 18 of the Securities Exchange Act of 1934 and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.
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