The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statement.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Atrion Corporation and its subsidiaries (“we,” “our,” “us,” “Atrion” or the “Company”) develop and manufacture products primarily for medical applications. We market our products throughout the United States and internationally. Our customers include physicians, hospitals, distributors and other manufacturers. Atrion Corporation’s principal subsidiaries through which these operations are conducted are Atrion Medical Products, Inc., Halkey-Roberts Corporation and Quest Medical, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of Atrion Corporation and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. 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 funds 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 corporate and government bonds, commercial paper, mutual funds and equity securities. We classify our investment securities in one of three categories: held-to-maturity, available-for-sale, or trading. Securities that we have the positive intent and ability to hold to maturity are reported at amortized cost and classified as held-to-maturity securities.
We report our available-for-sale and trading securities at fair value with changes in fair value recognized in other investment income (loss) in the Consolidated Statement of Income. Prior to our adoption of ASU 2016-01, Financial Instruments-Overall, Subtopic 825-10: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) in January 2018, unrealized gains and losses for our available-for-sale securities were reported in stockholders’ equity as accumulated other comprehensive income.
We consider as current assets those investments which will mature in the next 12 months including interest receivable on long-term bonds. The remaining investments are considered non-current assets including our investment in equity securities which we intend to hold longer than 12 months. We periodically evaluate our investments for impairment.
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, 2020 and 2019 are as follows (in thousands):
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
Cash deposits
|
|
$
|
16,628
|
|
|
$
|
38,942
|
|
Money market funds
|
|
|
4,822
|
|
|
|
3,460
|
|
Commercial paper
|
|
|
1,000
|
|
|
|
2,646
|
|
Total cash and cash equivalents
|
|
$
|
22,450
|
|
|
$
|
45,048
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Commercial paper (held-to-maturity)
|
|
$
|
5,178
|
|
|
$
|
6,778
|
|
Bonds (held-to-maturity)
|
|
|
14,101
|
|
|
|
16,988
|
|
Allowance for credit losses
|
|
|
(21
|
)
|
|
|
-
|
|
Total short-term investments
|
|
$
|
19,258
|
|
|
$
|
23,766
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Mutual funds (available for sale)
|
|
$
|
563
|
|
|
$
|
1,105
|
|
Bonds (held-to-maturity)
|
|
|
41,619
|
|
|
|
27,845
|
|
Allowance for credit losses
|
|
|
(52
|
)
|
|
|
-
|
|
Equity securities (available for sale)
|
|
|
4,077
|
|
|
|
2,822
|
|
Total long-term investments
|
|
$
|
46,207
|
|
|
$
|
31,772
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short and long-term investments
|
|
$
|
87,915
|
|
|
$
|
100,586
|
|
Account Receivables
Accounts receivable are recorded at the original sales price to the customer. We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the failure of customers to make required payments. The allowance for doubtful accounts is updated periodically to reflect our estimate of collectability. Accounts are written off when we determine the receivable will not be collected.
Inventories
Inventories are stated at the lower of cost (including materials, direct labor and applicable overhead) or net realizable value. Cost is determined by using the first-in, first-out method. The following table details the major components of inventory (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
20,308
|
|
|
$
|
18,157
|
|
Work in process
|
|
|
11,339
|
|
|
|
8,525
|
|
Finished goods
|
|
|
18,651
|
|
|
|
15,411
|
|
Total inventories
|
|
$
|
50,298
|
|
|
$
|
42,093
|
|
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
Accounts Payable
We reflect disbursements as trade accounts payable until such time as payments are presented to our bank for payment. At December 31, 2020 and 2019, disbursements totaling approximately $1,434,000 and $1,236,000, respectively, had not been presented for payment to our bank.
Income Taxes
We account for income taxes utilizing Accounting Standards Codification (ASC 740), Income Taxes, or ASC 740. ASC 740 requires the asset and liability method for the recording of deferred income taxes, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statement and the tax basis 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 requires the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attributes of income tax positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain tax position taken or expected to be taken on an income tax return must be recognized in the financial statements at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more-likely-than-not of being sustained.
Our uncertain tax positions are recorded within “Other non-current liabilities” in the accompanying consolidated balance sheets. We classify interest expense on underpayments of income taxes and accrued penalties related to unrecognized tax benefits in the income tax provision.
We account for excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee stock compensation as required by ASU 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), within income tax expense. An excess tax benefit is the realized tax benefit related to the amount of deductible compensation cost reported on an employer’s tax return for equity instruments in excess of the compensation cost for those instruments recognized for financial reporting purposes.
During the years ended December 31, 2020 and 2019, we made quarterly payments in excess of federal and state income taxes due of approximately $1,525,000 and $4,000, respectively. These amounts were 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):
|
|
December 31,
|
|
|
Useful
|
|
|
|
2020
|
|
|
2019
|
|
|
Lives
|
|
Land
|
|
$
|
5,511
|
|
|
$
|
5,511
|
|
|
|
—
|
|
Buildings
|
|
|
35,114
|
|
|
|
34,582
|
|
|
30-40 yrs.
|
|
Machinery and equipment
|
|
|
178,287
|
|
|
|
160,897
|
|
|
3-15 yrs.
|
|
Total property, plant and equipment
|
|
$
|
218,912
|
|
|
$
|
200,990
|
|
|
|
|
|
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
Depreciation expense of $11,533,000, $10,733,000 and $9,003,000 was recorded for the years ended December 31, 2020, 2019 and 2018, respectively. Depreciation expense is recorded in either cost of goods sold or operating expenses based on the associated assets’ usage.
Patents and Licenses
Costs for patents and licenses acquired are determined at acquisition date. Patents and licenses are amortized over the useful lives of the individual patents and licenses, which are from seven to 20 years. Patents and licenses are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Goodwill
Goodwill represents the excess of cost over the fair value of tangible and identifiable intangible net assets acquired. Annual impairment testing for goodwill is performed in the fourth quarter of each year 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, 2020 and 2019 was $9,730,000. Our evaluation of goodwill during each year resulted in no impairment losses.
Current Accrued Liabilities
The items comprising current accrued liabilities are as follows (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued payroll and related expenses
|
|
$
|
5,656
|
|
|
$
|
4,233
|
|
Accrued vacation
|
|
|
276
|
|
|
|
311
|
|
Other accrued liabilities
|
|
|
633
|
|
|
|
604
|
|
Total accrued liabilities
|
|
$
|
6,565
|
|
|
$
|
5,148
|
|
Revenues
We recognize revenue when obligations under the terms of a contract with our customer are satisfied. This occurs with the transfer of control of our products to customers when products are shipped. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services. Sales and other taxes we may collect concurrent with revenue-producing activities are excluded from revenue.
We believe that our medical device business will benefit in the long term from an aging world population along with an increase in life expectancy. In the near term however, demand for our products fluctuates based on our customers’ requirements which are driven in large part by their customers’ 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.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
A summary of revenues by geographic area, based on shipping destination, for 2020, 2019 and 2018 is as follows (in thousands):
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
85,682
|
|
|
$
|
98,496
|
|
|
$
|
95,757
|
|
Germany
|
|
|
9,712
|
|
|
|
7,996
|
|
|
|
8,898
|
|
Other countries less than 5% of revenues
|
|
|
52,197
|
|
|
|
48,574
|
|
|
|
47,793
|
|
Total
|
|
$
|
147,591
|
|
|
$
|
155,066
|
|
|
$
|
152,448
|
|
A summary of revenues by product line for 2020, 2019 and 2018 is as follows (in thousands):
`
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Fluid Delivery
|
|
$
|
75,228
|
|
|
$
|
72,117
|
|
|
$
|
70,606
|
|
Cardiovascular
|
|
|
48,524
|
|
|
|
54,799
|
|
|
|
50,904
|
|
Ophthalmology
|
|
|
4,700
|
|
|
|
7,124
|
|
|
|
10,473
|
|
Other
|
|
|
19,139
|
|
|
|
21,026
|
|
|
|
20,465
|
|
Total
|
|
$
|
147,591
|
|
|
$
|
155,066
|
|
|
$
|
152,448
|
|
More than 99 percent of our total revenue in the periods presented herein is pursuant to shipments initiated by a purchase order. Under the guidance from Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASC 606), the purchase order is the contract with the customer. As a result, the vast majority of our revenue is recognized at a single point in time when the performance obligation of the product being shipped is satisfied, rather than recognized over time, and presented as a receivable on the consolidated balance sheets.
Our payment terms vary by the type and location of our customers and the products or services offered. The term between invoicing and when payment is due is 30 days in most cases. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.
We evaluate the collectability of specific accounts and determine when to grant credit to our customers using a combination of factors, including the age of the outstanding balances, evaluation of customers’ current and past financial condition, recent payment history, current economic environment, and discussions with our personnel and with the customers directly. We apply these same factors and more when evaluating certain aged receivables for collectability issues and to determine changes necessary to our allowance for doubtful accounts. If circumstances change, our estimates of the collectability of amounts could be changed by a material amount.
We have elected to recognize the cost for shipping as an expense in cost of sales when control over the product has transferred to the customer. Shipping and handling fees charged to customers are reported as revenue.
We do not make any material accruals for product returns and warranty obligations. Our manufactured products come with a standard warranty to be free from defect and, in the event of a defect, may be returned by the customer within a reasonable period of time. Historically, our returns have been unpredictable but very low due to our focus on quality control. A one-year warranty is provided with certain equipment sales but warranty claims and our accruals for these obligations have been minimal.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
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. For such arrangements, we historically allocated revenue to each performance obligation which is capable of being distinct and accounted for as a separate performance obligation based on relative standalone selling prices. We generally determine standalone selling prices based on observable inputs, primarily the prices charged to customers.
Beginning July 1, 2018, for agreements with an embedded lease component, we adopted the practical expedient in ASU 2018-11 Leases: Targeted Improvements (ASU 2018-11) that allows us to treat these agreements as a single performance obligation and recognize revenue under ASC 606 rather than under the lease accounting guidelines, since the predominant component of revenue is the non-lease component.
Our fixed monthly equipment rentals to customers are accounted for as operating leases under ASU 2016-02, Leases (ASC 842). Fixed monthly rentals provide for a flat rental fee each month.
A limited number of our contracts have variable consideration including tiered pricing and rebates which we monitor closely for potential constraints on revenue. For these contracts we estimate our position quarterly using the most-likely-outcome method, including customer-provided forecasts and historical buying patterns, and we accrue for any asset or liability these arrangements may create. The effect of accruals for variable consideration on our consolidated financial statements is immaterial.
We do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount which we have the right to invoice. We believe that the complexity added to our disclosures by the inclusion of a large amount of insignificant detail in attempting to disclose information under ASC 606 about immaterial contracts would potentially obscure more useful and important information.
Leases to Customers
The lease assets from our sales type leases are recorded in our accounts receivable in the accompanying consolidated balance sheets, and as of December 31, 2020 and 2019 the balance totaled $315,000 and $398,000 respectively.
Our equipment treated as leases to customers under ASC 842 is included in our Property, Plant and Equipment on our consolidated balance sheets. After our adoption of ASU 2018-11, the cost of the assets and associated depreciation that remain under lease agreements is immaterial. Due to the immaterial amount of revenue from our lessor activity, all other lessor disclosures under ASC 842 have been omitted.
Leased Property and Equipment
As a lessee, we have three leases in total for equipment and facilities used internally, which we account for as operating leases. At December 31, 2020, our right-of-use asset balance was $295,000 and our lease liability at December 31, 2020 for these leases was $272,000. The monthly expense of $27,000 for these operating leases, which are our only lessee arrangements, is immaterial and therefore all other lessee disclosures under ASC 842 have been omitted.
Research and Development Costs
Research and Development, or R&D, costs relating to the development of new products and improvements of existing products are expensed as incurred.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
Stock-Based Compensation
We have a stock-based compensation plan covering certain of our officers, directors and key employees. As explained in detail in Note 8, we account for stock-based compensation utilizing the fair value recognition provisions of ASC 718, Compensation-Stock Compensation, or ASC 718.
Liability-classified awards.
The Company classifies certain awards 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 of liability-classified awards are recorded to general and administrative expense over the vesting period of the award.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. The ASU introduced a new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to the original ASU.
The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and trade and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized.
On January 1, 2020, we adopted the guidance prospectively with a cumulative adjustment to retained earnings. Atrion has not restated comparative information for 2019 and, therefore, the comparative information for 2019 is reported under the old model and is not comparable to the information presented for 2020.
At adoption, we recognized an incremental allowance for credit losses on our allowance for credit losses related to our held-to-maturity debt securities of approximately $42,000 and our trade accounts receivable of approximately $4,000. Additionally, we recorded an approximately $36,000 decrease in retained earnings associated with the increased estimated credit losses on our trade accounts receivable and investments. The impact on our operating results for 2020 from our adoption of this pronouncement was not material.
From time to time new accounting pronouncements applicable to us are issued by the FASB, or other standards setting bodies, which we will adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
Fair Value Measurements
Accounting standards use a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. These tiers are: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists therefore requiring an entity to develop its own assumptions.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
As of December 31, 2020 and 2019, we held investments in commercial paper, bonds, money market funds, mutual funds and equity securities that are required to be measured for disclosure purposes at fair value on a recurring basis. The fair values of these investments and their tier levels are shown in Note 2 below.
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.
We have investments in money market funds, bonds and commercial paper. As a result, we are exposed to potential loss from market risks that may occur as a result of changes in interest rates, changes in credit quality of the issuer and otherwise. These securities have a higher degree of, and a greater exposure to, credit or default risk and may be less liquid in times of economic weakness or market disruptions 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, 2020 and 2019, we had allowances for doubtful accounts of approximately $41,000 and $36,000, respectively. The carrying amount of the receivables approximates their fair value. We had two customers which accounted for 12% each of our accounts receivable as of December 31, 2020 and one customer which accounted for 12% of our accounts receivable as of December 31, 2019.
(2) Investments
As of December 31, 2020 and 2019, we held investments in commercial paper, bonds, money market funds, mutual funds and equity securities that are required to be measured for disclosure purposes at fair value on a recurring basis. The commercial paper and bonds are considered held-to-maturity and are recorded at amortized cost in the accompanying consolidated balance sheets. The money market funds, equity securities and mutual funds are recorded at fair value in the accompanying consolidated balance sheets. These investments are considered Level 1 or Level 2 as detailed in the table below. We consider as current assets those investments which will mature in the next 12 months including interest receivable on the long-term bonds. The remaining investments are considered non-current assets including our investment in equity securities we intend to hold longer than 12 months. The fair values of these investments were estimated using recently executed transactions and market price quotations. 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):
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
|
|
Gross Unrealized
|
|
|
|
Level
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
As of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
1
|
|
|
|
4,822
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,822
|
|
Commercial paper
|
|
|
2
|
|
|
|
6,178
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,178
|
|
Bonds
|
|
|
2
|
|
|
|
55,720
|
|
|
$
|
505
|
|
|
$
|
(44
|
)
|
|
$
|
56,181
|
|
Mutual funds
|
|
|
1
|
|
|
|
599
|
|
|
$
|
—
|
|
|
$
|
(36
|
)
|
|
$
|
563
|
|
Equity investments
|
|
|
2
|
|
|
|
5,675
|
|
|
$
|
—
|
|
|
$
|
(1,598
|
)
|
|
$
|
4,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
1
|
|
|
|
3,460
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,460
|
|
Commercial paper
|
|
|
2
|
|
|
|
9,424
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
9,426
|
|
Bonds
|
|
|
2
|
|
|
|
44,833
|
|
|
$
|
138
|
|
|
$
|
(19
|
)
|
|
$
|
44,952
|
|
Mutual funds
|
|
|
1
|
|
|
|
1,052
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
1,105
|
|
Equity investments
|
|
|
2
|
|
|
|
5,675
|
|
|
$
|
—
|
|
|
$
|
(2,853
|
)
|
|
$
|
2,822
|
|
The above equity investments represent an investment in one company at December 31, 2020 and is classified as available for sale. 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. As of December 31, 2020 we had no bond investments in a loss position for more than 12 months.
At December 31, 2020, the length of time until maturity of the bonds we currently own ranged from one to 51 months and the length of time until maturity of the commercial paper ranged from one to nine months.
Topic 326 utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for held-to-maturity securities at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. Our credit loss calculations for held-to-maturity securities are based upon historical default and recovery rates of bonds rated with the same rating as our portfolio. We also apply an adjustment factor to these credit loss calculations based upon our assessment of the expected impact from current economic conditions on our investments, including the impact of COVID-19. We monitor the credit quality of debt securities classified as held-to-maturity through the use of their respective credit ratings and update them on a quarterly basis with our latest assessment completed on December 31, 2020. During the year 2020, our allowance for credit losses related to short-term and long-term investments increased by $12,000 and $18,000, respectively.
The following table summarizes the amortized cost of our held-to-maturity bonds at December 31, 2020, aggregated by credit quality indicator (in thousands):
Held-to-Maturity Bonds
|
Credit Quality Indicators
|
|
Asset
Backed
Bonds
|
|
|
Fed Govt. Bonds/Notes
|
|
|
Municipal
Bonds
|
|
|
Corporate
Bonds
|
|
|
Totals
|
|
AAA/AA/A
|
|
$
|
1,413
|
|
|
$
|
3,222
|
|
|
$
|
637
|
|
|
$
|
32,126
|
|
|
$
|
37,398
|
|
BBB/BB
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,322
|
|
|
|
18,322
|
|
TOTAL
|
|
$
|
1,413
|
|
|
$
|
3,222
|
|
|
$
|
637
|
|
|
$
|
50,448
|
|
|
$
|
55,720
|
|
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
(3) Patents and Licenses
Purchased patents and licenses 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):
December 31, 2020
|
|
|
December 31, 2019
|
|
Weighted Average
Original Life
(years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Weighted Average
Original Life
(years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
15.67
|
|
|
$
|
13,840
|
|
|
$
|
12,419
|
|
|
|
15.67
|
|
|
$
|
13,840
|
|
|
$
|
12,301
|
|
Aggregate amortization expense for patents and licenses was $119,000 for both 2020 and 2019. Estimated future amortization expense for each of the years set forth below ending December 31 is as follows (in thousands):
2021
|
|
$
|
119
|
|
2022
|
|
$
|
117
|
|
2023
|
|
$
|
113
|
|
2024
|
|
$
|
113
|
|
2025
|
|
$
|
112
|
|
(4) Line of Credit
As of December 31, 2020 and 2019, we had a $75.0 million revolving credit facility with a money center bank pursuant to which the lender is obligated to make advances until February 28, 2022. On February 12, 2021 this credit facility was amended to, among other things, extend the date for advances to February 28, 2024. The credit facility is secured by substantially all our inventories, equipment and accounts receivable. Interest under the credit facility is assessed at 30-day, 60-day or 90-day LIBOR, as selected by us, plus 0.875 percent (1.035 percent at December 31, 2020) and is payable monthly. We had no outstanding borrowings under the credit facility at December 31, 2020 or December 31, 2019. Our ability to borrow funds under the credit facility from time to time is contingent on 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, 2020, we were in compliance with all of the covenants.
(5) Income Taxes
The items comprising Provision for Income Taxes are as follows (in thousands):
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Current — Federal
|
|
$
|
3,166
|
|
|
$
|
3,508
|
|
|
$
|
6,405
|
|
— State
|
|
|
904
|
|
|
|
1,090
|
|
|
|
2,001
|
|
|
|
|
4,070
|
|
|
|
4,598
|
|
|
|
8,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred — Federal
|
|
|
2,111
|
|
|
|
1,660
|
|
|
|
(626
|
)
|
— State
|
|
|
171
|
|
|
|
149
|
|
|
|
1
|
|
|
|
|
2,282
|
|
|
|
1,809
|
|
|
|
(625
|
)
|
Provision for Income Taxes
|
|
$
|
6,352
|
|
|
$
|
6,407
|
|
|
$
|
7,781
|
|
Temporary differences and carryforwards which have given rise to deferred tax liabilities as of December 31, 2020 and 2019 are as follows (in thousands):
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
|
|
2020
|
|
|
2019
|
|
Deferred tax liabilities (assets):
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
11,532
|
|
|
$
|
9,697
|
|
Patents and goodwill
|
|
|
1,775
|
|
|
|
1,756
|
|
Benefit plans
|
|
|
(1,976
|
)
|
|
|
(2,131
|
)
|
Inventories
|
|
|
(420
|
)
|
|
|
(350
|
)
|
Capital loss carryover
|
|
|
(544
|
)
|
|
|
(556
|
)
|
Other
|
|
|
(179
|
)
|
|
|
(513
|
)
|
|
|
|
10,188
|
|
|
|
7,903
|
|
Plus: Valuation allowance
|
|
|
580
|
|
|
|
593
|
|
Total deferred tax liabilities
|
|
$
|
10,768
|
|
|
$
|
8,496
|
|
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):
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Income tax expense at the statutory federal income tax rate
|
|
$
|
8,078
|
|
|
$
|
9,065
|
|
|
$
|
8,828
|
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes
|
|
|
838
|
|
|
|
978
|
|
|
|
1,572
|
|
R&D tax credits
|
|
|
(1,589
|
)
|
|
|
(1,470
|
)
|
|
|
(1,212
|
)
|
Foreign-derived intangible income deduction
|
|
|
(1,051
|
)
|
|
|
(1,700
|
)
|
|
|
(1,000
|
)
|
Excess tax benefit from stock compensation
|
|
|
(81
|
)
|
|
|
(412
|
)
|
|
|
(95
|
)
|
Change in valuation allowance
|
|
|
(13
|
)
|
|
|
(16
|
)
|
|
|
-
|
|
Uncertain tax positions
|
|
|
(450
|
)
|
|
|
(42
|
)
|
|
|
(373
|
)
|
Other, net
|
|
|
619
|
|
|
|
4
|
|
|
|
61
|
|
Provision for Income Taxes
|
|
$
|
6,352
|
|
|
$
|
6,407
|
|
|
$
|
7,781
|
|
At December 31, 2020, our deferred tax valuation allowance of $580,000 primarily related to a deferred tax asset for a remaining capital loss carryover deduction of $2.6 million which will expire in 2021 if not utilized.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits as required by ASC 740 is as follows (in thousands):
Gross unrecognized tax benefits at January 1, 2018
|
|
$
|
865
|
|
Increase in tax positions for prior years
|
|
|
25
|
|
Increase in tax positions for current years
|
|
|
—
|
|
Lapse in statutes of limitation
|
|
|
(397
|
)
|
Gross unrecognized tax benefits at December 31, 2018
|
|
$
|
493
|
|
Increase in tax positions for prior years
|
|
|
19
|
|
Increase in tax positions for current year
|
|
|
—
|
|
Lapse in statutes of limitation
|
|
|
(62
|
)
|
Gross unrecognized tax benefits at December 31, 2019
|
|
$
|
450
|
|
Increase in tax positions for prior years
|
|
|
8
|
|
Increase in tax positions for current year
|
|
|
—
|
|
Lapse in statutes of limitation
|
|
|
(458
|
)
|
Gross unrecognized tax benefits at December 31, 2020
|
|
$
|
—
|
|
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, as well as all material state and local income tax matters, for years through 2016.
We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The liability for unrecognized tax benefits included accrued interest of $20,000 and $19,000 at December 31, 2019 and 2018, respectively. Tax expense for the years ended December 31, 2020, 2019 and 2018 included a net interest benefit of $35,000, $16,000 and $18,000, respectively.
(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 may from time to time determine. On May 21, 2015 our Board of Directors adopted a stock repurchase program authorizing the repurchase of up to 250,000 shares of our common stock in open-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, 2020, there remained 202,018 for repurchasing under this program. As of December 31, 2019, there remained 231,765 shares available for repurchase under this program. During 2020 we repurchased a total of 29,747 shares of our common stock in the open-market. There were no stock repurchases during 2019 or 2018.
We increased our quarterly cash dividend payments in September of each of the past three years. The quarterly dividend was increased to $1.35 per share in September 2018, to $1.55 per share in September 2019 and to $1.75 per share in September 2020. Holders of our stock units earned non-cash dividend equivalents of $24,000 in 2020, $22,000 in 2019 and $25,000 in 2018.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
(7) Income Per Share
The following is the computation of basic and diluted income per share:
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands, except per share amounts)
|
|
Net Income
|
|
$
|
32,115
|
|
|
$
|
36,761
|
|
|
$
|
34,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
1,836
|
|
|
|
1,855
|
|
|
|
1,853
|
|
Add: Effect of dilutive securities
|
|
|
5
|
|
|
|
8
|
|
|
|
5
|
|
Weighted average diluted shares outstanding
|
|
|
1,841
|
|
|
|
1,863
|
|
|
|
1,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
17.49
|
|
|
$
|
19.82
|
|
|
$
|
18.49
|
|
Diluted
|
|
$
|
17.44
|
|
|
$
|
19.73
|
|
|
$
|
18.44
|
|
As required by ASC 260, Earnings per Share, unvested 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 six, seven and 501 shares of common stock for the years ended December 31, 2020, 2019 and 2018, respectively, were excluded from the computation of weighted average diluted shares outstanding because their effect would have been anti-dilutive.
(8) Stock-based Compensation
At December 31, 2020, we had one stock-based compensation plan that is described below. We account for our plan under ASC 718, and the disclosures that follow are based on applying ASC 718.
Our Amended and Restated 2006 Equity Incentive Plan, or 2006 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 2006 Plan, 200,000 shares, in the aggregate, of common stock were reserved for awards. The purchase price of shares issued on the exercise of options were 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, 2020, no future stock-based awards were permitted under the 2006 Plan.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
A summary of stock option transactions for the year ended December 31, 2020, is presented below:
Options
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual
Term
|
|
Outstanding at December 31, 2019
|
|
|
20,000
|
|
|
$
|
501.03
|
|
|
2.3 years
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
20,000
|
|
|
$
|
501.03
|
|
|
1.3 years
|
|
Exercisable at December 31, 2020
|
|
|
12,000
|
|
|
$
|
501.03
|
|
|
1.3 years
|
|
All nonvested options outstanding at December 31, 2020 are expected to vest. 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.
There were no options granted in 2020 and 2019.
The weighted average grant date fair value of the options granted in 2017 was $130.35. The total intrinsic value of options outstanding at December 31, 2020, was $2.8 million. The total intrinsic value of exercisable options at December 31, 2020, was $1.7 million.
There were no restricted stock grants during 2020 and 2019. 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, pledged 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, 2020, is presented below:
Nonvested Shares
|
|
Shares
|
|
|
Weighted Average Award Date Fair Value Per Share
|
|
Restricted stock at December 31, 2019
|
|
|
3,540
|
|
|
$
|
445.47
|
|
Granted in 2020
|
|
|
—
|
|
|
|
—
|
|
Vested in 2020
|
|
|
(1,180
|
)
|
|
$
|
445.47
|
|
Restricted stock at December 31, 2020
|
|
|
2,360
|
|
|
$
|
445.47
|
|
All shares of nonvested restricted stock outstanding at December 31, 2020 are expected to vest. The total fair value of restricted stock vested during 2020, 2019 and 2018 was $762,000, $994,000 and $699,000, respectively.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
During 2020, restricted stock units were added to certain employee accounts under the 2006 Plan as dividend equivalents. All of our restricted stock units granted under the 2006 Plan 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 on termination of employment unless the termination is in connection with a change in control. During the vesting period, holders of restricted stock units earn dividends in the form of additional units. During 2020, one non-employee 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.
A summary of changes in stock units for the year ended December 31, 2020, is presented below:
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, 2019
|
|
|
3,601
|
|
|
$
|
623.19
|
|
|
|
—
|
|
|
|
|
Added
|
|
|
33
|
|
|
$
|
635.04
|
|
|
|
16
|
|
|
$
|
711.75
|
|
Forfeited
|
|
|
(40
|
)
|
|
$
|
766.48
|
|
|
|
—
|
|
|
|
|
|
Vested
|
|
|
(479
|
)
|
|
$
|
388.02
|
|
|
|
(16
|
)
|
|
$
|
711.75
|
|
Nonvested at December 31, 2020
|
|
|
3,115
|
|
|
$
|
657.70
|
|
|
|
—
|
|
|
|
|
|
All nonvested restricted stock units set forth above at December 31, 2020 are expected to vest. The total intrinsic value of these outstanding stock units which were not convertible at December 31, 2020, including 503 stock units held for the accounts of non-employee directors, was $2,324,000. The total fair value of directors’ stock units that vested during 2020, 2019 and 2018 was $11,000, $7,000 and $6,000, respectively.
In addition to the above, during 2020 we granted 3,865 restricted stock units to three employees outside of the 2006 Plan that will be settled in cash and are treated as liability-classified awards. The grant-date fair value per unit for these awards was $646.90. No grants of this type were made outside the 2006 Plan prior to 2020. These units will 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. At December 31, 2020, none of these units had vested and our recorded liability for these units was $250,000. The intrinsic value of these units at December 31, 2020 was $2,496,000 including accrued amounts for dividend equivalents.
There were no stock awards to nonemployee directors under the 2006 Plan in 2020. The total value of stock awards to nonemployee directors awarded under the 2006 Plan was $240,000 in each of 2019 and 2018. These awards vested immediately at the time of the grants. Compensation related to stock awards, restricted stock and 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, 2020, 2019 and 2018, we recorded stock-based compensation expense as a G&A expense in the amount of $1,731,000, $1,682,000 and $1,659,000, respectively, for all of the above-mentioned stock-based compensation arrangements. The total tax benefit recognized in the income statement from stock-based compensation arrangements for the years ended December 31, 2020, 2019 and 2018 was $444,000, $765,000 and $441,000, respectively. These amounts include excess tax benefits in each year.
Atrion Corporation
Notes to Consolidated Financial Statements – (continued)
Unrecognized compensation cost information for our various stock-based compensation awards is shown below as of December 31, 2020:
|
|
Unrecognized
Compensation
Cost
|
|
|
Weighted Average
Remaining Years
in Amortization
Period
|
|
Stock options
|
|
$
|
682,000
|
|
|
|
1.3
|
|
Restricted stock
|
|
|
687,000
|
|
|
|
1.3
|
|
Restricted stock units
|
|
|
990,000
|
|
|
|
2.8
|
|
Restricted stock units (to be settled in cash)
|
|
|
2,246,000
|
|
|
|
4.5
|
|
Total
|
|
$
|
4,605,000
|
|
|
|
|
|
We have a policy of utilizing treasury shares to satisfy stock option exercises, stock unit conversions and restricted stock awards that are equity-classified awards.
(9) Industry Segment and Geographic Information
We operate in one reportable industry segment: developing and manufacturing products primarily for medical applications and 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 42 percent, 36 percent and 37 percent of our net revenues in 2020, 2019 and 2018, respectively. We have no assets located outside the United States.
(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 $917,000, $845,000 and $752,000 in 2020, 2019 and 2018, respectively.
The Company has a Nonqualified Deferred Compensation Plan 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 $1,544,000 and $3,266,000 at December 31, 2020 and 2019, respectively. These amounts are reflected in “Other Liabilities and Deferred Credits” in the accompanying 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, 2020, 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 $2.0 million in potential future payments under this settlement as of December 31, 2020 due to the uncertainty of 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, 2020, could have resulted in payments aggregating $4.9 million.
At December 31, 2020, the Company had lease obligations totaling $272,000 with certain lessors for equipment and facilities for 2021.