ATRI ATRION Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

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 ophthalmology markets. Our other medical and non-medical products include instrumentation and disposables used in valves and inflation devices used in marine and aviation safety products.

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. Research and development, or 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:

For the three months ended March 31, 2023, we reported revenues of $40.0 million, down 15 percent, operating income of $4.5 million, down 56 percent, and net income of $3.5 million, down 59 percent from the three months ended March 31, 2022.

Results for the three months ended March 31, 2023

Consolidated net income totaled $3.5 million, or $1.98 per basic and diluted share, in the first quarter of 2023. This is compared with consolidated net income of $8.5 million, or $4.73 per basic and $4.71 per diluted share, in the first quarter of 2022. The income per basic share computations are based on weighted average basic shares outstanding of 1,762 thousand in the 2023 period and 1,799 thousand in the 2022 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,763 thousand in the 2023 period and 1,803 thousand in the 2022 period.

Consolidated revenues of $40.0 million for the first quarter of 2023 were 15 percent lower than revenues of $47.1 million for the first quarter of 2022. Several customers unexpectedly pushed out deliveries of products citing concerns that a global economic slowdown is impacting the speed at which their inventories will be brought to appropriate levels. Our Fluid Delivery product line revenue decreased 27 percent and our Other product line revenue declined by 19 percent.

Revenues by product line were as follows (in thousands):

Cost of goods sold of $24.9 million for the first quarter of 2023 was 11 percent lower than our cost of goods sold of $27.9 million for the first quarter of 2022, primarily due to lower sales volumes. Our cost of goods sold in the first quarter of 2023 was 62.3 percent of revenue compared to 59.2 percent of revenue in the first quarter of 2022.

Gross profit of $15.1 million in the first quarter of 2023 was down $4.2 million or 22 percent versus the comparable 2022 period. Our gross profit percentage in the first quarter of 2023 was 37.7 percent of revenues compared with 40.8 percent of revenues in the first quarter of 2022. The decrease in gross profit percentage in the 2023 period compared to the 2022 period was related to higher manufacturing costs and the mix of products shipped.

Our first quarter 2023 operating expenses of $10.6 million were $1.6 million higher than the operating expenses for the first quarter of 2022. This increase was attributable to a $1.2 million increase in general and administrative expenses, primarily for compensation related to a one-time retirement-related bonus, a $253 thousand increase in R&D expenses, primarily related to compensation and outside services, and a $211 thousand increase in selling expenses related to compensation.

Operating income of $4.5 million in the first quarter of 2023 represented a $5.8 million, or 56.4 percent, decrease in operating income over first quarter 2022 operating income. This decrease was due to lower sales and higher operating expenses, partially offset by lower cost of goods sold. Operating income was 11.2 percent of revenues for the first quarter of 2023 and 21.7 percent of revenues for the first quarter of 2022.

Interest and dividend income in the first quarter of 2023 was $240 thousand compared with $137 thousand for the same period in the prior year. The increase was attributable to higher interest income received on investments.

Other investment income in the first quarter of 2023 was a $721 thousand loss compared with a loss of $240 thousand in the first quarter of 2022. These amounts were attributable to unrealized gains and losses on equity investments resulting from changes in the market values of the investments in each quarter.

Income tax expense was $514 thousand for first quarter of 2023 compared with $1.7 million for the first quarter of 2022. The decrease in tax expense is due to lower taxable income. The effective tax rate for the first quarter of 2023 was 12.9 percent compared with 16.4 percent for the first quarter of 2022. The decrease in the first quarter 2023 period effective tax rate was primarily related to the impact of the R&D tax credit on lower income before income taxes.

Liquidity and Capital Resources

As of March 31, 2023, 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, 2024. 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, as selected by us, plus 1.0 percent and is payable monthly. We had no outstanding borrowings under the credit facility at March 31, 2023, and we were in compliance with all financial covenants.

At March 31, 2023, we had a total of $26.3 million in cash and cash equivalents, short-term investments, and long-term investments. At December 31, 2022, cash and cash equivalents, short-term investments, and long-term investments totaled $34.6 million.

Cash flows from operating activities of $4.3 million for the three months ended March 31, 2023 were primarily comprised of net income plus the net effect of non-cash expenses, an increase in inventory, and a decrease in accounts receivable. During the first three months of 2023, we used $7.5 million for the addition of property and equipment, $4.2 million for the purchase of investments, $3.8 million for dividends, and $613 thousand for the purchase of treasury stock. During the same period, maturities and sales of investments generated $11.6 million in cash. For the three months ended March 31, 2022, cash flows from operating activities of $11.8 million were primarily comprised of net income plus the net effect of non-cash expenses and an increase in accounts receivable. During the first three months of 2022, we used $10.0 million for the purchase of investments, $7.6 million for the addition of property and equipment, $3.5 million for dividends, and $3.4 million for the purchase of treasury stock. During the same period, maturities and sales of investments generated $5.2 million in cash.

At March 31, 2023, we had working capital of $97.4 million, including $4.6 million in cash and cash equivalents and $13.0 million in short-term investments, compared to working capital of $101.3 million at December 31, 2022. The $3.9 million decrease in working capital during the first three months of 2023 was primarily related to a decrease in short term investments and accounts receivable, partially offset by an increase in inventory.

We believe that our $26.3 million in cash, cash equivalents, short-term investments, and long-term investments, along with cash flows from operations and available borrowings of up to $75.0 million under our credit facility, will be sufficient to fund our cash requirements for at least the foreseeable future, including the remaining costs associated with the expansion of one of our manufacturing facilities. We believe that our strong financial position would allow us to access equity or debt financing should that be necessary.

COVID-19 Impact

The COVID-19 pandemic has impacted the global economy and our business, caused market instability and uncertainty in the labor market, and put pressure on supply chains and healthcare systems. Even with the public health actions that have been taken to reduce the spread and severity of the virus, the global economy and markets continue to experience disruptions, and the virus may continue to pose future risks with the emergence of new variants. We will continue to monitor the COVID-19 pandemic as well as resulting legislative and regulatory changes to manage our response and assess and seek to mitigate potential adverse impacts on our business. For additional discussion regarding the COVID-19 pandemic and our related risks, see Part I, Item 1A, “Risk Factors” included in our 2022 Form 10-K.

Forward-Looking Statements

Statements in this Management’s Discussion and Analysis and elsewhere in this Quarterly Report on Form 10-Q 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 ability to fund our cash requirements for the foreseeable future with our current assets, long-term investments, cash flow, and borrowings under the credit facility, and our access to equity and debt financing. 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 leads to further 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 COVID-19 pandemic; the impact of global and regional economic and credit market conditions on healthcare spending; the risk that the COVID-19 pandemic further disrupts local economies and causes 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 personnel; 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 Quarterly Report on Form 10-Q 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.