UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended September 30, 2006
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from to
Commission File Number 0-10763
Atrion Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0821819
---------------------------------- --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Allentown Parkway, Allen, Texas 75002
(Address of Principal Executive Offices) (Zip Code)
(972) 390-9800
(Registrant's Telephone Number, Including Area Code)
Indicate by check 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. [X] Yes [_] No
Indicate by check whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]
Indicate by check whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding at
Title of Each Class November 1, 2006
--------------------------------------- --------------------------------------
Common stock, Par Value $0.10 per share 1,871,057
ATRION CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. Financial Information 2
Item 1. Financial Statements
Consolidated Statements of Income (Unaudited)
For the Three and Nine Months Ended
September 30, 2006 and 2005 3
Consolidated Balance Sheets
September 30, 2006 (Unaudited) and December 31, 2005 4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended
September 30, 2006 and 2005 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II. Other Information 18
Item 6. Exhibits and Reports on
Form 8-K 18
SIGNATURES 19
Exhibits 20
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2006 2005 2006 2005
(in thousands, except per share amounts)
Revenues $ 19,290 $ 18,338 $ 59,641 $ 55,085
Cost of goods sold 11,803 11,377 36,033 33,297
----------- ----------- ----------- -----------
Gross profit 7,487 6,961 23,608 21,788
----------- ----------- ----------- -----------
Operating expenses:
Selling 1,415 1,378 4,631 4,231
General and administrative 2,190 1,925 6,541 6,144
Research and development 696 547 2,072 1,752
----------- ----------- ----------- -----------
4,301 3,850 13,244 12,127
----------- ----------- ----------- -----------
Operating income 3,186 3,111 10,364 9,661
----------- ----------- ----------- -----------
Other income:
Interest income 5 7 26 32
Interest expense (58) (18) (58) (61)
Other income (expense), net (4) 2 (26) 10
----------- ----------- ----------- -----------
(57) (9) (58) (19)
----------- ----------- ----------- -----------
Income from continuing operations
before provision for
income taxes 3,129 3,102 10,306 9,642
Provision for income taxes (433) (861) (2,685) (2,999)
----------- ----------- ----------- -----------
Income from continuing operations 2,696 2,241 7,621 6,643
Gain on disposal of discontinued
operations, net of income
taxes -- -- 165 165
----------- ----------- ----------- -----------
Net income $ 2,696 $ 2,241 $ 7,786 $ 6,808
=========== =========== =========== ===========
Income per basic share:
Income from continuing operations $ 1.45 $ 1.23 $ 4.13 $ 3.73
Gain on disposal of
discontinued operations -- -- 0.09 0.09
----------- ----------- ----------- -----------
$ 1.45 $ 1.23 $ 4.22 $ 3.82
=========== =========== =========== ===========
Weighted average basic
shares outstanding 1,858 1,829 1,846 1,781
=========== =========== =========== ===========
Income per diluted share:
Income from continuing operations $ 1.38 $ 1.15 $ 3.91 $ 3.47
Gain on disposal of discontinued operations -- -- 0.08 0.09
----------- ----------- ----------- -----------
$ 1.38 $ 1.15 $ 3.99 $ 3.56
=========== =========== =========== ===========
Weighted average diluted shares outstanding 1,960 1,953 1,951 1,915
=========== =========== =========== ===========
Dividends per common share $ 0.20 $ 0.17 $ 0.54 $ 0.45
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
3
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September, 30
2006 December 31,
Assets (unaudited) 2005
------ ----------- ----
Current assets:
Cash and cash equivalents $ 234 $ 525
Accounts receivable 9,541 8,291
Inventories 18,278 17,705
Prepaid expenses 1,053 832
Other 620 620
-------- --------
29,726 27,973
-------- --------
Property, plant and equipment 81,114 63,041
Less accumulated depreciation and amortization 30,621 27,787
-------- --------
50,493 35,254
-------- --------
Other assets and deferred charges:
Patents 2,341 2,331
Goodwill 9,730 9,730
Other 3,031 3,182
-------- --------
15,102 15,243
-------- --------
$ 95,321 $ 78,470
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 8,096 $ 7,128
Accrued income and other taxes 712 1,098
-------- --------
8,808 8,226
-------- --------
Line of credit 11,647 2,529
Other non-current liabilities 6,030 5,820
Stockholders' equity:
Common shares, par value $0.10 per share; authorized
10,000 shares, issued 3,420 shares 342 342
Paid-in capital 13,853 12,508
Retained earnings 89,104 82,318
Treasury shares,1,559 at September 30, 2006 and 1,586
at December 31, 2005, at cost (34,463) (33,273)
-------- --------
68,836 61,895
-------- --------
$ 95,321 $ 78,470
======== ========
The accompanying notes are an integral part of these statements.
4
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------------------
2006 2005
------------- -------------
Cash flows from operating activities:
Net income $ 7,786 $ 6,808
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on disposal of discontinued operations (165) (165)
Depreciation and amortization 3,555 3,328
Deferred income taxes 179 206
Tax benefit related to stock options -- 1,180
Stock based compensation expense 61 --
Other 33 10
------------- -------------
11,449 11,367
Changes in operating assets and liabilities:
Accounts receivable (1,250) (1,369)
Inventories (573) (3,143)
Prepaid expenses (221) (11)
Other non-current assets (99) (1,088)
Accounts payable and accrued liabilities 968 341
Accrued income and other taxes (386) 9
Other non-current liabilities 31 24
------------- -------------
Net cash provided by continuing operations 9,919 6,130
Net cash provided by discontinued operations 165 165
------------- -------------
10,084 6,295
------------- -------------
Cash flows from investing activities:
Property, plant and equipment additions (18,589) (10,340)
Deposit on land purchase -- 3,750
Property, plant and equipment sales 3 21
------------- -------------
(18,586) (6,569)
------------- -------------
Cash flows from financing activities:
Net change in line of credit 9,118 (983)
Exercise of stock options 1,029 2,239
Purchase of treasury stock (1,594) --
Tax benefit related to stock options 658 --
Dividends paid (1,000) (807)
------------- -------------
8,211 449
------------- -------------
Net change in cash and cash equivalents (291) 175
Cash and cash equivalents at beginning of period 525 255
------------- -------------
Cash and cash equivalents at end of period $ 234 $ 430
============= =============
Cash paid for:
Interest (net of capitalization) $ 58 $ 63
Income taxes $ 2,552 $ 1,835
The accompanying notes are an integral part of these statements.
5
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
In the opinion of management, all adjustments necessary for a fair
presentation of results of operations for the periods presented have
been included in the accompanying unaudited consolidated financial
statements of Atrion Corporation and its subsidiaries (the "Company").
Such adjustments consist of normal recurring items. The accompanying
financial statements have been prepared in accordance with the
instructions to Form 10-Q and include the information and notes
required by such instructions. Accordingly, the consolidated financial
statements and notes thereto should be read in conjunction with the
financial statements and notes included in the Company's 2005 Annual
Report on Form 10-K.
(2) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by using the first-in, first-out method. The following table
details the major components of inventories (in thousands):
September 30, December 31,
2006 2005
------------------------------------------------------------------------------
Raw materials $ 7,528 $ 6,898
Work in process 4,178 4,291
Finished goods 6,572 6,516
------------------------------------------------------------------------------
Total inventories $ 18,278 $ 17,705
==============================================================================
(3) Income per share
The following is the computation for basic and diluted income per
share:
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
-------------- --------------- -------------- -------------
(in thousands, except per share amounts)
Income from continuing operations $ 2,696 $ 2,241 $ 7,621 $ 6,643
============= ============= ============== =============
Weighted average basic shares outstanding
1,858 1,829 1,846 1,781
Add: Effect of dilutive securities
(options and restricted stock) 102 124 105 134
------------- ------------- -------------- -------------
Weighted average diluted shares
outstanding 1,960 1,953 1,951 1,915
============= ============= ============== =============
Earnings per share from continuing
operations:
Basic $ 1.45 $ 1.23 $ 4.13 $ 3.73
============= ============== ============== =============
Diluted $ 1.38 $ 1.15 $ 3.91 $ 3.47
============= ============== ============== =============
There were no outstanding options to purchase shares of common stock
that were not included in the diluted income per share calculations
because their effect would be anti-dilutive for the three-month and
nine-month periods ended September 30, 2006 and 2005.
6
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Stock-Based Compensation
At September 30, 2006, the Company had three stock-based employee
compensation plans. Prior to January 1, 2006, the Company accounted for
those plans under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. No stock-based
employee compensation cost was reflected in net income, as all options
granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The Company
recorded compensation expense in the amount of approximately $37,000
for the three-month period and $61,000 for the nine-month period ended
September 30, 2006. The Company recognized tax benefits related to
compensation expense of approximately $13,000 for the three-month
period and $14,000 for the nine-month period ended September 30, 2006.
Effective January 1, 2006, the Company adopted the provisions of SFAS
No. 123R, "Accounting for Stock-based Compensation" ("SFAS No. 123R")
using the modified-prospective transition method and the disclosures
that follow are based on applying SFAS No. 123R. Under this transition
method, compensation expense recognized during the three and nine
months ended September 30, 2006, included compensation expense for all
share-based awards granted prior to, but not yet vested as of January
1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation". In accordance with the modified-prospective
transition method, results for the prior periods have not been
restated.
As a result of the adoption of SFAS No. 123R, the financial results of
the Company were lower than the results would have been under the
previous accounting method for stock-based compensation by the
following amounts:
Nine months ended
September 30, 2006
(in thousands , except
per share amounts)
-------------------
Income from continuing operations before income taxes $ 43
===================
Income from continuing operations and net income $ 35
===================
Basic and diluted earnings per share $.02
===================
Prior to the adoption of SFAS No. 123R all tax benefits resulting from
the exercise of stock options were reflected as operating cash flows in
the Consolidated Statements of Cash Flows. SFAS No. 123R requires that
cash flows from the exercise of stock-based compensation resulting from
tax benefits in excess of recognized compensation cost (excess tax
benefits) be classified as financing cash flows. For the nine months
ended September 30, 2006, $658,000 of such excess tax benefits was
classified as financing cash flows. For the nine months ended September
30, 2005, $1,180,000 of such excess tax benefits were recorded as
operating cash flows, as was prescribed prior to the adoption of SFAS
No. 123R.
The Company's 1997 Stock Incentive Plan provides for the grant to key
employees of incentive and nonqualified stock options, stock
appreciation rights, restricted stock and performance shares. In
addition, under the 1997 Stock Incentive Plan, outside directors
(directors who are not employees of the Company or any subsidiary)
received automatic annual grants of nonqualified stock options to
purchase 2,000 shares of common stock. The 1997 Stock Incentive Plan
was amended in 2005 to provide that no additional stock options may be
granted to outside directors thereunder. Under the 1997 Stock Incentive
Plan, 624,425 shares, in the aggregate, of common stock were reserved
for grants. The purchase price of shares issued on the exercise of
incentive options must be at least equal to the fair market value of
such shares on the date of grant. The purchase price for shares issued
on the exercise of nonqualified options and restricted and performance
shares is fixed by the Compensation Committee of the Board of
Directors. The options granted become exercisable as determined by the
Compensation Committee and expire no later than 10 years after the date
of grant.
7
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During 1998, the Company's stockholders approved the adoption of the
Company's 1998 Outside Directors Stock Option Plan which, as amended,
provided for the automatic grant on February 1, 1998 and February 1,
1999 of nonqualified stock options to the Company's outside directors.
Although no additional options may be granted under the 1998 Outside
Directors Stock Option Plan, all outstanding options under this plan
continue to be governed by the terms and conditions of the plan and the
existing option agreements for those grants.
During 2006, the Company's stockholders approved the adoption of the
Company's 2006 Equity Incentive Plan which provides for the grant to
key employees and consultants of incentive and nonqualified stock
options, restricted stock, restricted stock units, deferred stock
units, stock appreciation rights and performance shares. Under the 2006
Equity Incentive Plan, 100,000 shares, in the aggregate, of common
stock were reserved for awards. The purchase price of shares issued on
the exercise of options must be at least equal to the fair market value
of such shares on the date of grant. The purchase price for restricted
and performance shares is fixed by the Compensation Committee of the
Board of Directors. The options granted become exercisable and expire
as determined by the Compensation Committee except that incentive
options expire no later than 10 years after the date of grant.
Option transactions for the three and nine months ended September 30,
2006 are as follows:
Three months ended Nine months ended
September 30, 2006 September 30, 2006
------------------ ------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
-------------- ----------------- -------------- ----------------
Options outstanding at the beginning of
the period 176,051 $ 25.64 225,100 $ 24.86
Granted 25,000 $ 71.86 25,000 $ 71.86
Expired - $ - - $ -
Exercised (3,751) $ 21.59 (52,800) $ 22.01
-------------- --------------
Options outstanding at the end of the period 197,300 $ 31.57 197,300 $ 31.57
============== ==============
Exercisable options at September 30, 2006 172,300 $ 25.73
8
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Shares of restricted stock have been awarded to certain key employees.
Restrictions lapse as the shares vest, generally over five years.
During the vesting period, holders of the restricted stock have voting
rights and earn dividends, but the shares may not be sold, assigned,
transferred, pledged or otherwise encumbered. Nonvested shares are
forfeited on termination of employment. Changes in restricted stock for
the three and nine months ended September 30, 2006 were as follows:
Three months ended Nine months ended
September 30, 2006 September 30, 2006
------------------ ------------------
Weighted Weighted
Average Award Average Award
Shares Date Fair Value Shares Date Fair Value
-------------- ----------------- -------------- -----------------
Nonvested shares at the beginning of $ - $ -
the period - -
Awarded 7,500 $ 71.86 7,500 $ 71.86
Vested - $ - - $ -
Forfeited - $ - - $ -
-------------- --------------
Nonvested shares at the end of the
period 7,500 $ 71.86 7,500 $ 71.86
============== ==============
The Company estimates the fair value of stock options granted using the
Black-Scholes option-pricing formula and a single option award
approach. This fair value is then amortized on a straight-line basis
over the requisite service periods of the awards, which is generally
the vesting period. The expected life represents the period that the
Company's 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.
Stock-based payments made prior to January 1, 2006 were accounted for
using the intrinsic value method under APB 25. The fair value of
stock-based payments made subsequent to January 1, 2006 are valued
using the Black-Scholes valuation method with a volatility factor based
on the Company's historical stock trading history. The Company bases
the risk-free interest rate using the Black-Scholes valuation method on
the implied yield currently available on U. S. Treasury securities with
an equivalent term. The Company bases the dividend yield used in the
Black-Scholes valuation method on the Company's stock dividend history.
The weighted average grant date fair value of options granted for the
three months and nine months ended September 30, 2006 were $18.02 and
$18.02, respectively.
The total intrinsic value of options exercised during the three and
nine months ended September 30, 2006 was $0. The total intrinsic values
of options outstanding and options currently exercisable at September
30, 2006 were $0 and $0, respectively. The weighted-average remaining
contractual life for options outstanding and options currently
exercisable at September 30, 2006 was 2.89 and 2.60 years,
respectively. The total intrinsic value of restricted stock grants at
September 30, 2006 was $539,000. The weighted-average remaining
contractual term for restricted stock awards at September 30, 2006 was
4.8 years.
As of September 30, 2006 there was $432,000 in unrecognized
compensation cost related to nonvested stock options granted under the
plans and $521,000 in unrecognized compensation cost related to
nonvested restricted stock grants. The unrecognized compensation costs
related to nonvested stock options will be recognized over a period of
3.8 years. The unrecognized compensation cost related to nonvested
stock awards will be recognized over a period of 4.8 years. The total
fair value of options vested during the three months ended September
30, 2006 was $0. At September 30, 2006 there were 25,000 nonvested
stock options and 7,500 shares of nonvested restricted stock.
The Company has a policy of utilizing existing treasury shares to
satisfy stock option exercises and restricted stock awards.
9
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table illustrates the effect on net income and income per
share if the Company had applied the fair value recognition provisions
of SFAS No. 123R to stock-based employee compensation in the 2005
periods (in thousands, except per share amounts):
Three Months ended Nine Months ended
September 30, September 30,
2005 2005
--------------------- -------------------
Net income, as reported $ 2,241 $ 6,808
Deduct: Total stock-based employee compensation expense
determined under fair value-based methods for all awards,
net of tax effects 10 121
--------------------- -------------------
Pro forma net income $ 2,231 $ 6,687
===================== ===================
Income per share:
Basic - as reported $ 1.23 $ 3.82
===================== ===================
Basic - pro forma $ 1.22 $ 3.76
===================== ===================
Diluted - as reported $ 1.15 $ 3.56
===================== ===================
Diluted - pro forma $ 1.14 $ 3.49
===================== ===================
(5) Pension Benefits
The components of net periodic pension cost are as follows for the
three and nine months ended September 30, 2006 and September 30, 2005
(in thousands):
Three Months ended Nine Months ended
September 30, September 30,
-------------------------------- --------------------------------
2006 2005 2006 2005
--------------- ------------- --------------- -------------
Service cost $ 69 $ 67 $ 207 $ 201
Interest cost 83 80 249 240
Expected return on assets (111) (114) (333) (342)
Prior service cost amortization (9) (9) (27) (27)
Actuarial loss 29 27 87 81
Transition amount amortization - (11) - (33)
--------------- ------------- --------------- -------------
Net periodic pension cost $ 61 $ 40 $ 183 $ 120
=============== ============= =============== =============
10
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In 2006, the Company expects to contribute approximately $250,000 to
its pension plan to satisfy minimum funding requirements for the year.
As of September 30, 2006, contributions of $250,000 have been made to
this plan.
(6) Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies
the accounting for uncertainty in income taxes recognized in financial
statements. FIN 48 requires the impact of a tax position to be
recognized in the financial statements if that position is more likely
than not of being sustained by the taxing authority. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The
Company is currently evaluating the requirements of FIN 48.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158").
SFAS 158 requires an entity to recognize in its statement of financial
position an asset for a defined benefit pension or postretirement
plan's overfunded status or a liability for a plan's underfunded
status, and to recognize changes in that funded status through other
comprehensive income in the year in which the changes occur. SFAS 158
will not change the amount of net periodic benefit expense recognized
in an entity's results of operations. SFAS 158 is effective for fiscal
years ending after December 15, 2006. The Company is currently
evaluating the requirements of SFAS 158.
On September 13, 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108 "Considering the Effects of Prior
Year Misstatements When Quantifying Misstatements in Current Year
Financial Statements" ("SAB 108"), which provides interpretive guidance
on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. SAB 108 is effective for fiscal years ending after
November 15, 2006. The Company does not expect the adoption of SAB No.
108 to have a material impact on its consolidated financial position,
results of operations and cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"), which provides guidance for measuring the
fair value of assets and liabilities, as well as requires expanded
disclosures about fair value measurements. SFAS 157 indicates that fair
value should be determined based on the assumptions marketplace
participants would use in pricing the asset or liability, and provides
additional guidelines to consider in determining the market-based
measurement. The Company will be required to adopt SFAS 157 on January
1, 2008. The Company is currently evaluating the impact of adopting
SFAS 157 on its Consolidated Financial Statements.
11
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
The Company designs, develops, manufactures, sells and distributes
products and components, primarily for the medical and healthcare
industry. The Company markets components to other equipment
manufacturers for incorporation in their products and sells finished
devices to physicians, hospitals, clinics and other treatment centers.
The Company's medical products primarily serve the fluid delivery,
cardiovascular, and ophthalmology markets. The Company's other medical
and non-medical products include obstetrics products, instrumentation
and disposables used in dialysis, contract manufacturing and valves and
inflation devices used in marine and aviation safety products.
The Company's products are used in a wide variety of applications by
numerous customers. The Company encounters competition in all of its
markets and competes primarily on the basis of product quality, price,
engineering, customer service and delivery time.
The Company's strategy is to provide a broad selection of products in
the areas of its expertise. Research and development efforts are
focused on improving current products and developing highly-engineered
products that meet customer needs and have the potential for broad
market applications and significant sales. 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. The Company also focuses on controlling costs by
investing in modern manufacturing technologies and controlling
purchasing processes. The Company has been successful in consistently
generating cash from operations and has used that cash to reduce
indebtedness, to fund capital expenditures, to repurchase stock and,
starting in 2003, to pay dividends.
The Company's strategic objective is to further enhance its position in
its served markets by:
o Focusing on customer needs;
o Expanding existing product lines and developing new products;
o Maintaining a culture of controlling cost; and
o Preserving and fostering a collaborative, entrepreneurial
management structure.
For the three months ended September 30, 2006, the Company reported
revenues of $19.3 million, operating income of $3.2 million and net
income of $2.7 million, up 5 percent, 2 percent and 20 percent,
respectively, from the three months ended September 30, 2005. For the
nine months ended September 30, 2006, the Company reported revenues of
$59.6 million, operating income of $10.4 million and net income of $7.8
million, up 8 percent, 7 percent and 14 percent, respectively, from the
nine months ended September 30, 2005.
During the third quarter of 2006, the Company completed the
construction of the new facility for a subsidiary, Halkey-Roberts
Corporation ("Halkey-Roberts"). The relocation of the Halkey-Roberts
operations to its new facility was substantially completed in the third
quarter of 2006.
12
Results for the three months ended September 30, 2006
Consolidated net income totaled $2.7 million, or $1.45 per basic and
$1.38 per diluted share, in the third quarter of 2006. This is compared
with consolidated net income of $2.2 million, or $1.23 per basic and
$1.15 per diluted share, in the third quarter of 2005. The income per
basic share computations are based on weighted average basic shares
outstanding of 1,858,356 in the 2006 period and 1,828,886 in the 2005
period. The income per diluted share computations are based on weighted
average diluted shares outstanding of 1,960,274 in the 2006 period and
1,952,700 in the 2005 period.
Consolidated revenues of $19.3 million for the third quarter of 2006
were 5 percent higher than revenues of $18.3 million for the third
quarter of 2005. This 5 percent increase in revenues was primarily
attributable to an approximate 15 percent increase in the revenues from
the Company's fluid delivery products and an approximate 14 percent
increase in the revenues from the Company's cardiovascular products.
These increases, which were generally attributable to higher sales
volumes, were partially offset by an approximate 14 percent decrease in
the revenues from the Company's ophthalmic products.
Revenues by product line were as follows (in thousands):
Three Months ended
September 30,
---------------------------------------
2006 2005
---------------- -----------------
Fluid Delivery $ 6,121 $ 5,306
Cardiovascular 5,707 5,001
Ophthalmology 3,301 3,825
Other 4,161 4,206
---------------- -----------------
Total $ 19,290 $ 18,338
================ =================
Cost of goods sold of $11.8 million for the third quarter of 2006 was 4
percent higher than in the comparable 2005 period. Increased sales
volume and increased manufacturing overhead costs offset by a favorable
product mix were the primary contributors to the increase in cost of
goods sold for the third quarter of 2006.
Gross profit of $7.5 million in the third quarter of 2006 was $526,000,
or 8 percent, higher than in the comparable 2005 period. The Company's
gross profit percentage in the third quarter of 2006 was 38.8 percent
of revenues compared with 38.0 percent of revenues in the third quarter
of 2005. The increase in gross profit percentage in the 2006 period
compared to the 2005 period was primarily related to improved product
mix partially offset by increased manufacturing overhead costs.
The Company's third quarter 2006 operating expenses of $4.3 million
were $451,000 higher than the operating expenses for the third quarter
of 2005, resulting primarily from a $265,000 increase in General and
Administrative (G&A) expenses, a $37,000 increase in selling (Selling)
expenses, and a $149,000 increase in Research and Development (R&D)
expenses. The increase in G&A for the third quarter of 2006 was
primarily related to increased outside services and costs associated
with the relocation to the new facility for Halkey-Roberts. The
increase in Selling expenses for the third quarter of 2006 was
principally attributable to increased compensation costs and outside
services. The increase in R&D costs was primarily related to outside
services, prototype expenses, new product testing costs, and process
enhancements. Operating income in the third quarter of 2006 increased
$75,000, or 2 percent, to $3.2 million from $3.1 million in the third
quarter of 2005. Operating income was 16.5 percent of revenues in the
third quarter of 2006 compared to 17.0 percent of revenues in the third
quarter of 2005. The change in operating income for the third quarter
of 2006 as compared with the third quarter of 2005 was primarily
attributable to the previously mentioned increased gross profit offset
by the increased operating expenses.
13
Interest expense of $58,000 for the 2006 period is greater than the
2005 period primarily related to increased borrowing levels in
connection with the construction of the Halkey-Roberts facility. Third
quarter 2006 interest charges of $112,000, through August 31, 2006,
were capitalized during the construction phase of the new
Halkey-Roberts facility. Income tax expense for the third quarter of
2006 was $433,000 compared to income tax expense of $861,000 for the
same period in the prior year. The effective tax rate for the third
quarter of 2006 was 13.8 percent compared with 27.7 percent for the
third quarter of 2005. The lower effective tax rate for the 2006 period
is primarily related to a review of the Company's R&D tax credits for
2005 and prior-year tax returns which indicated that the Company was
entitled to higher credits than had been claimed.
Results for the nine months ended September 30, 2006
Consolidated net income totaled $7.8 million, or $4.22 per basic and
$3.99 per diluted share, for the nine months ended September 30, 2006.
This is compared with consolidated net income of $6.8 million, or $3.82
per basic and $3.56 per diluted share, for the nine months ended
September 30, 2005. The income per basic share computations are based
on weighted average basic shares outstanding of 1,846,265 in the 2006
period and 1,780,822 in the 2005 period. The income per diluted share
computations are based on weighted average diluted shares outstanding
of 1,951,413 in the 2006 period and 1,915,087 in the 2005 period.
Consolidated revenues of $59.6 million for the nine months ended
September 30, 2006 were 8 percent higher than revenues of $55.1 million
for the nine months ended September 30, 2005. This 8 percent increase
in revenues was primarily attributable to an approximate 25 percent
increase in the revenues from the Company's fluid delivery products and
an approximate 22 percent increase in the revenues from the Company's
cardiovascular products. These increases, which were generally
attributable to higher sales volumes, were partially offset by an
approximate 17 percent decrease in the revenues from the Company's
ophthalmic products and an approximate 3 percent decrease in the
revenues from the Company's other products.
14
Revenues by product line were as follows (in thousands):
Nine months ended
September 30,
-------------- ----- ----------------
2006 2005
-------------- ----------------
Fluid Delivery $ 19,180 $ 15,356
Cardiovascular 17,147 14,102
Ophthalmology 9,685 11,632
Other 13,629 13,995
-------------- ----------------
Total $59,641 $ 55,085
============== ================
Cost of goods sold of $36.0 million for the nine months ended September
30, 2006 was 8 percent higher than in the comparable 2005 period.
Increased sales volume, increased manufacturing overhead costs, and a
temporary production curtailment due to reduced orders from certain
ophthalmic and related kitting business customers were the primary
contributors to the increase in cost of goods sold for the nine months
ended September 30, 2006.
Gross profit of $23.6 million for the nine months ended September 30,
2006 was $1.8 million, or 8 percent, higher than in the comparable 2005
period. The Company's gross profit percentage was 39.6 percent of
revenues for both the nine months ended September 30, 2006 and 2005.
The Company's third quarter 2006 operating expenses of $13.2 million
were $1.1 million higher than the operating expenses for the nine
months ended September 30, 2005, resulting primarily from a $400,000
increase in Selling expenses, a $320,000 increase in R&D expenses and a
$397,000 increase in G&A expenses. The increase in Selling expenses for
the nine months ended September 30, 2006 was principally attributable
to increased compensation costs, advertising and promotion costs and
outside services. The increase in R&D costs was primarily related to
outside services, prototype expenses, new product testing costs, and
process enhancements. The increase in G&A for the nine months ended
September 30, 2006 was primarily related to increased outside services
and costs associated with the relocation to the new facility for
Halkey-Roberts partially offset by a decrease in insurance costs.
Operating income for the nine months ended September 30, 2006 increased
$703,000, or 7 percent, to $10.4 million from $9.7 million in the nine
months ended September 30, 2005. Operating income was 17.4 percent of
revenues for the nine months ended September 30, 2006 compared to 17.5
percent of revenues for the nine months ended September 30, 2005.
Interest expense of $58,000 for the 2006 period is less than the 2005
period because of the capitalization of interest charges in connection
with the construction of the Halkey-Roberts facility. Interest charges
of $326,000, through August 31, 2006, were capitalized during the
construction phase of the new Halkey-Roberts facility. Income tax
expense for the nine months ended September 30, 2006 was $2.7 million
compared to income tax expense of $3.0 million for the same period in
the prior year. The effective tax rate for the nine months ended
September 30, 2006 was 26.0 percent compared with 31.1 percent for the
nine months ended September 30, 2005. The lower effective tax rate for
the 2006 period is primarily related to a review of the Company's R&D
tax credits for 2005 and prior-year tax returns which indicated that
the Company was entitled to higher credits than had been claimed.
15
The Company recorded a gain on the disposal of discontinued operations
relating to the 1997 sale of its natural gas operations of $165,000
after tax, or $0.09 per basic and $0.08 per diluted share, for the
first nine months of 2006 and $165,000 after tax, or $0.09 per basic
and $0.09 per diluted share, for the first nine months of 2005,
resulting from the receipt of contingent deferred payments in each
year. No additional payments are due in future periods under the terms
of the 1997 agreement pursuant to which the Company sold its natural
gas operations.
Liquidity and Capital Resources
At September 30, 2006, the Company had cash and cash equivalents of
$234,000 compared with $525,000 at December 31, 2005. The Company had
outstanding borrowings of $11.6 million under its $25.0 million
revolving credit facility ("Credit Facility") at September 30, 2006 and
$2.5 million at December 31, 2005. The increase in the outstanding
balance under the Credit Facility in the first nine months of 2006 was
primarily attributable to borrowings to partially fund the construction
of the new Halkey-Roberts facility. The Credit Facility, which expires
November 12, 2009, and may be extended under certain circumstances,
contains various restrictive covenants, none of which is expected to
impact the Company's liquidity or capital resources. At September 30,
2006, the Company was in compliance with all financial covenants.
As of September 30, 2006, the Company had working capital of $20.9
million, including $234,000 in cash and cash equivalents. The $1.2
million increase in working capital during the first nine months of
2006 was primarily related to an increase in accounts receivable and
inventories, and a decrease in accrued income and other taxes partially
offset by an increase in accounts payable and accrued liabilities. The
increase in accounts receivable during the first nine months of 2006
was primarily related to the increase in revenues for the third quarter
of 2006 as compared to the fourth quarter of 2005. The increase in
inventories is primarily related to increased purchases of raw
materials in an effort to realize lower costs due to volume purchasing
and increased stocking levels to support increased revenues. The
increase in accounts payable is primarily related to the increased raw
material purchases. Cash flows from continuing operations generated
$9.9 million for the nine months ended September 30, 2006 as compared
to $6.1 million for the nine months ended September 30, 2005. The 2005
period was heavily impacted by a $3.1 million increase in inventories.
During the first nine months of 2006, the Company expended $18.6
million for the purchase of property and equipment. Of this amount,
approximately $13.0 million was expended for the construction of the
new Halkey-Roberts facility. The Company received net proceeds of $1.0
million from the exercise of employee stock options during the first
nine months of 2006. During the first nine months of 2006, the Company
repurchased 24,000 shares of its common stock for approximately $1.6
million and paid dividends totaling $1.0 million to its stockholders.
The Company believes that its existing cash and cash equivalents, cash
flows from operations, borrowings available under the Company's credit
facility, supplemented, if necessary, with equity or debt financing,
which the Company believes would be available, will be sufficient to
fund the Company's cash requirements for the foreseeable future.
16
Forward-Looking Statements
The statements in this Management's Discussion and Analysis that are
forward-looking are based upon current expectations, and actual results
may differ materially. Therefore, the inclusion of such forward-looking
information should not be regarded as a representation by the Company
that the objectives or plans of the Company would be achieved. Such
statements include, but are not limited to, the Company's expectations
regarding future liquidity and capital resources. Words such as
"anticipates," "believes," "expects," "estimated" 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: 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;
the Company's ability to protect its 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; 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 the
Company to alter its marketing, capital expenditures or other budgets,
which in turn may affect the Company's results of operations and
financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For the quarter ended September 30, 2006, the Company did not
experience any material changes in market risk exposures that affect
the quantitative and qualitative disclosures presented in the Company's
2005 Annual Report on Form 10K.
Item 4. Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and its Chief Financial Officer, evaluated the
Company's disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2006. Based upon
this evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and
procedures are effective. There were no changes in our internal control
over financial reporting for the quarter ended September 30, 2006 that
have materially affected or are reasonably likely to materially affect
our internal control over financial reporting.
17
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Chief Executive Officer Amended and Restated Employment
Agreement
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
(b) Reports on Form 8-K
On August 8, 2006, the Company filed a report on Form 8-K
with the SEC regarding the public dissemination of a press
release announcing its financial results for the second
quarter ended June 30, 2006 (Item 12).
On August 10, 2006, the Company filed a report on Form 8-K
with the SEC regarding an amendment to the existing
employment agreement dated January 1, 2002 and amended on
December 3, 2002 between the Company and the Company's
Chairman, President and Chief Executive Officer and the
adoption of a Rights Plan.
18
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.
Atrion Corporation
(Registrant)
Date: November 6, 2006 /s/ Emile A. Battat
----------------------------
Emile A. Battat
Chairman, President and
Chief Executive Officer
Date: November 6, 2006 /s/ Jeffery Strickland
----------------------------
Jeffery Strickland
Vice President and
Chief Financial Officer
19