ATRI ATRION Corporation

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

or

Commission File Number 001-32982

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Registration S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

ATRION CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1.   Financial Statements.

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 (Unaudited)

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

ATRION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2024, we reported revenues of $47.3 million, up 18 percent, operating income of $3.1 million, down 30 percent, and net income of $2.8 million, down 20 percent as compared to the three months ended March 31, 2023.

Results for the three months ended March 31, 2024

Consolidated net income totaled $2.8 million, or $1.59 per basic and diluted share, in the first quarter of 2024. This is compared with consolidated net income total of $3.5 million, or $1.98 per basic and diluted share, in the first quarter of 2023. The income per basic share computations are based on weighted average basic shares outstanding of 1,760 thousand in the 2024 period and 1,762 thousand in the 2023 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,761 thousand in the 2024 period and 1,763 thousand in the 2023 period.

Consolidated revenues of $47.3 million for the first quarter of 2024 were 18.4 percent higher than revenues of $40.0 million for the first quarter of 2023. Our first quarter 2024 results were favorably impacted by a 27.8 percent increase in Cardiovascular revenue, an 11.1 percent increase in Fluid Delivery revenue, an 8.6 percent increase in Ophthalmic revenue, and a 17.1 percent increase in Other product line revenue as compared to the first quarter of 2023.

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

Cost of goods sold of $35.0 million for the first quarter of 2024 was 40.4 percent higher than our cost of goods sold of $24.9 million for the first quarter of 2023, primarily due to increased revenue, and higher manufacturing costs, including a $2.3 million one-time inventory write-off at one of our subsidiaries attributable to a correction of a prior-year immaterial error related to our 2023 10-K. Our cost of goods sold in the first quarter of 2024 was 73.9 percent of revenue compared to 62.3 percent of revenue in the first quarter of 2023.

Gross profit of $12.4 million in the first quarter of 2024 was $2.7 million or 18.1 percent lower than in the comparable 2023 period. Our gross profit percentage in the first quarter of 2024 was 26.1 percent of revenues compared with 37.7 percent of revenues in the first quarter of 2023. The decrease in gross profit percentage in the 2024 period compared to the 2023 period was related to the higher manufacturing costs mentioned above, as well as mix of products sold.

Our first quarter 2024 operating expenses of $9.2 million were $1.4 million lower than the operating expenses for the first quarter of 2023. This decrease was attributable to a $1.5 million decrease in general and administrative expenses, largely driven by reduced compensation costs, partially offset by an increase in selling expense of $44.7 thousand driven by commissions. There was also a slight increase of $20.7 thousand in research and development expenses driven by supplies, which was offset by a decrease in outside services.

Operating income of $3.1 million in the first quarter of 2024 represented a $1.3 million, or 29.7 percent, decrease in operating income as compared to first quarter 2023 operating income. This decrease was due to the gross profit decrease discussed above. Operating income was 6.6 percent of revenues for the first quarter of 2024 and 11.2 percent of revenues for the first quarter of 2023.

Interest and dividend income in the first quarter of 2024 was $156 thousand compared with $240 thousand for the same period in the prior year. The decrease in interest and dividend income was due to a decrease in interest income as compared to first quarter of 2023.

Other investment income in the first quarter of 2024 was a $109 thousand loss compared with $721 thousand loss in the first quarter of 2023. These amounts were attributable to unrealized losses on equity investments resulting from changes in the market values of the investments in each quarter.

Income tax expense was $411 thousand for the first quarter of 2024 compared with $514 thousand for the first quarter of 2023. The effective tax rate for the first quarter of 2024 was 12.8 percent compared with 12.9 percent for the first quarter of 2023.

Liquidity and Capital Resources

As of March 31, 2024, we had a $25.0 million revolving credit facility with a money-center bank pursuant to which the lender is obligated to make advances until 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 Adjusted Term SOFR, as selected by us, plus 1.0 percent, and is payable monthly. We had no outstanding borrowings under the credit facility at March 31, 2024, and we were in compliance with all financial covenants.

At March 31, 2024, we had a total of $18.7 million in cash and cash equivalents, short-term investments, and long-term investments. At December 31, 2023, cash and cash equivalents, short-term investments, and long-term investments totaled $14.4 million.

Cash flows from operating activities of $11.5 million for the three months ended March 31, 2024 were primarily comprised of net income plus the net effect of non-cash expenses, a decrease in inventory, and an increase in accounts receivable. During the first three months of 2024, we used $3.8 million to pay dividends, $3.6 million to purchase investments, and $3.2 million for the addition of property and equipment. During the same period, our maturities and sales of investments generated $2.7 million in cash. For the three months ended March 31, 2023, cash flows from operating activities of $4.3 million 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.

At March 31, 2024, we had working capital of $100.3 million, including $7.1 million in cash and cash equivalents and $2.8 million in short-term investments, compared to working capital of $102.1 million at December 31, 2023. The $1.8 million decrease in working capital during the first three months of 2024 was primarily related to a decrease in inventory and prepaid expenses, partially offset by an increase in cash and cash equivalents and accounts receivable.

We believe that our $18.7 million in cash, cash equivalents, short-term investments, and long-term investments, along with cash flows from operations and available borrowings of up to $25.0 million under our credit facility, will be sufficient to fund our cash requirements for at least the foreseeable future. We believe that our strong financial position would allow us to access equity or debt financing should that be necessary.

COVID-19 Impact

We believe the impact of COVID-19 on our business has largely diminished at this time; however, uncertainties continue, particularly around disruptions to the global economy, supply chains, and 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 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. For additional discussion regarding COVID-19 and our related risks, see Part I, Item 1A, “Risk Factors” included in our 2023 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 plans to hold certain investments for longer than 12 months, our belief that the impact of standards recently issued by the Financial Accounting Standards Board, or other standard-setting bodies, that are not yet effective, will not have a material impact on our consolidated financial statements upon adoption, and our ability to fund our cash requirements for the foreseeable future with our current assets, long-term investments, cash flow, and borrowings under our credit facility, and our access to equity and debt financing. Implementing control and procedure improvements will address the material weakness described below. 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 COVID-19 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 COVID-19; the impact of global and regional economic and credit market conditions on healthcare spending; the risk that COVID-19 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

For the quarter ended March 31, 2024, we did not experience any material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in our 2023 Form 10-K.

Item 4. Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2024. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are not effective due to the material weakness described in our 2023 Form 10-K. There were no changes in our internal control over financial reporting for the quarter ended March 31, 2024 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. However, as reported in our 2023 Form 10-K, we are planning, initiating, and implementing control and procedure improvements and anticipate that these improvements will address the material weakness.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We have no pending legal proceedings of the type described in Item 103 of Regulation S-K.

Item 1A. Risk Factors.

As of the date of this Report, there has been no material change in the risk factors described in our 2023 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

On May 21, 2015, our Board of Directors approved a stock repurchase program 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. Our stock repurchase program has no expiration date but may be terminated by our Board of Directors at any time. No repurchases of our stock were made during the three months ended March 31, 2024. As of March 31, 2024, we had repurchased 121,247 shares of our common stock authorized under the program and the number of shares still available for repurchase under the program was 128,753.

Item 6. Exhibits.

Exhibit Index

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.