Atrion (ATRI) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Atrion Corporation's unaudited condensed consolidated financial statements and accompanying notes, providing a detailed interim financial overview Condensed Consolidated Statements of Income This section details Atrion Corporation's unaudited condensed consolidated statements of income for the reported interim periods Three Months Ended September 30 (in thousands, except per share amounts) | Metric | 2023 | 2022 | Change (YoY) | | :----------------------------------- | :--- | :--- | :----------- | | Revenues | $41,911 | $44,631 | -6.1% | | Cost of goods sold | $28,175 | $26,978 | +4.4% | | Gross profit | $13,736 | $17,653 | -22.2% | | Operating income | $4,066 | $9,603 | -57.7% | | Net income | $2,939 | $8,839 | -66.7% | | Net income per basic share | $1.67 | $4.95 | -66.2% | | Net income per diluted share | $1.67 | $4.94 | -66.2% | | Dividends per common share | $2.20 | $2.15 | +2.3% | Nine Months Ended September 30 (in thousands, except per share amounts) | Metric | 2023 | 2022 | Change (YoY) | | :----------------------------------- | :--- | :--- | :----------- | | Revenues | $125,742 | $140,651 | -10.6% | | Cost of goods sold | $79,671 | $82,921 | -3.9% | | Gross profit | $46,071 | $57,730 | -20.3% | | Operating income | $15,915 | $30,882 | -48.5% | | Net income | $12,987 | $26,686 | -51.3% | | Net income per basic share | $7.38 | $14.89 | -50.5% | | Net income per diluted share | $7.37 | $14.86 | -50.4% | | Dividends per common share | $6.50 | $6.05 | +7.4% | Condensed Consolidated Balance Sheets This section presents Atrion Corporation's unaudited condensed consolidated balance sheets, detailing assets, liabilities, and equity at period end As of September 30, 2023 vs. December 31, 2022 (in thousands) | Asset/Liability/Equity | Sep 30, 2023 | Dec 31, 2022 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Cash and cash equivalents | $658 | $4,731 | -$4,073 | | Short-term investments | $3,839 | $21,152 | -$17,313 | | Accounts receivable | $23,290 | $23,951 | -$661 | | Inventories | $82,946 | $65,793 | +$17,153 | | Total current assets | $115,743 | $119,397 | -$3,654 | | Property, plant and equipment (net) | $126,766 | $123,754 | +$3,012 | | Total assets | $264,809 | $264,712 | +$97 | | Accounts payable and accrued liabilities | $13,915 | $18,024 | -$4,109 | | Accrued income and other taxes | $1,351 | $74 | +$1,277 | | Line of credit | $4,500 | $0 | +$4,500 | | Total current liabilities | $15,266 | $18,098 | -$2,832 | | Total stockholders' equity | $240,182 | $239,541 | +$641 | Condensed Consolidated Statements of Cash Flows This section outlines Atrion Corporation's unaudited condensed consolidated statements of cash flows, detailing operating, investing, and financing activities Nine Months Ended September 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | Change | | :----------------------------------- | :--- | :--- | :----- | | Net cash provided by operating activities | $9,148 | $28,947 | -$19,799 | | Net cash used in investing activities | -$4,557 | -$8,199 | +$3,642 | | Net cash used in financing activities | -$8,664 | -$25,887 | +$17,223 | | Net change in cash and cash equivalents | -$4,073 | -$5,139 | +$1,066 | | Cash and cash equivalents at end of period | $658 | $27,125 | -$26,467 | Notes to Condensed Consolidated Statement of Changes in Stockholders' Equity This section provides notes to Atrion Corporation's condensed consolidated statement of changes in stockholders' equity for the interim periods Stockholders' Equity Changes (in thousands) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :----------------------------------- | :----------- | :----------- | | Total Stockholders' Equity (Nine Months) | $240,182 | $246,275 | | Net Income (Nine Months) | $12,987 | $26,686 | | Dividends (Nine Months) | -$11,456 | -$10,847 | | Purchase of Treasury Stock (Nine Months) | -$1,667 | -$14,430 | | Metric | Sep 30, 2023 | Sep 30, 2022 | | :----------------------------------- | :----------- | :----------- | | Total Stockholders' Equity (Three Months) | $240,182 | $246,275 | | Net Income (Three Months) | $2,939 | $8,839 | | Dividends (Three Months) | -$3,878 | -$3,841 | | Purchase of Treasury Stock (Three Months) | $0 | -$5,090 | Notes to Condensed Consolidated Financial Statements This section provides explanatory notes to Atrion Corporation's unaudited condensed consolidated financial statements (1) Basis of Presentation Unaudited condensed consolidated financial statements are prepared under US GAAP for interim reporting, with management's estimates evaluated quarterly - Statements are prepared in accordance with US GAAP for interim financial information and include all normal and recurring adjustments[19] - Management's estimates and assumptions are based on historical experience and other reasonable factors, evaluated quarterly[19] (2) Inventories Inventories are valued at the lower of cost or net realizable value using FIFO, increasing by $17,153 thousand due to raw materials, WIP, and finished goods - Inventories are stated at the lower of cost or net realizable value, with cost determined by the first-in, first-out method[21] Inventory Components (in thousands) | Component | Sep 30, 2023 | Dec 31, 2022 | Change | | :---------------- | :----------- | :----------- | :----- | | Raw materials | $37,890 | $33,329 | +$4,561 | | Work in process | $17,036 | $13,618 | +$3,418 | | Finished goods | $28,020 | $18,846 | +$9,174 | | Total inventories | $82,946 | $65,793 | +$17,153 | (3) Income per share Basic and diluted income per share calculations show a significant decrease for the three and nine months ended September 30, 2023 Income Per Share (Three Months Ended September 30) | Metric | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Net income | $2,939 | $8,839 | | Weighted average basic shares outstanding | 1,760 | 1,786 | | Weighted average diluted shares outstanding | 1,761 | 1,788 | | Basic EPS | $1.67 | $4.95 | | Diluted EPS | $1.67 | $4.94 | Income Per Share (Nine Months Ended September 30) | Metric | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Net income | $12,987 | $26,686 | | Weighted average basic shares outstanding | 1,761 | 1,793 | | Weighted average diluted shares outstanding | 1,762 | 1,796 | | Basic EPS | $7.38 | $14.89 | | Diluted EPS | $7.37 | $14.86 | - Incremental shares from stock options and restricted stock units are included in diluted EPS calculation using the treasury stock method, excluding anti-dilutive securities[24] (4) Investments The Company's investments include bonds, money market, mutual funds, and equity securities, with total cash, cash equivalents, and investments decreasing from $34,552 thousand to $13,971 thousand - Investments include bonds (held-to-maturity at amortized cost), money market accounts, mutual funds, and equity securities (recorded at fair value)[25] Cash, Cash Equivalents, and Investments (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | Change | | :----------------------------------- | :----------- | :----------- | :----- | | Cash and cash equivalents | $658 | $4,731 | -$4,073 | | Short-term investments | $3,839 | $21,152 | -$17,313 | | Long-term investments | $9,474 | $8,669 | +$805 | | Total cash, cash equivalents and investments | $13,971 | $34,552 | -$20,581 | Fair Value of Investments (in thousands) | Investment Type | Sep 30, 2023 Fair Value | Dec 31, 2022 Fair Value | | :----------------------------------- | :---------------------- | :---------------------- | | Money market | $656 | $2,380 | | Commercial paper | $0 | $13,967 | | Bonds | $7,447 | $11,424 | | Mutual funds | $1,725 | $350 | | Equity investments | $4,001 | $5,469 | - As of September 30, 2023, the Company had six bond investments in a loss position for more than 12 months, with maturities ranging from less than a month to 27 months[32][33] (5) Patents and Licenses Patents and license fees are amortized over their useful lives, with expenses of $28 thousand (3 months) and $85 thousand (9 months) for Sep 30, 2023 - Patents and license fees are amortized over their useful life, with a weighted average original life of 15.67 years[36] Amortization Expense (in thousands) | Period | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Three months ended Sep 30 | $28 | $29 | | Nine months ended Sep 30 | $85 | $89 | Estimated Future Amortization Expense (in thousands) | Year | Amount | | :--- | :----- | | 2024 | $113 | | 2025 | $112 | | 2026 | $112 | | 2027 | $108 | | 2028 | $108 | (6) Revenues Revenue is recognized upon product shipment, with total revenues decreasing by 6.1% (3 months) and 10.6% (9 months) due to declines in Fluid Delivery and Other product lines - Revenue is recognized when performance obligations are satisfied with the transfer of control of products to customers upon shipment, with payment typically due within 30 days[39][43] Revenue by Geographic Area (in thousands) | Region | Three Months Sep 2023 | Three Months Sep 2022 | Nine Months Sep 2023 | Nine Months Sep 2022 | | :---------------- | :-------------------- | :-------------------- | :------------------- | :------------------- | | United States | $26,146 | $27,779 | $78,594 | $84,121 | | European Union | $6,695 | $6,371 | $21,361 | $23,851 | | All other regions | $9,070 | $10,481 | $25,787 | $32,679 | | Total | $41,911 | $44,631 | $125,742 | $140,651 | Revenue by Product Line (in thousands) | Product Line | Three Months Sep 2023 | Three Months Sep 2022 | Nine Months Sep 2023 | Nine Months Sep 2022 | | :---------------- | :-------------------- | :-------------------- | :------------------- | :------------------- | | Fluid Delivery | $17,717 | $19,303 | $52,591 | $64,973 | | Cardiovascular | $17,170 | $16,780 | $51,568 | $50,165 | | Ophthalmology | $2,700 | $1,607 | $6,849 | $4,495 | | Other | $4,324 | $6,941 | $14,734 | $21,018 | | Total | $41,911 | $44,631 | $125,742 | $140,651 | (7) Recent Accounting Pronouncements The Company adopts new accounting standards as effective, expecting no material impact from recently issued, not-yet-effective pronouncements - The Company generally adopts new accounting standards as of the specified effective date[46] - Recently issued standards not yet effective are not expected to have a material impact on consolidated financial statements upon adoption[46] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, liquidity, capital resources, and external factors for the three and nine months ended September 30, 2023 Overview Atrion develops medical products for fluid delivery, cardiovascular, and ophthalmology, focusing on quality, R&D, customer needs, and controlled growth - Atrion Corporation develops and manufactures products primarily for medical applications, serving fluid delivery, cardiovascular, and ophthalmology markets[48] - The business strategy emphasizes product quality, price, engineering, customer service, and delivery time, with R&D focused on improving current products and developing highly-engineered niche products[48][49] - Strategic objectives include focusing on customer needs, expanding product lines, investing in future growth while controlling costs, and preserving a collaborative, entrepreneurial management culture[50][51] Results for the three months ended September 30, 2023 Q3 2023 revenues decreased 6.1% to $41,911 thousand, operating income fell 57.7% to $4,066 thousand, and net income dropped 66.7% to $2,939 thousand due to lower sales and higher costs Key Financial Results (Three Months Ended September 30, in thousands, except EPS) | Metric | 2023 | 2022 | Change (YoY) | | :----------------------------------- | :--- | :--- | :----------- | | Revenues | $41,911 | $44,631 | -6.1% | | Operating income | $4,066 | $9,603 | -57.7% | | Net income | $2,939 | $8,839 | -66.7% | | Net income per basic share | $1.67 | $4.95 | -66.2% | | Net income per diluted share | $1.67 | $4.94 | -66.2% | - Revenues decreased by 6.1% due to an 8.2% decrease in Fluid Delivery revenue and a 37.7% decrease in Other product line revenue, although the rate of decline has narrowed as supply chain shortages eased[53][54] - Gross profit decreased by 22.2% to $13.7 million, with the gross profit percentage falling from 39.6% to 32.8% due to higher manufacturing costs[54][55] - Operating expenses increased by $1.6 million, driven by a $959 thousand increase in general and administrative expenses and a $618 thousand increase in R&D expenses[55] - Other investment income shifted from a $764 thousand gain in Q3 2022 to a $782 thousand loss in Q3 2023, primarily due to unrealized gains and losses on equity investments[58] Results for the nine months ended September 30, 2023 Nine-month revenues declined 10.6% to $125,742 thousand, operating income fell 48.5% to $15,915 thousand, and net income dropped 51.3% to $12,987 thousand due to lower sales and higher costs Key Financial Results (Nine Months Ended September 30, in thousands, except EPS) | Metric | 2023 | 2022 | Change (YoY) | | :----------------------------------- | :--- | :--- | :----------- | | Revenues | $125,742 | $140,651 | -10.6% | | Operating income | $15,915 | $30,882 | -48.5% | | Net income | $12,987 | $26,686 | -51.3% | | Net income per basic share | $7.38 | $14.89 | -50.5% | | Net income per diluted share | $7.37 | $14.86 | -50.4% | - Revenue decrease was driven by a 19.1% decline in Fluid Delivery and a 29.9% decline in Other product lines[60] - Gross profit percentage decreased from 41.0% in 2022 to 36.6% in 2023 due to higher manufacturing costs[62] - Operating expenses increased by $3.3 million, primarily due to a $2.4 million increase in general and administrative expenses and a $925 thousand increase in R&D expenses[62] - Other investment income shifted from a $216 thousand gain in the first nine months of 2022 to a $1.4 million loss in the same period of 2023, attributable to unrealized gains and losses on equity investments[63] - The effective tax rate decreased from 16.2% to 14.1%, primarily due to the impact of the R&D tax credit on lower income before income taxes[64][65] Liquidity and Capital Resources Total cash and investments decreased to $14,000 thousand; $4,500 thousand drawn on a $75,000 thousand credit facility, with working capital at $100,500 thousand - As of September 30, 2023, total cash, cash equivalents, short-term investments, and long-term investments were $14.0 million, down from $34.6 million at December 31, 2022[66] - The Company has a $75.0 million revolving credit facility, with $4.5 million outstanding borrowings and $70.5 million available as of September 30, 2023[66][68] - Working capital decreased by $822 thousand to $100.5 million, primarily due to a decrease in cash and short-term investments, partially offset by an increase in inventory and prepaid expenses[68] - Cash flows from operating activities for the nine months ended September 30, 2023, were $9.1 million, a decrease from $28.9 million in the prior year[67] COVID-19 Impact COVID-19's direct business impact has diminished, but global uncertainties persist; the Company continues to monitor related changes - The impact of COVID-19 on the business has largely diminished, but uncertainties remain regarding global economy, supply chains, and healthcare systems[69] - The Company continues to monitor COVID-19 and resulting legislative and regulatory changes to mitigate potential adverse impacts[69] Forward-Looking Statements Forward-looking statements are based on current expectations, subject to risks, and the Company disclaims any obligation to update them - Forward-looking statements are based on current expectations, and actual results or future events may differ materially due to numerous risks and uncertainties[70][71] - The Company does not undertake any obligation to supplement, update, or revise forward-looking statements, except as required by applicable law[71] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk exposures were reported for Q3 2023 compared to the 2022 Form 10-K - No material changes in market risk exposures were experienced for the quarter ended September 30, 2023, compared to the 2022 Form 10-K[72] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023[73] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[73] PART II - OTHER INFORMATION Item 1. Legal Proceedings Atrion Corporation has no pending legal proceedings as described in Item 103 of Regulation S-K - The Company has no pending legal proceedings of the type described in Item 103 of Regulation S-K[73] Item 1A. Risk Factors No material changes to risk factors were reported as of the date of this report compared to the 2022 Form 10-K - No material change in the risk factors described in the 2022 Form 10-K as of the report date[74] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's stock repurchase program and its activity during the reporting period Issuer Purchases of Equity Securities Details of the Company's stock repurchase program, including shares authorized, repurchased, and remaining available - The Board of Directors approved a stock repurchase program on May 21, 2015, authorizing the repurchase of up to 250,000 shares of common stock[74] - No repurchases were made during the three months ended September 30, 2023[74] - As of September 30, 2023, 121,247 shares had been repurchased under the program, with 128,753 shares remaining available for repurchase[74] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including SOX certifications and XBRL taxonomy documents Exhibit Index | Number | Description | | :----- | :--------------------------------------------------------------------------------------------------------------------------------------------------- | | 31.1 | Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer | | 31.2 | Sarbanes-Oxley Act Section 302 Certification of Chief Financial 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 | | 32.2 | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes – Oxley Act Of 2002 | | 101.INS | 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 | SIGNATURES The report is duly signed by Atrion Corporation's President/CEO and VP/CFO as of November 7, 2023 - The report was signed by David A. Battat, President and Chief Executive Officer, and Cindy Ferguson, Vice President and Chief Financial Officer, on November 7, 2023[77][78]