10-Q

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 June 30, 2018

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 001-32982

Atrion Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware	63-0821819
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
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 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 “accelerated filer,” “large accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	☐

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.

Title of Each Class	Number of Shares Outstanding at July 25, 2018
Common stock, Par Value $0.10 per share	1,852,756

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 Six Months Ended June 30, 2018 and 2017	3
Consolidated Statements of Comprehensive Income (Unaudited) For the Three and Six Months Ended June 30, 2018 and 2017	4
Consolidated Balance Sheets (Unaudited) June 30, 2018 and December 31, 2017	5
Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2018 and 2017	6
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) June 30, 2018 and December 31, 2017	7
Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.               Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.               Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.               Controls and Procedures	21
PART II.  Other Information	21
Item 1.               Legal Proceedings	21
Item 1A.            Risk Factors	21
Item 6.               Exhibits	21
SIGNATURES	22
Exhibit Index	23

PART I

FINANCIAL INFORMATION

2

Item 1. Financial Statements

ATRION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 (Unaudited)

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
	(in thousands, except per share amounts)
Revenues	$38,847	$36,164	$78,248	$74,669
Cost of goods sold	19,624	18,470	40,074	38,344
Gross profit	19,223	17,694	38,174	36,325
Operating expenses:
Selling	2,045	1,864	4,064	3,612
General and administrative	4,309	4,287	8,537	8,304
Research and development	1,603	1,368	2,941	2,907
	7,957	7,519	15,542	14,823
Operating income	11,266	10,175	22,632	21,502
Interest and dividend income	411	370	742	519
Other investment income (losses)	(408)	--	(1,197)	1
	3	370	(455)	520
Income before provision for income taxes	11,269	10,545	22,177	22,022
Provision for income taxes	(2,472)	(519)	(4,892)	(2,046)
Net income	$8,797	$10,026	$17,285	$19,976
Net income per basic share	$4.75	$5.44	$9.33	$10.86
Weighted average basic shares outstanding	1,852	1,844	1,853	1,839
Net income per diluted share	$4.74	$5.40	$9.31	$10.76
Weighted average diluted shares outstanding	1,857	1,858	1,856	1,856
Dividends per common share	$1.20	$1.05	$2.40	$2.10

The accompanying notes are an integral part of these statements.

3

ATRION CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
	(In thousands)
Net Income	$8,797	$10,026	$17,285	$19,976
Other Comprehensive Income
Unrealized income on investments, net of tax expense of $204 and $36 in 2017	--	379	--	66
Comprehensive Income	$8,797	$10,405	$17,285	$20,042

The accompanying notes are an integral part of these statements.

4

ATRION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

Assets	June 30, 2018	December 31, 2017
	(in thousands)
Current assets:
Cash and cash equivalents	$36,063	$30,136
Short-term investments	24,176	35,468
Accounts receivable	18,269	17,076
Inventories	32,503	29,354
Prepaid expenses and other current assets	2,919	3,199
	113,930	115,233
Long-term investments	22,208	9,136
Property, plant and equipment	174,322	167,080
Less accumulated depreciation and amortization	104,750	100,711
	69,572	66,369
Other assets and deferred charges:
Patents	1,718	1,778
Goodwill	9,730	9,730
Other	1,624	1,534
	13,072	13,042
Total assets	$218,782	$203,780
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$9,738	$8,876
Accrued income and other taxes	593	746
	10,331	9,622
Line of credit	--	--
Other non-current liabilities	10,394	9,770
Stockholders’ equity:
Common stock, par value $0.10 per share; authorized10,000 shares, issued 3,420 shares	342	342
Paid-in capital	49,635	48,730
Accumulated other comprehensive loss	--	(1,215)
Retained earnings	279,807	268,194
Treasury shares,1,567 at June 30, 2018 and 1,568 at December 31, 2017, at cost	(131,727)	(131,663)
Total stockholders’ equity	198,057	184,388
Total liabilities and stockholders’ equity	$218,782	$203,780

The accompanying notes are an integral part of these financial statements.

5

ATRION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2018	2017
	(In thousands)
Cash flows from operating activities:
Net income	$17,285	$19,976
Adjustments to reconcile net income tonet cash provided by operating activities:
Depreciation and amortization	4,455	4,223
Deferred income taxes	(235)	1,009
Stock-based compensation	917	903
Net change in unrealized gains and losses on investments	1,197	--
Net change in accrued interest, premiums, and discounts
on investments	(125)	(82)
Other	3	(2)
	23,497	26,027
Changes in operating assets and liabilities:
Accounts receivable	(1,193)	(2,524)
Inventories	(3,149)	(950)
Prepaid expenses	280	(2,841)
Other non-current assets	(90)	81
Accounts payable and accrued liabilities	862	(552)
Accrued income and other taxes	(153)	862
Other non-current liabilities	859	39
	20,913	20,142
Cash flows from investing activities:
Property, plant and equipment additions	(7,598)	(5,422)
Purchase of investments	(26,887)	(21,911)
Proceeds from maturities of investments	24,035	19,000
	(10,450)	(8,333)
Cash flows from financing activities:
Shares tendered for employees’ withholding taxes on stock-based compensation	(90)	(7,735)
Dividends paid	(4,446)	(3,873)
	(4,536)	(11,608)
Net change in cash and cash equivalents	5,927	201
Cash and cash equivalents at beginning of period	30,136	20,022
Cash and cash equivalents at end of period	$36,063	$20,223
Cash paid for:
Income taxes	$5,592	$2,295
Non-cash financing activities:
Non-cash effect of stock option exercises	$--	$10,237

The accompanying notes are an integral part of these financial statements.

6

ATRION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

	Common Stock		Treasury Stock			Accumulated
					Additional	Other
	Shares				Paid-in	Comprehensive	Retained
	Outstanding	Amount	Shares	Amount	Capital	Income (Loss)	Earnings	Total
Balances, January 1, 2017	1,852	$342	1,568	$(131,663)	$48,730	$(1,215)	$268,194	$184,388
Net income							17,285	17,285
Reclass from adopting ASU 2016-01						1,215	(1,215)	--
Stock-based compensation transactions	1		(1)	26	905			931
Shares surrendered in stock transactions				(90)				(90)
Dividends							(4,457)	(4,457)
Balances, June 30, 2018	1,853	$342	1,567	$(131,727)	$49,635	$0	$279,807	$198,057

The accompanying notes are an integral part of these financial statements

7

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)      

Basis of Presentation

The accompanying unaudited consolidated financial statements of Atrion Corporation and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these statements include all normal and recurring adjustments necessary to present a fair statement of our consolidated results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. Preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and notes. Actual results could differ from those estimates. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 ("2017 Form 10-K"). References herein to "Atrion," the "Company," "we," "our," and "us" refer to Atrion Corporation and its subsidiaries.

(2)       

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined by using the first-in, first-out method. The following table details the major components of inventories (in thousands):

	June 30,	December 31,
	2018	2017
Raw materials	$14,267	$13,545
Work in process	7,837	6,647
Finished goods	10,399	9,162
Total inventories	$32,503	$29,354

(3)     

Income per share

The following is the computation for basic and diluted income per share:

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
	(in thousands, except per share amounts)
Net income	$8,797	$10,026	$17,285	$19,976
Weighted average basic shares outstanding	1,852	1,844	1,853	1,839
Add: Effect of dilutive securities	5	14	3	17
Weighted average diluted shares outstanding	1,857	1,858	1,856	1,856
Earnings per share:
Basic	$4.75	$5.44	$9.33	$10.86
Diluted	$4.74	$5.40	$9.31	$10.76

8

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. Dilutive securities representing 1,200and 1,027 shares of common stock for the quarters ended June 30, 2018 and 2017, respectively, were excluded from the computation of weighted average diluted shares outstanding because their effect would have been anti-dilutive.

(4)    

Investments

As of June 30, 2018, we held investments in certificates of deposit, commercial paper, bonds, mutual funds and equity securities that are required to be measured for disclosure purposes at fair value on a recurring basis. The certificates of deposit, commercial paper and bonds are considered held-to-maturity and are recorded at amortized cost in the accompanying consolidated balance sheet. The equity securities and mutual funds are recorded at fair value in the accompanying consolidated balance sheet. 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):

	Gross Unrealized
	Level	Cost	Gains	Losses	Fair Value
As of June 30, 2018:
Short-term Investments
Certificates of deposit	2	2,021	$--	$(4)	$2,017
Commercial paper	2	10,977	$--	$(9)	$10,968
Bonds	2	11,178	$--	$(29)	$11,149
Long-term Investments
Bonds	2	18,781	$--	$(259)	$18,522
Mutual funds	1	485	$--	$(4)	$481
Equity investments	2	5,675	$--	$(2,729)	$2,946
As of December 31, 2017:
Short-term Investments
Certificates of deposit	2	4,020	$--	$(3)	$4,017
Commercial paper	2	31,220	$26	$(38)	$31,208
Bonds	2	6	$--	$--	$6
Mutual funds	1	219	$3	$--	$222
Long-term Investments
Bonds	2	5,000	$--	$(75)	$4,925
Equity investments	2	5,675	$--	$(1,539)	$4,136

9

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The above long-term bonds represent investments in various issuers at June 30, 2018. The unrealized losses for these investments relate to a rise in interest rates which resulted in a lower market price for those securities. Only one of these bond investments has been in a loss position for more than 12 months.

The certificate of deposit matures in 5.2 months. The commercial paper securities have maturities ranging from 0.2 months to 3.4 months. The bonds have maturities ranging from 0.4 months to 53.5 months.

(5)     

Patents and Licenses

Purchased patents and license fees 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):

June 30, 2018			December 31, 2017
Weighted Average Original Life (years)	GrossCarryingAmount	AccumulatedAmortization	Weighted Average Original Life (years)	GrossCarryingAmount	AccumulatedAmortization
15.67	$13,840	$12,122	15.67	$13,840	$12,062

Aggregate amortization expense for patents and licenses was $30,000 for the three months ended June 30, 2018 and 2017 and $60,000 and $92,000 for the six months ended June 30, 2018 and 2017, respectively.

Estimated future amortization expense for each of the years set forth below ending December 31 is as follows (in thousands):

2019	$119
2020	$119
2021	$119
2022	$117
2023	$113

(6)     

Income Taxes

Income tax expense for the second quarter of 2018 was $2.5 million compared to income tax expense of $519,000 for the same period in the prior year. The effective tax rate for the second quarter of 2018 was 22 percent, compared with 5 percent for the second quarter of 2017. The Tax Cuts and Jobs Act, enacted in December 2017, reduced the corporate federal income tax rate in the United States from 35 percent to 21 percent effective for us on January 1, 2018. The Tax Cuts and Jobs Act also ended the domestic production activities deduction under Section 199 which previously helped lower our effective tax rate by 3 percentage points. The benefit we received from the lower tax rate under the Tax Cuts and Jobs Act was not as large as the excess tax benefits we received in the second quarter of 2017 of $3.0 million from the exercise of stock options together with the benefit from the Section 199 deduction.

10

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We continue to assess the income tax effects of the Tax Cuts and Jobs Act and whether recorded amounts may be affected due to changes in our interpretations and assumptions, as well as regulatory guidance that may be issued.

(7)    

Recent Accounting Pronouncements

Accounting Standards Update 2014-09, Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, also known as ASC 606. This new standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASC 606 replaced most existing revenue recognition guidance in United States Generally Accepted Accounting Principles when it became effective for fiscal years beginning after December 15, 2017. We adopted the new standard on January 1, 2018, using the full retrospective method. Because accounting for revenue from contracts with customers did not materially change for us under the new standard as explained below, prior period consolidated financial statements did not require adjustment.

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 customer requirements which are driven in large part by their customers’ 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.

A summary of revenues by geographic area, based on shipping destination, for the three and six months ended June 30, 2018 and 2017 are as follows (in thousands):

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2018	2017	2018	2017
United States	$24,833	$24,079	$49,440	$47,184
Germany	2,291	1,919	4,962	4,956
Other countries less than 5% of revenues	11,723	10,166	23,846	22,529
Total	$38,847	$36,164	$78,248	$74,669

11

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A summary of revenues by product line for the three and six months ended June 30, of 2018 and 2017 are as follows (in thousands):

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2018	2017	2018	2017
Fluid Delivery	$18,128	$15,630	$36,928	$33,636
Cardiovascular	13,003	12,222	26,213	23,686
Ophthalmology	2,852	3,762	5,637	7,435
Other	4,864	4,550	9,470	9,912
Total	$38,847	$36,164	$78,248	$74,669

More than ninety-eight percent of our total revenue in the periods presented herein is pursuant to shipmentsinitiated by a purchase order, which under the new ASC 606 guidance 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 balance sheet.

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 thirty 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 maintain an allowance for doubtful accounts to reflect estimated losses resulting from the failure of customers to make required payments. On an ongoing basis, the collectability of accounts receivable is assessed based upon historical collection trends, current economic factors and the assessment of the collectability of specific accounts. 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. Accounts are written off when it is determined the receivable will not be collected. 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.

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.

12

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 4 percent of our total revenue in all periods presented herein. A portion of these contracts representing less than 3 percent of our revenues include multiple performance obligations. For such arrangements, we allocate 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. Lease revenues, including embedded leases under certain of these contracts, represent less than 1 percent of our total revenue in all periods presented herein.  

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 to 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 about immaterial contracts under ASC 606 would potentially obscure more useful and important information.

ASU 2016-02, Leases

On February 25, 2016 the FASB issued ASU 2016-02, Leases (ASC 842).  The main objective of this new standard is to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The new leasing standard requires lessees to recognize a right of use asset and lease liability on the balance sheet. Lessor accounting is updated to align with certain changes in the lessee model and the new revenue recognition standard (ASC 606).  Atrion elected to early adopt this new standard as of January 1, 2018, using the modified retrospective approach as required.

As a lessee, Atrion has only two leases for equipment used internally which we account for as operating leases. Upon adoption of ASC 842, we recorded a right-of-use asset and a lease liability for these leases as of January 1, 2018. The monthly expense of $2,025 for these operating leases, which are our only lessee arrangements, is immaterial and therefore all other lessee disclosures under ASC 842 have been omitted.

As a lessor, Atrion has agreements with certain customers for the rental of our equipment for use in hospitals. These arrangements include sales type leases, fixed monthly rentals and rental agreements containing a lease component (embedded lease) and non-lease components. Lease revenues from all of these agreements represented less than 1 percent of our total revenue in the first half of 2018 and in all of 2017.

13

ATRION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The fixed monthly rentals and embedded lease arrangements are accounted for as operating leases. Fixed monthly rentals provide for a flat fee each month. For our embedded lease agreements we have chosen under ASC 842 to continue to use a variable basis (based on consumables sold in the period) to allocate and recognize revenue as we have in prior periods because it most closely represents the way in which benefit of the asset is derived.

The lease assets from our sales type leases are recorded in our accounts receivables in the accompanying consolidated balance sheet, and as of June 30, 2018 the balance totaled $517,000. Our equipment being leased as operating leases to our customers is included in our Property Plant and Equipment on our balance sheet. As of June 30, 2018, the cost of this property and related accumulated depreciation was $8.0 million and $5.65 million, respectively. Due to the immaterial amount of revenue from our lessor activity, all other lessor disclosures under ASC 842 have been omitted.

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective of this update is to enhance the reporting model for financial instruments in order to provide users of financial statements with more decision-useful information. Changes to the previous guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments.

The primary impact of this change for us relates to our available-for-sale equity investment and resulted in unrecognized gains and losses from this investment being reflected in our income statement beginning in 2018.  We adopted ASU 2016-01 as of January 1, 2018, applying the update by means of a cumulative-effect adjustment to the balance sheet by reclassifying the balance of our Accumulated Other Comprehensive Loss in the shareholders’ equity section of the balance sheet to Retained Earnings. The balance reclassified of $1,215,000 was a result of prior-period unrealized losses from our equity investment.

In the second quarter of 2018 we recorded an unrealized loss on our equity investment of $412,000 as a result of a decline in the market value of this investment during the quarter. This brings the 2018 year-to-date loss on this investment to $1,190,000. This loss is reflected in other investment income (loss) in our income statement. This change in accounting is expected to create greater volatility in our investment income each quarter in the future.

ASU 2017-08, Receivables – Non-refundable Fees and Other Costs (Subtopic 310-20).

In March 2017, the FASB issued ASU 2017-08, Receivables – Non-refundable Fees and Other Costs (Subtopic 310-20). The main objective of this update is to shorten the period of amortization of the premium on certain callable debt securities to the earliest call date. However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendment is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. We elected to early adopt this amendment as of January 1, 2018. None of our investments in 2017 had any premium paid, so no adjustments were needed for prior-period activity. We do not believe the adoption of this standard will have a material impact on our Financial Statements in 2018 or future periods.

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.

14

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 dialysis and 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 strategy is to provide a broad selection of products in the areas of our expertise. We focus our research and development, or R&D, efforts 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 and payoff indebtedness, to fund capital expenditures, to repurchase stock and to pay dividends.

Our strategic objective is to further enhance our position in our served markets by:

●

Focusing on customer needs;

●

Expanding existing product lines and developing new products;

●

Manufacturing products to exacting quality standards; and

●

Preserving and fostering a collaborative and entrepreneurial culture.

For the three months ended June 30, 2018, we reported revenues of $38.8 million, operating income of $11.3 million and net income of $8.8 million, up 7 percent, up 11 percent and down 12 percent, respectively, from the three months ended June 30, 2017. For the six months ended June 30, 2018, we reported revenues of $78.2 million, operating income of $22.6 million and net income of $17.3 million, up 5 percent, up 5 percent and down 14 percent, respectively, from the six months ended June 30, 2017. The decline in net income for both the three and six month periods ended June 30, 2018 were attributable to higher effective tax rates in the current year periods.

Results for the three months ended June 30, 2018

Consolidated net income totaled $8.8 million, or $4.75 per basic and $4.74 per diluted share, in the second quarter of 2018. This is compared with consolidated net income of $10.0 million, or $5.44 per basic and $5.40 per diluted share, in the second quarter of 2017. The income per basic share computations are based on weighted average basic shares outstanding of 1,852,000 in the 2018 period and 1,844,000 in the 2017 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,857,000 in the 2018 period and 1,858,000 in the 2017 period.

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Consolidated revenues of $38.8 million for the second quarter of 2018 were 7 percent higher than revenues of $36.2 million for the second quarter of 2017. This increase was primarily attributable to increased volumes of our fluid delivery products.

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

	Three Months ended June 30,
	2018	2017
Fluid Delivery	$18,128	$15,630
Cardiovascular	13,003	12,222
Ophthalmology	2,852	3,762
Other	4,864	4,550
Total	$38,847	$36,164

Cost of goods sold of $19.6 million for the second quarter of 2018 was 6 percent higher than cost of goods sold of $18.5 million for the second quarter of 2017 primarily due to increased revenues partially offset by improved manufacturing efficiencies and the impact of continued cost improvement projects. Our cost of goods sold in the second quarter of 2018 was 50.5 percent of revenues compared with 51.1 percent of revenues in the second quarter of 2017.

Gross profit of $19.2 million in the second quarter of 2018 was $1.5 million, or 9 percent, higher than in the comparable 2017 period. Our gross profit percentage in the second quarter of 2018 was 49.5 percent of revenues compared with 48.9 percent of revenues in the second quarter of 2017. The increase in gross profit percentage in the 2018 period compared to the 2017 period was primarily related to improved manufacturing efficiencies and cost improvement projects mentioned above.

Our second quarter 2018 operating expenses of $8.0 million were $438,000 higher than the operating expenses for the second quarter of 2017. This increase was attributable to a $22,000 increase in General and Administrative, or G&A, expenses, a $181,000 increase in Selling expenses and a $235,000 increase in R&D expenses. The increase in G&A expenses for the second quarter of 2018 was principally attributable to increased outside services, increased travel and increased software costs partially offset by lower compensation and benefit costs. The increase in Selling expenses was principally attributable to increased outside services, trade shows and compensation. The increase in R&D expenses was primarily related to increased outside services and increased compensation partially offset by decreased supply costs.

Operating income in the second quarter of 2018 increased $1.1 million to $11.3 million, an 11 percent increase compared to our operating income in the quarter ended June 30, 2017. Operating income was 29 percent of revenues for the second quarter of 2018 as compared to 28 percent of revenues for the second quarter of 2017.

Interest and dividend income in the second quarter of 2018 was $411,000, compared with $370,000 for the same period in the prior year. Increased levels of investment and increased interest rates were the primary reasons for the increase.

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Other investment loss in the second quarter of 2018 was $408,000. We adopted ASU 2016-01 as of January 1, 2018 (see Note 7). For the second quarter of 2018 we recorded an unrealized loss on an equity investment of $412,000 as a result of a decline in the market value of this investment during the quarter.

Income tax expense for the second quarter of 2018 was $2.5 million compared to income tax expense of $519,000 for the same period in the prior year. The effective tax rate for the second quarter of 2018 was 21.9 percent, compared with 4.9 percent for the second quarter of 2017. The Tax Cuts and Jobs Act, reduced the corporate federal income tax rate in the United States from 35 percent to 21 percent effective for us on January 1, 2018. Our effective tax rate for the second quarter of 2017 was favorably impacted by excess tax benefits of $3.0 million related to stock compensation together with the benefit from the Section 199 deductions. We expect the effective tax rate for the remainder of 2018 to be approximately 21.0 percent.

Results for the six months ended June 30, 2017

Consolidated net income totaled $17.3 million, or $9.33 per basic and $9.31 per diluted share, in the first six months of 2018. This is compared with consolidated net income of $20.0 million, or $10.86 per basic and $10.76 per diluted share, in the first six months of 2017. The income per basic share computations are based on weighted average basic shares outstanding of 1,853,000 in the 2018 period and 1,839,000 in the 2017 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,856,000 in both the 2018 and 2017 periods.

Consolidated revenues of $78.2 million for the first six months of 2018 were 5 percent higher than revenues of $74.7 million for the first six months of 2017. This increase was primarily attributable to increased volumes of our fluid delivery and cardiovascular products.

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

	Six Months ended June 30,
	2018	2017
Fluid Delivery	$36,928	$33,636
Cardiovascular	26,213	23,686
Ophthalmology	5,637	7,435
Other	9,470	9,912
Total	$78,248	$74,669

Cost of goods sold of $40.1 million for the first six months of 2018 was $1.7 million higher than in the comparable 2017 period. The primary contributor to the increase in our cost of goods sold was increased revenues in the first six months of 2018. Our cost of goods sold in the first six months of 2018 was 51.2 percent of revenues compared with 51.4 percent of revenues in the first six months of 2017.

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Gross profit of $38.2 million in the first six months of 2018 was $1.8 million, or 5 percent, higher than in the comparable 2017 period. Our gross profit percentage in the first six months of 2018 was 48.8 percent of revenues compared with 48.6 percent of revenues in the first six months of 2017. The increase in gross profit percentage in the 2018 period compared to the 2017 period was primarily related to favorable manufacturing efficiencies in the first six months of 2018.

Operating expenses of $15.5 million for the first six months 2018 were $719,000 higher than the operating expenses for the first six months of 2017. This increase was comprised of a $233,000 increase in G&A, a $452,000 increase in Selling expenses expenses and a $34,000 increase in R&D expenses. The increase in G&A expenses for the first six months of 2018 was principally attributable to increased outside services, increased travel and increased software costs partially offset by decreased compensation and benefit costs. The increase in Selling expenses was primarily related to increased travel, increased promotion costs, increased outside services and increased compensation. The increase in R&D costs was primarily related to increased compensation and travel costs partially offset by decreased regulatory costs and reduced repairs.

Operating income in the first six months of 2018 increased $1.1 million to $22.6 million, a 5 percent increase from our operating income in the six months ended June 30, 2017. Operating income was 29 percent of revenues in both the first six months of 2018 and the first six months of 2017.

Interest and dividend income for the first six months of 2018 was $742,000, compared with $519,000 for the same period in the prior year. Increased levels of investment and increased interest rates were the primary reasons for the increase.

We adopted ASU 2016-01 as of January 1, 2018 (see Note 7). For the first six months of 2018 we recorded an unrealized loss on an equity investment of $1.2 million as a result of a decline in the market value of this investment during the 2018 period which was reflected as an Other investment loss on our income statement.

Income tax expense for the first six months of 2018 was $4.9 million compared to income tax expense of $2.0 million for the same period in the prior year. The effective tax rate for the first six months of 2018 was 22.1 percent, compared with 9.3 percent for the first six months of 2017. The effective tax rate for the first six months of 2017 was favorably impacted by a tax benefit of $5.3 million related to excess tax benefits from stock compensation together with the benefit from the Section 199 deductions.

Liquidity and Capital Resources

As of June 30, 2018, we had a $75.0 million revolving credit facility with a money center bank, entered into on February 28, 2017, pursuant to which the lender is obligated to make advances until February 28, 2022. The credit facility is secured by substantially all of our inventories, equipment and accounts receivable. We had no outstanding borrowings under our credit facility at June 30, 2018. Our ability to borrow funds under the credit agreement 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 June 30, 2018, we were in compliance with all financial covenants.

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At June 30, 2018, we had a total of $82.5 million in cash and cash equivalents, short-term investments and long-term investments, an increase of $7.7 million from December 31, 2017. The principal contributor to this increase was operating results.

Cash flows from operating activities of $20.9 million for the six months ended June 30, 2018 were primarily comprised of net income plus the net effect of non-cash expenses, increases to accounts payable and accrued liabilities partially offset by increases to accounts receivable and inventories. During the first six months of 2018, we expended $7.6 million for the addition of property and equipment, $26.9 million for the purchase of investments and $4.5 million for dividends. During the same period, maturities of investments generated $24.0 million in cash.

At June 30, 2018, we had working capital of $103.6 million, including $36.1 million in cash and cash equivalents and $24.2 million in short-term investments. The $2.0 million decrease in working capital during the first six months of 2018 was primarily related to decreases in short-term investments and increases in accounts payable and accrued liabilities. This decrease was partially offset by increases in cash and cash equivalents and inventories. The net decrease in cash and short-term investments was primarily related to a shift in the investments mix to an increase in long-term investments. The increase in inventories was primarily related to replenishment of inventories to levels required for operational effectiveness. The increase in accounts payable and accrued liabilities is primarily related to timing of payments for replenishment of inventories and operating expenditures.

We believe that our $82.5 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 costs associated with the planned 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. Additionally, we believe that our cash and cash equivalents, short-term investments and long-term investments, as a whole, will continue to increase during the remainder of 2018

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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 effective tax rate for the remainder of 2018, 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, our access to equity and debt financing, and the increase in cash, cash equivalents, and investments during the remainder of 2018. 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: 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 June 30, 2018, we did not experience any material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in our 2017 Form 10-K.

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Item 4.  Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2018. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting for the quarter ended June 30, 2018 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, we may be involved in claims or litigation that arise in the normal course of business. We are not currently a party to any legal proceedings, which, if decided adversely, would have a material adverse effect on our business, financial condition, or results of operations.

Item 1A.  Risk Factors

There were no material changes to the risk factors disclosed in our 2017 Form 10-K.

Item 6.  Exhibits

Exhibit
Number	Description
10.1	Amended and Restated Atrion Corporation 2006 Equity Incentive Plan (As last amended on November 7, 2017)
31.1	Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer
31.2	Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer
32.1	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes – Oxley Act Of 2002
32.2	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes – Oxley Act Of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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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: August 7, 2018	By:	/s/ David A. Battat
		David A. Battat
		President and Chief Executive Officer

Date: August 7, 2018	By:	/s/ Jeffery Strickland
		Jeffery Strickland
		Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)

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Exhibit Index

Exhibit
Number	Description
10.1	Amended and Restated Atrion Corporation 2006 Equity Incentive Plan (As last amended on November 7, 2017)
31.1	Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer
31.2	Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer
32.1	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes – Oxley Act Of 2002
32.2	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of The Sarbanes – Oxley Act Of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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EX-10.1

Exhibit 10.1

AMENDED AND RESTATED

ATRION CORPORATION 2006 EQUITY INCENTIVE PLAN

(As last amended on November 7, 2017)

Table of Contents

ARTICLE 1.	DEFINITIONS	1
ARTICLE 2.	COMMON STOCK SUBJECT TO PLAN	3
2.1	Common Stock Subject to Plan	3
2.2	Add-back of Grants	3
ARTICLE 3.	ELIGIBILITY; GRANTS; AWARD AGREEMENTS	4
3.1	Eligibility	4
3.2	Awards	4
3.3	Provisions Applicable to Section 162(m)	4
3.4	Award Agreement	4
ARTICLE 4.	OPTIONS	5
4.1	Award Agreement for Option Grant	5
4.2	Option Price	5
4.3	Qualification for Incentive Stock Options	5
4.4	Change in Incentive Stock Option Grant	5
4.5	Option Term	5
4.6	Option Exercisability and Vesting	6
ARTICLE 5.	EXERCISE OF OPTIONS	6
5.1	Exercise	6
5.2	Manner of Exercise	6
5.3	Conditions to Issuance of Common Stock	7
5.4	Rights as Stockholders	7
5.5	Ownership and Transfer Restrictions	7
5.6	Limitations on Exercise of Options	7
ARTICLE 6.	STOCK AWARDS	8
6.1	Award Agreement	8
6.2	Awards of Restricted Common Stock, Restricted Stock Units and Deferred Stock Units	8
6.3	Rights as Stockholders	8
6.4	Restriction	9
6.5	Lapse of Restrictions	9
6.6	Repurchase of Restricted Common Stock	9
6.7	Escrow	9
6.8	Legend	9
6.9	Conversion	9
ARTICLE 7.	STOCK APPRECIATION RIGHTS	9
7.1	Award Agreement for SARs	9
7.2	General Requirements	10
7.3	Base Amount	10
7.4	Tandem SARs	10
7.5	SAR Exercisability	10
7.6	Value of SARs	10
7.7	Form of Payment	10
ARTICLE 8.	PERFORMANCE UNITS	10
8.1	Award Agreement for Performance Units	10
8.2	General Requirements	10
8.3	Performance Period and Performance Goals	11
8.4	Payment With Respect to Performance Units	11
ARTICLE 9.	DIVIDEND EQUIVALENTS	11
9.1	Grant of Dividend Equivalents	11
ARTICLE 10.	OTHER STOCK-BASED AWARDS	11
10.1	Grant of Other Stock-Based Awards	11
ARTICLE 11.	ADMINISTRATION	11
11.1	Committee	11
11.2	Duties and Powers of Committee	12
11.3	Compensation; Professional Assistance; Good Faith Actions	12
11.4	Delegation by the Committee.	12

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ARTICLE 12.	AMISCELLANEOUS PROVISIONS	12
12.1	Transferability	12
12.2	Amendment, Suspension or Termination of this Plan	13
12.3	Changes in Common Stock or Assets of the Company, Acquisition or
	Liquidation of the Company and Other Corporate Events	13
12.4	Continued Employment	14
12.5	Tax Withholding	15
12.6	Forfeiture Provisions	15
12.7	Limitations Applicable to Section 16 Persons and Performance-Based Compensation	15
12.8	Effect of Plan Upon Option and Compensation Plans	15
12.9	Restrictions	15
12.1	Compliance with Laws	15
12.11	Titles	16
12.12	Governing Law	16
12.13	Effective Date	16

ii

AMENDED AND RESTATED

ATRION CORPORATION 2006 EQUITY INCENTIVE PLAN

Atrion Corporation, a Delaware corporation (the "Company"), has established the Amended and Restated Atrion Corporation 2006 Equity Incentive Plan (the "Plan") for the benefit of Employees, Non-Employee Directors and Consultants.

The purposes of this Plan are (a) to recognize and compensate selected Employees, Non-Employee Directors and Consultants who contribute to the success of the Company and its Subsidiaries, (b) to attract and retain Employees, Non-Employee Directors and Consultants, and (c) to provide incentive compensation to Employees, Non-Employee Directors and Consultants based upon the performance of the Company and its Subsidiaries.

ARTICLE 1. DEFINITIONS

Whenever the following initially capitalized terms are used in the Plan, they shall have the meanings specified below, unless the context clearly indicates otherwise.

"Award" shall mean the grant or award of Options, Restricted Common Stock, Restricted Stock Units, Deferred Stock Units, SARs, Dividend Equivalents, Performance Units or Other Stock-Based Awards under this Plan.

"Award Agreement" shall mean an agreement between the Company and a Participant setting forth the terms and conditions of an Award granted to a Participant.

"Board" shall mean the Board of Directors of the Company, as comprised from time to time.

"Change in Control" shall mean the occurrence of any of the following events: (a) any person, entity or affiliated group, excluding the Company or any employee benefit plan of the Company, acquiring more than twenty-five percent (25%) of the then outstanding shares of voting stock of the Company, (b) the consummation of any merger or consolidation of the Company into another company, such that the holders of the shares of the voting stock of the Company immediately before such merger or consolidation own less than fifty percent (50%) of the voting power of the securities of the surviving company or the parent of the surviving company, (c) the adoption of a plan for complete liquidation of the Company or the sale or disposition of all or substantially all of the Company's assets of the Company, such that after the transaction, the holders of the shares of the voting stock of the Company immediately prior to the transaction own less than fifty percent (50%) of the voting securities of the acquiror or the parent of the acquiror, or (d) during any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board.

"Code" shall mean the Internal Revenue Code of 1986, as amended.

"Committee" shall mean the Compensation Committee of the Board.

"Common Stock " shall mean the common stock, par value ten cents ($0.10) per share, of the Company.

"Company" shall mean Atrion Corporation, a Delaware corporation, or any business organization which succeeds to all or substantially all of its business, whether by virtue of a purchase, merger, consolidation, or otherwise. For purposes of this Plan, the term Company shall include, where applicable, a Subsidiary that employs an Employee or engages a Consultant.

"Consultant" shall mean a professional or technical expert, consultant, advisor or independent contractor who provides services to the Company or a Subsidiary, and who may be selected to participate in the Plan.

1

"Deferred Stock Unit" shall mean a right to receive Common Stock awarded under Article 6 of this Plan.

"Director" shall mean a member of the Board.

"Dividend Equivalent" shall mean a right granted to a Participant under Article 9 of this Plan.

"Employee" shall mean any employee (as defined in accordance with the regulations and revenue rulings then applicable under Section 3401(c) of the Code) of the Company or a Subsidiary of the Company, whether such employee was so employed at the time this Plan was initially adopted or becomes so employed subsequent to the adoption of this Plan, who may be selected to participate in the Plan.

"Employment Agreement" shall mean the employment, consulting or similar contractual agreement entered into by an Employee or a Consultant, as the case may be, and the Company governing the terms of the Employee's or Consultant's employment or engagement with the Company, if any.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

"Fair Market Value" of a share of Common Stock, as of a given date, means (i) with respect to an Award of an Incentive Stock Option and an Award which is intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code, the average of the high and low sales price of shares of Common Stock on such date as reported by any national securities exchange on which the shares of Common Stock are traded or, if no shares of Common Stock are traded on any such exchange on such date, then on the next preceding date on which any shares of Common Stock were traded on such exchange; and (ii) with respect to all other Awards, the closing sales price of a share of Common Stock on such date as reported by any national securities exchange on which the shares of Common Stock are traded or, if no shares of Common Stock are traded on any such exchange on such date, then on the next preceding date on which any shares of Common Stock were traded on such exchange; or (iii) if shares of Common Stock are not publicly traded on any exchange, the fair market value of a share of Common Stock as determined by the Committee acting in good faith and after consultation with independent advisors.

"Incentive Stock Option" shall mean an option which conforms to the applicable provisions of Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee.

"Non-Employee Director" shall mean a Director who is not an Employee.

"Non-Qualified Stock Option" shall mean an Option which the Committee does not designate as an Incentive Stock Option.

"Option" shall mean an option to purchase shares of Common Stock that is granted under Article 4 of this Plan. An option granted under this Plan shall, as determined by the Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option; provided, however, that Options granted to consultants shall be Non-Qualified Stock Options.

"Other Stock-Based Awards" shall mean a right granted to a Participant under Article 10 of this Plan.

"Participant" shall mean an Employee, Non-Employee Director or Consultant who has been granted an Award.

"Performance Units" shall mean performance units granted under Article 8 of this Plan.

"Permanent Disability" or "Permanently Disabled" shall mean the inability of a Participant, due to a physical or mental impairment, to perform the material services of the Participant's position with the Company for a period of six (6) months, whether or not consecutive, during any 365-day period. A determination of Permanent Disability shall be made by a physician satisfactory to both the Participant and the Committee, provided that if the Participant and the Committee do not agree on a physician, each of them shall select a physician and those two physicians together shall select a third physician, whose determination as to Permanent Disability shall be binding on all parties.

2

"Plan" shall mean the Amended and Restated Atrion Corporation 2006 Equity Incentive Plan, as embodied herein and as amended from time to time.

"Plan Year" shall mean the fiscal year of the Company.

"Restricted Common Stock" shall mean Common Stock awarded under Article 6 of this Plan.

"Restricted Stock Unit" shall mean a right to receive Common Stock awarded under Article 6 of this Plan.

"Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as such rule may be amended from time to time.

"SAR" shall mean stock appreciation rights awarded under Article 7 of this Plan.

"Stock Award" shall mean an Award of Restricted Common Stock, Restricted Stock Units or Deferred Stock Units under Article 6 of this Plan.

"Stock Award Account" shall mean the bookkeeping account reflecting Awards of Restricted Stock Units and Deferred Stock Units under Article 6 of this Plan.

"Subsidiary" shall mean an entity in an unbroken chain beginning with the Company if each of the entities other than the last entity in the unbroken chain owns fifty percent (50%) or more of the total combined voting power of all classes of equity in one of the other entities in such chain.

"Termination of Employment" shall mean the date on which the employee-employer, consulting, contractual, service or similar relationship between a Participant and the Company is terminated for any reason, with or without cause, including, but not by way of limitation, a termination of employment by resignation, discharge, death, Permanent Disability or Retirement, but excluding (i) termination of employment where there is a simultaneous reemployment or continuing employment of a Participant by the Company, and (ii) at the discretion of the Committee, termination of employment which results in a temporary severance of the employee-employer relationship. The Committee, in its absolute discretion, shall determine the effect of all matters and questions relating to a Termination of Employment (subject to the provisions of any Employment Agreement between a Participant and the Company), including, but not limited to all questions of whether particular leaves of absence constitute a Termination of Employment; provided, however, that, unless otherwise determined by the Committee in its discretion, a leave of absence, change in status from an employee to an independent contractor or other change the employee-employer, consulting, contractual, service or similar relationship shall constitute a Termination of Employment if, and to the extent that, such leave of absence, change in status or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section.

ARTICLE 2. COMMON STOCK SUBJECT TO PLAN

Common Stock Subject to Plan.

The Common Stock subject to an Award shall be shares of the Company's authorized but unissued, reacquired, or treasury Common Stock. Subject to adjustment as described in Section 12.3, the aggregate number of shares of Common Stock that may be issued under the Plan is two hundred thousand (200,000) shares. The Company, during the term of the Plan, will at all times reserve and keep available such number of shares of Common Stock as shall be sufficient to satisfy the requirements of the Plan.

The maximum number of shares of Common Stock with respect to which Options may be granted or other Awards made to any individual in any calendar year shall not exceed thirty-five thousand (35,000) shares.

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Add-back of Grants. If any Option or SAR expires or is canceled without having been fully exercised, is exercised in whole or in part for cash as permitted by this Plan, or is exercised prior to becoming vested as permitted under Section 4.6.3 and is forfeited prior to becoming vested, the number of shares of Common Stock subject to such Option or SAR but as to which such Option, SAR or other right was not exercised or vested prior to its expiration, cancellation or exercise may again be optioned, granted or awarded hereunder. Shares of Common Stock which are delivered by the Participant or withheld by the Company upon the exercise of any Option or other Award under this Plan, in payment of the exercise price thereof, may again be optioned, granted or awarded hereunder. If any shares of Common Stock awarded as Restricted Common Stock, Restricted Stock Units, Dividend Equivalents, Other Stock-Based Awards or other Award hereunder or as payment for Performance Units are forfeited by the Participant, such shares may again be optioned, granted or awarded hereunder. Notwithstanding the provisions of this Section 2.2, no shares of Common Stock may again be optioned, granted or awarded pursuant to an Incentive Stock Option if such action would cause such Option to fail to qualify as an Incentive Stock Option under Section 422 of the Code.

ARTICLE 3. ELIGIBILITY; GRANTS; AWARD AGREEMENTS

Eligibility. Any Employee, Non-Employee Director or Consultant selected to participate pursuant to Section 3.2 shall be eligible to participate in the Plan.

Awards. The Committee shall determine which Employees, Non-Employee Directors and Consultants shall receive Awards, whether the Employee, Non-Employee Director or Consultant will receive Options, Restricted Common Stock, Restricted Stock Units, Deferred Stock Units, Dividend Equivalents, SARs, Performance Units or Other Stock-Based Awards, whether an Option grant shall be of Incentive Stock Options or Non-Qualified Stock Options, and the number of shares of Common Stock subject to such Award. Notwithstanding the foregoing, the terms and conditions of an Award intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall include, but not be limited to, such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code.

Provisions Applicable to Section 162(m).

Notwithstanding anything in the Plan to the contrary, the Committee may grant Options, Restricted Common Stock, Restricted Stock Units, SARs, Dividend Equivalents, Performance Units or Other Stock Based Awards to an Employee that vest upon the attainment of performance targets for the Company which are related to one or more of the following performance goals: (i) pre-tax income, (ii) operating income, (iii) cash flow, (iv) earnings per share, (v) return on equity, (vi) return on invested capital or assets, (vii) cost reductions or savings, (viii) earnings from continuing operations, (ix) total stockholder return, or (x) such other identifiable and measurable performance objectives, as determined by the Committee.

To the extent necessary to comply with the performance-based compensation requirements of Section 162(m)(4)(C) of the Code, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (i) select the performance goal or goals applicable to the fiscal year or other designated fiscal period, (ii) establish the various targets and bonus amounts which may be earned for such fiscal year or other designated fiscal period, (iii) specify the relationship between performance goals and targets and the amounts to be earned by each Employee for such fiscal year or other designated fiscal period and (iv) take such other action as the Committee may deem appropriate to comply with the performance-based compensation requirements of Section 162(m)(4)(C) of the Code. Following the completion of each fiscal year or other designated fiscal period, the Committee shall certify in writing whether the applicable performance targets have been achieved for such fiscal year or other designated fiscal period. In determining the amount earned by such Employee, the Committee shall have the right to reduce (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the fiscal year or other designated fiscal period.

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Award Agreement. Upon the selection of an Employee, Non-Employee Director or Consultant to receive an Award, the Committee shall cause a written Award Agreement to be issued to such individual encompassing the terms and conditions of such Award, as determined by the Committee in its sole discretion; provided, however, that, if applicable, the terms of such Award Agreement shall comply with the terms of such Employee’s or Consultant’s Employment Agreement, if any. Such Award Agreement shall provide for the exercise price for Options and SARs; the purchase price, if any, for Restricted Common Stock, Restricted Stock Units, Deferred Stock Units and Other Stock-Based Awards; the performance criteria for Performance Units; and the exercisability and vesting schedule, payment terms and such other terms and conditions of such Award that are consistent with the Plan, as determined by the Committee in its sole discretion. Each Award Agreement shall be executed by the Participant and an officer of the Company authorized to sign such Award Agreement. All Awards shall be made conditional upon the Participant's acknowledgment, in writing in the Award Agreement or otherwise by acceptance of the Award, that all decisions and determinations of the Committee shall be final and binding on the Participant, his beneficiaries and any other person having or claiming an interest under such Award.

ARTICLE 4. OPTIONS

Award Agreement for Option Grant. Option grants shall be evidenced by an Award Agreement, pursuant to Section 3.4. All Award Agreements evidencing Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. All Award Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code.

Option Price. The price per share of the Common Stock subject to each Option shall be set by the Committee; provided, however, that (i) such price shall not be less than the par value of a share of Common Stock and shall not be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the date the Option is granted, (ii) in the case of Incentive Stock Options granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code), such price shall not be less than one hundred and ten percent (110%) of the Fair Market Value of a share of Common Stock on the date the Option is granted.

Qualification for Incentive Stock Options. The Committee may grant an Incentive Stock Option to an individual only if such person is an employee of the Company or is an employee of a Subsidiary as permitted under Section 422(a)(2) of the Code.

Change in Incentive Stock Option Grant. Any Incentive Stock Option granted under this Plan may be modified by the Committee to disqualify such Option from treatment as an Incentive Stock Option under Section 422 of the Code. To the extent that the aggregate Fair Market Value of shares of Common Stock with respect to which Incentive Stock Options (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by a Participant during any calendar year (under the Plan and all other Incentive Stock Option plans of the Company) exceeds one hundred thousand dollars ($100,000), such Options shall be treated as Non-Qualified Stock Options to the extent required or permitted by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 4.4, the Fair Market Value of shares of Common Stock shall be determined as of the time the Option with respect to such shares of Common Stock is granted.

Option Term. The term of an Option shall be set by the Committee in its discretion; provided, however, in the case of Incentive Stock Options, the term shall not be more than ten (10) years from the date the Incentive Stock Option is granted, or five (5) years from such date if the Incentive Stock Option is granted to an Employee then owning (within the meaning of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code). Such Incentive Stock Options shall be subject to Section 5.6, except as limited by the requirements of Section 422 of the Code and regulations and rulings thereunder applicable to Incentive Stock Options.

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Option Exercisability and Vesting.

The period during which Options in whole or in part become exercisable and vest in the Participant shall be set by the Committee and shall be as provided for in the Award Agreement. At any time after the grant of an Option, the Committee may, in its sole and absolute discretion and subject to whatever terms and conditions it selects, accelerate the period during which an Option becomes exercisable and vests.

Each Award Agreement shall set forth the extent to which, if any, the Participant shall have the right to exercise the Options after the Participant's Termination of Employment. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among the Options granted and may differentiate between the reasons for the Participants’ Termination of Employment.

At any time on or after the grant of an Option, the Committee may provide in an Award Agreement that the Participant may elect to exercise part or all of an Option before it otherwise has become exercisable. Any shares of Common Stock so purchased shall be restricted Common Stock and shall be subject to a repurchase right in favor of the Company during a specified restriction period, with the repurchase price equal to the lesser of (i) the price per share paid by the Participant for the Common Stock, or (ii) the Fair Market Value of such Common Stock at the time of repurchase, or such other restrictions as the Committee deems appropriate. The Participant shall have, unless otherwise provided by the Committee in the Award Agreement, all the rights of an owner of Common Stock, subject to the restrictions and provisions of his Award Agreement, including the right to vote such Common Stock and to receive all dividends and other distributions paid or made with respect to Common Stock.

Any Options which are not exercisable and vested immediately prior to a Change in Control, including shares of restricted Common Stock received upon the exercise of an Option as described in Section 4.6.3 above, shall, upon a Change in Control, become one hundred percent (100%) exercisable, if not previously exercised, and one hundred percent (100%) vested, unless the Award Agreement or the Participant's Employment Agreement provides otherwise.

ARTICLE 5. EXERCISE OF OPTIONS

Exercise. At any time and from time to time prior to the time when any exercisable Option or portion thereof becomes unexercisable under the Plan or the Award Agreement, such Option or portion thereof may be exercised in whole or in part; provided, however, that the Company shall not be required to issue fractional shares of Common Stock and the Committee may, by the terms of the Option, require any partial exercise to be with respect to a minimum number of shares of Common Stock.

Manner of Exercise. An exercisable Option, or any exercisable portion thereof, may be exercised solely by delivery to the Company of all of the following prior to the time when such Option or such portion becomes unexercisable under the Plan or the Award Agreement:

A written notice signed by the Participant or other person then entitled to exercise such Option or portion thereof, stating that such Option or portion is being exercised, provided such notice complies with all applicable rules established by the Committee from time to time.

Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended, and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, causing legends to be placed on certificates for shares of Common Stock and issuing stop-transfer notices to agents and registrars.

In the event that the Option shall be exercised pursuant to Section 12.1 by any person or persons other than the Participant, appropriate proof of the right of such person or persons to exercise the Option or portion thereof.

Unless otherwise determined by the Committee, the exercise price of an Option or portion thereof, including the amount of any withholding tax due, may be paid as follows:

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In cash or by check;

Through the delivery of shares of Common Stock owned by the Participant, duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof, provided, that shares of Common Stock used to exercise the Option have been held by the Participant for the requisite period of time to avoid adverse accounting consequences to the Company with respect to the Option;

Through the surrender of shares of Common Stock then issuable upon exercise of the Option having a Fair Market Value on the date of Option exercise equal to the aggregate exercise price of the Option or exercised portion thereof;

Through an exercise complying with Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System; or

Through any combination of the consideration provided for in this Section 5.2.4 or such other method approved by the Committee consistent with applicable law.

Conditions to Issuance of Common Stock. The Company shall not be required to issue or deliver any certificate or other indicia evidencing ownership of shares of Common Stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions:

The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its sole discretion, determine to be necessary or advisable.

The lapse of such reasonable period of time following the exercise of the Option as the Committee may establish from time to time for reasons of administrative convenience.

The receipt by the Company of full payment for such Common Stock, including payment of any applicable withholding tax.

The Participant agreeing to the terms and conditions of the Plan and the Award Agreement.

Rights as Stockholders. The holders of Options shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares of Common Stock purchasable upon the exercise of any part of an Option unless and until certificates or other indicia representing such shares of Common Stock have been issued by the Company to such holders.

Ownership and Transfer Restrictions. The Committee, in its absolute discretion, may impose at the time of grant such restrictions on the ownership and transferability of the shares of Common Stock purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the Award Agreement and may be referred to on the certificates or other indicia evidencing such shares of Common Stock.

Limitations on Exercise of Options.

Vested Incentive Stock Options may not be exercised after the earliest of (i) their expiration date, (ii) twelve (12) months from the date of the Participant's Termination of Employment by reason of his death, (iii) twelve (12) months from the date of the Participant's Termination of Employment by reason of his Permanent Disability, or (iv) the expiration of three (3) months from the date of the Participant's Termination of Employment for any reason other than such Participant's death or Permanent Disability, unless the Participant dies within said three (3) month period and the Award Agreement or the Committee permits later exercise. Leaves of absence for less than ninety (90) days shall not cause a Termination of Employment for purposes of Incentive Stock Options.

Non-Qualified Stock Options may be exercised up until their expiration date, unless the Committee provides otherwise in the Award Agreement.

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ARTICLE 6. STOCK AWARDS

Award Agreement. Awards of Restricted Common Stock, Restricted Stock Units and Deferred Stock Units shall be evidenced by an Award Agreement, pursuant to Section 3.4. All Award Agreements evidencing Restricted Common Stock, Restricted Stock Units and Deferred Stock Units intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code.

Awards of Restricted Common Stock, Restricted Stock Units and Deferred Stock Units.

The Committee may from time to time, in its absolute discretion, consistent with this Plan:

determine which Employees, Non-Employee Directors and Consultants shall receive Stock Awards;

determine the aggregate number of shares of Common Stock to be awarded as Stock Awards to Employees, Non-Employee Directors and Consultants;

determine the terms and conditions applicable to such Stock Awards; and

determine when the restrictions, if any, lapse.

The Committee may establish the purchase price, if any, and form of payment for a Stock Award. If the Committee establishes a purchase price, the purchase price shall be no less than the par value of the Common Stock to be purchased, unless otherwise permitted by applicable state law.

Upon the selection of an Employee, Non-Employee Director or Consultant to be awarded Restricted Common Stock, the Committee shall instruct the Secretary of the Company to issue such Restricted Common Stock and may impose such conditions on the issuance of such Restricted Common Stock as it deems appropriate, subject to the provisions of Article 11.

Upon the selection of an Employee, Non-Employee Director or Consultant to be awarded Restricted Stock Units or Deferred Stock Units, the Committee shall instruct the Secretary of the Company to establish a Stock Award Account on behalf of each such Participant. The Committee may impose such conditions on the issuance of such Restricted Stock Units or Deferred Stock Units as it deems appropriate.

Awards of Restricted Common Stock and Restricted Stock Units shall vest pursuant to the Award Agreement.

Upon the occurrence of a Change in Control, all Restricted Common Stock and Restricted Stock Units shall become one hundred percent (100%) vested, unless the Participant’s Award Agreement or the Participant’s Employment Agreement provides otherwise.

A Participant shall be one hundred percent (100%) vested in the number of Deferred Stock Units held in his or her Stock Award Account at all times. The term for which the Deferred Stock Units shall be deferred shall be provided for in the Award Agreement.

Rights as Stockholders.

Upon delivery of the shares of Restricted Common Stock to the Participant or the escrow holder pursuant to Section 6.7, the Participant shall have, unless otherwise provided by the Committee in the Award Agreement, all the rights of an owner of Common Stock, subject to the restrictions and provisions of his Award Agreement; provided, however, that in the discretion of the Committee, any extraordinary distributions with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.4.

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Nothing in this Plan shall be construed as giving a Participant who receives an Award of Restricted Stock Units or Deferred Stock Units any of the rights of an owner of Common Stock unless and until shares of Common Stock are issued and transferred to the Participant in accordance with the terms of the Plan and the Award Agreement. Notwithstanding the foregoing, in the event that any dividend is paid by the Company with respect to the Common Stock (whether in the form of cash, Common Stock or other property), then the Committee shall, in the manner it deems equitable or appropriate, adjust the number of Restricted Stock Units or Deferred Stock Units allocated to each Participant's Stock Award Account to reflect such dividend.

Restriction. All shares of Restricted Common Stock issued under this Plan (including any Common Stock received as a result of stock dividends, stock splits or any other form of recapitalization, if any) shall at the time of the Award, in the terms of each individual Award Agreement, be subject to such restrictions as the Committee shall, in its sole discretion, determine, which restrictions may include, without limitation, restrictions concerning voting rights, transferability, vesting, Company performance and individual performance; provided, however, that by action taken subsequent to the time shares of Restricted Common Stock are issued, the Committee may, on such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of the Award Agreement. Restricted Common Stock may not be sold or encumbered until all restrictions are terminated or expire.

Lapse of Restrictions. The restrictions on Awards of Restricted Common Stock and Restricted Stock Units shall lapse in accordance with the terms of the Award Agreement. Each Award Agreement shall set forth whether shares of Restricted Common Stock or Restricted Stock Units then subject to restrictions are forfeited or if the restrictions shall lapse upon the Participant's Termination of Employment. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among the Awards of Restricted Common Stock or Restricted Stock Units and may differentiate between the reasons for the Participant's Termination of Employment.

Repurchase of Restricted Common Stock. The Committee may provide in the terms of the Award Agreement awarding Restricted Common Stock that the Company shall have call rights, a right of first offer or a right of refusal regarding shares of Restricted Common Stock then subject to restrictions.

Escrow. The Company may appoint an escrow holder to retain physical custody of each certificate or control of each other indicia representing shares of Restricted Common Stock until all of the restrictions imposed under the Award Agreement with respect to the shares of Common Stock evidenced by such certificate expire or shall have been removed.

Legend. In order to enforce the restrictions imposed upon shares of Restricted Common Stock hereunder, the Committee shall cause a legend or restrictions to be placed on certificates of Restricted Common Stock that are still subject to restrictions under Award Agreements, which legend or restrictions shall make appropriate reference to the conditions imposed thereby.

Conversion. Upon vesting in the case of Restricted Stock Units, and upon the lapse of the deferral period in the case of Deferred Stock Units, such Restricted Stock Units or Deferred Stock Units shall be converted into an equivalent number of shares of Common Stock that will be distributed to the Participant, or in the case of the Participant's death, to the Participant's legal representative. Such distribution shall be evidenced by a stock certificate, appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company, or other appropriate means as determined by the Company. All distributions shall be made no later than March 15th of the calendar year following the year, with respect to the Restricted Stock Units, in which such Restricted Stock Units vest or, with respect to Deferred Stock Units, in which the deferral period lapses. In the event ownership or issuance of the Common Stock is not feasible due to applicable exchange controls, securities regulations, tax laws or other provisions of applicable law, as determined by the Company in its sole discretion, the Participant, or, in the case of the Participant's death, the Participant's legal representative, shall receive cash proceeds in an amount equal to the value of the shares of Common Stock otherwise distributable to the Participant, net of tax withholding as provided in Section 12.5.

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ARTICLE 7. STOCK APPRECIATION RIGHTS

Award Agreement for SARs. Awards of SARs shall be evidenced by an Award Agreement, pursuant to Section 3.4. All Award Agreements evidencing SARs intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code.

General Requirements. The Committee may grant SARs separately or in tandem with any Option (for all or a portion of the applicable Option). The Committee shall determine which Employees, Non-Employee Directors and Consultants shall receive Awards of SARs and the amount of such Awards.

Base Amount. The Committee shall establish the base amount of the SAR at the time the SAR is granted. The base amount of each SAR shall be equal to the price per share of the related Option or, if there is no related Option, the Fair Market Value of a share of Common Stock as of the date of grant of the SAR, unless the Committee determines a higher base amount.

Tandem SARs. Tandem SARs may be granted either at the time the Option is granted or at any time thereafter while the Option remains outstanding; provided, however, that, in the case of an Incentive Stock Option, SARs may be granted only at the time of grant of the Incentive Stock Option. In the case of tandem SARs, the number of SARs granted to an Employee or Consultant that shall be exercisable during a specified period shall not exceed the number of shares of Common Stock that the Employee, Non-Employee Director or Consultant may purchase upon the exercise of the related Option during such period. Upon the exercise of an Option, the SARs relating to the Common Stock covered by such Option shall terminate. Upon the exercise of the SARs, the related Option shall terminate to the extent of an equal number of shares of Common Stock.

SAR Exercisability.

The period during which SARs in whole or in part become exercisable shall be set by the Committee and shall be as provided for in the Award Agreement. At any time after the grant of an SAR, the Committee may, in its sole and absolute discretion and subject to whatever terms and conditions its selects, accelerate the period during which the SAR becomes exercisable.

In each Award Agreement, the Committee shall indicate whether the portion of the SAR, if any, that remains non-exercisable upon the Participant’s Termination of Employment with the Company is forfeited. In so specifying, the Committee may differentiate between the reason for the Participant’s Termination of Employment.

Value of SARs. When a Participant exercises an SAR, the Participant shall receive in settlement of such SAR an amount equal to the value of the stock appreciation for the number of SARs exercised payable in cash, Common Stock or a combination thereof. The stock appreciation for an SAR is the amount by which the Fair Market Value of the underlying Common Stock on the date of exercise of the SAR exceeds the base amount of the SAR.

Form of Payment. The Committee shall determine whether the appreciation in an SAR shall be paid in the form of cash, Common Stock or a combination of the two, in such proportion as the Committee deems appropriate. For purposes of calculating the number of shares of Common Stock to be received, shares of Common Stock shall be valued at their Fair Market Value on the date of exercise of the SAR. If shares of Common Stock are received upon exercise of a SAR, cash shall be delivered in lieu of any fractional shares of Common Stock.

ARTICLE 8. PERFORMANCE UNITS

Award Agreement for Performance Units. Awards of Performance Units shall be evidenced by an Award Agreement, pursuant to Section 3.4. All Award Agreements evidencing Performance Units intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code.

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General Requirements. Each Performance Unit shall represent the right of the Participant to receive an amount based on the value of the Performance Unit, if performance goals established by the Committee are met. A Performance Unit shall be based on the Fair Market Value of a share of Common Stock or such other measurement base as the Committee deems appropriate. The Committee shall determine and set forth in the Award Agreement the number of Performance Units to be granted and the requirements applicable to such Performance Units. The Committee shall determine which Employees and Consultants shall receive Awards of a Performance Unit and the amount of such Awards.

Performance Period and Performance Goals. When Performance Units are granted, the Committee shall establish the performance period during which performance shall be measured (the "Performance Period"), performance goals applicable to the Performance Units ("Performance Goals") and such other conditions of the Award as the Committee deems appropriate. Performance Goals may relate to the financial performance of the Company or its Subsidiaries, the performance of Common Stock, individual performance or such other criteria as the Committee deems appropriate.

Payment With Respect to Performance Units. At the end of each Performance Period, the Committee shall determine to what extent the Performance Goals and other conditions of the Performance Units are met, the value of the Performance Units (if applicable), and the amount, if any, to be paid with respect to the Performance Units. Payments with respect to Performance Units shall be made in cash, in Common Stock or in a combination of the two, as determined by the Committee. All payments shall be made no later than March 15 of the calendar year following the year in which the Performance Period ends.

ARTICLE 9. DIVIDEND EQUIVALENTS

Grant of Dividend Equivalents. The Committee is hereby authorized, in its sole discretion, to grant Dividend Equivalents to Employees, Non-Employee Directors and Consultants subject to such terms and conditions as may be selected by the Committee. Dividend Equivalents shall entitle the Participant to receive payments (in cash, Common Stock, other Awards or other property as determined in the discretion of the Committee) equivalent to the amount of cash dividends paid by the Company to holders of Common Stock. Dividend Equivalents may be granted on a free-standing basis or in connection with another Award. Dividend Equivalents granted in connection with another Award may be granted with respect to all or a portion of the number of shares of Common Stock subject to such Award. The Committee may provide that the Dividend Equivalents be paid or distributed when accrued or be deemed to have been reinvested in additional shares of Common Stock or otherwise reinvested; provided, however, that the terms of any reinvestment of Dividend Equivalents must comply with all applicable laws, rules and regulations, including, without limitation, Section 409A of the Code, and Dividend Equivalents (other than free-standing Dividend Equivalents) shall be subject to all conditions and restrictions of the underlying Awards to which they relate, unless otherwise provided by the Committee. Notwithstanding the foregoing, the Committee may not grant Dividend Equivalents to Participants in connection with grants of Options or SARs to such Participants.

ARTICLE 10. OTHER STOCK-BASED AWARDS

Grant of Other Stock-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Employees, Non-Employee Directors and Consultants such other Awards that are payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of Common Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, shares of Common Stock awarded purely as a "bonus" and not subject to any restrictions or conditions, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares of Common Stock and other Awards valued by reference to book value of shares of Common Stock or the value of securities of or the performance of specified Subsidiaries. The Committee shall determine the terms and conditions of such Awards, which shall be evidenced an Award Agreement, pursuant to Section 3.4.

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ARTICLE 11. ADMINISTRATION

Committee. The Plan shall be administered by the Compensation Committee of the Board. The Board may remove members, add members, and fill vacancies on the Committee from time to time, all in accordance with the Company's Certificate of Incorporation, Bylaws, and with applicable law. The majority vote of the Committee, or for acts taken in writing without a meeting by the unanimous written consent of the members of the Committee, shall be valid acts of the Committee. Committee members may resign at any time by delivering written notice to the Board.

Duties and Powers of Committee. It shall be the duty of the Committee to conduct the general administration of this Plan in accordance with its provisions. The Committee shall have the power to designate the Employees, Non-Employee Directors and Consultants who shall participate in the Plan and to construe and interpret this Plan and the agreements pursuant to which Options, Restricted Common Stock, Restricted Stock Units, Deferred Stock Units, SARs, Dividend Equivalents, Performance Units or Other Stock-Based Awards are granted or awarded, and to adopt such rules for the administration, interpretation, and application of this Plan as are consistent therewith and to interpret, amend or revoke any such rules. Any such Award under this Plan need not be the same with respect to each Participant. Any such interpretations and rules with respect to Incentive Stock Options shall be consistent with the provisions of Section 422 of the Code. All determinations and decisions made by the Committee pursuant to the provisions of the Plan shall be final, conclusive and binding.

Compensation; Professional Assistance; Good Faith Actions. Unless otherwise determined by the Board, members of the Committee shall receive no compensation for their services pursuant to this Plan. All expenses and liabilities which members of the Committee incur in connection with the administration of this Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers, or other persons. The Committee, the Company and the Company's officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee or the Board in good faith shall be final and binding upon all Participants, the Company and all other interested persons. No members of the Committee or Board shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan or any Awards made hereunder, and all members of the Committee and the Board shall be fully protected by the Company in respect of any such action, determination or interpretation.

Delegation by the Committee. The Committee may, from time to time, delegate, to one (1) or more specified officers of the Company, the power and authority to grant or document Awards under the Plan to specified groups of eligible individuals, subject to such restrictions and conditions as the Committee, in its sole discretion, may impose. The delegation shall be as broad or as narrow as the Committee shall determine, provided that the delegation must specify any limitations on the authority required by the Delaware General Corporation Law and The Nasdaq Stock Market LLC listing rules. To the extent that the Committee has delegated the authority to determine certain terms and conditions of an Award, all references in the Plan to the Committee’s exercise of authority in determining such terms and conditions shall be construed to include the officer or officers to whom the Committee has delegated the power and authority to make such determination. However, there shall be no delegation of authority (a) to grant awards to any Section 16 person, (b) that will cause Awards intended to qualify as “performance-based” compensation under Code Section 162(m) to fail to so qualify, (c) that will result in a related-person transaction with an executive officer required to be disclosed under Item 404(a) of Regulation S-K (in accordance with Instruction 5.a.ii. thereunder) under the Exchange Act, or (d) that is not permitted under Sections 152 and 157 and other applicable provisions of the Delaware General Corporation Law. Any such Awards shall be made on the form of Award Agreement most recently approved for use by the Committee, unless the resolutions delegating the authority permit the use of a different form of Award Agreement approved by the Committee. Such delegation may be revoked at any time by the Committee.

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ARTICLE 12. MISCELLANEOUS PROVISIONS

Transferability.

No Award or any right therein or part thereof, shall be liable for the debts, contracts or engagements of the Participant or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means, whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that nothing in this Section 12.1.1 shall prevent transfers by will or by the applicable laws of descent and distribution or as permitted in Section 12.1.2 below. The Committee shall not be required to accelerate the exercisability of an Award or otherwise take any action pursuant to a divorce or similar proceeding in the event Participant's spouse is determined to have acquired a community property interest in all or any portion of an Award. Except as provided below, during the lifetime of the Participant, only he may exercise an Award (or any portion thereof) granted to him under the Plan. After the death of the Participant, any exercisable portion of an Award, prior to the time when such portion becomes unexercisable under the Plan or the applicable Award Agreement or other agreement, may be exercised by his personal representative or by any person empowered to do so under the deceased Participant's will or under the then applicable laws of descent and distribution.

Notwithstanding the foregoing, the Committee may provide in an Award Agreement, or amend an otherwise outstanding Award Agreement to provide, that a Participant may transfer an Award that is not an Incentive Stock Option or an SAR that is granted in relation to an Incentive Stock Option to family members, or one or more trusts or other entities for the benefit of or owned by family members, consistent with applicable securities laws, according to such terms as the Committee may determine; provided that the Participant receives no consideration for the transfer of such an Award and the transferred Award shall continue to be subject to the same terms and conditions as were applicable to the Award immediately before the transfer and shall be exercisable by the transferee according to the same terms as applied to the Participant.

Amendment, Suspension or Termination of this Plan.

Except as otherwise provided in this Section 12.2, this Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board; provided, however, no action of the Board may be taken that would otherwise require stockholder approval as a matter of applicable law, regulation or rule, without the consent of the stockholders. In no event may any Option or SAR be amended, other than pursuant to Section 12.3, to decrease the exercise or grant price thereof, be cancelled in conjunction with the grant of any new Option or SAR with a lower exercise or grant price, or otherwise be subject to any action that would be treated, under generally accepted accounting principles, as a "repricing" of such Option or SAR, unless the stockholders of the Company provide prior approval. No amendment, suspension or termination of this Plan shall impair any rights or obligations under any Award theretofore made to a Participant, unless such right has been reserved in the Plan or the Award Agreement, without the consent of the Participant holding such Award. No Award may be made during any period of suspension or after termination of this Plan. In no event may any Award be made under this Plan after December 31, 2019.

Notwithstanding the foregoing, the Board or the Committee may take any action necessary to comply with a change in applicable law, irrespective of the status of any Award as vested or unvested, exercisable or unexercisable, at the time of such change in applicable law.

Changes in Common Stock or Assets of the Company, Acquisition or Liquidation of the Company and Other Corporate Events.

In the event that any dividend (other than an ordinary cash dividend) or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split up, spin-off, combination, repurchase or other similar transaction or event affects the Common Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of the following:

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the maximum number of shares of Common Stock available for Awards;

the maximum number of shares of Common Stock subject to the Plan;

the number and kind of Company stock with respect to which an Award may be made under the Plan;

the number and kind of Company stock subject to an outstanding Award; and

the exercise price or purchase price with respect to any Award.

In addition, in the event of any merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company or any unusual or nonrecurring transactions or events affecting the Company or the financial statements of the Company, or of changes in applicable laws, regulations, or accounting principles, the Committee in its discretion is hereby authorized to take any one or more of the following actions whenever the Committee determines, in its sole discretion, that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award or right under this Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles:

the Committee may provide, by the terms of the Award Agreement or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Participant's request, for (i) the purchase of any such Award for the payment of an amount of cash equal to the amount that could have been attained upon the exercise of such Award or realization of the Participant's rights had such Award been currently exercisable, payable, fully vested or the restrictions lapsed, or (ii) the replacement of such Award with other rights or property selected by the Committee;

the Committee may provide, by the terms of such Award Agreement or by action taken prior to the occurrence of such transaction or event, that the Award cannot be exercised after such event;

the Committee may provide, by the terms of such Award or by action taken prior to the occurrence of such transaction or event, that for a specified period of time prior to such transaction or event such Award shall be exercisable, notwithstanding anything to the contrary in Section 4.6 or the provisions of such Award;

the Committee may provide, by the terms of such Award or by action taken prior to the occurrence of such transaction or event, that upon such event, such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar Awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices;

the Committee may make adjustments in the number, type and kind of shares of Common Stock subject to outstanding Options, Restricted Common Stock, Restricted Stock Units, Deferred Stock Units, SARs and Performance Units and in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding Awards, and rights and awards which may be granted in the future; and

the Committee may provide, by the terms of an Award of Restricted Common Stock or Restricted Stock Units or by action taken prior to the occurrence of such event, that for a specified period of time prior to such event, the restrictions imposed under an Award Agreement upon some or all shares of the Restricted Common Stock or the Restricted Stock Units may be terminated, and some or all shares of such Restricted Common Stock or some or all of such Restricted Stock Units may cease to be subject to forfeiture under Section 6.5 or repurchase under Section 6.6 after such event.

Subject to Section 12.7, the Committee may, in its sole discretion, at the time of grant, include such further provisions and limitations in any Award Agreement or certificate, as it may deem appropriate and in the best interests of the Company; provided, however, that no such provisions or limitations shall be contrary to the terms of the Participant's Employment Agreement or the terms of this Plan.

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Notwithstanding the foregoing, no action pursuant to this Section 12.3 shall be taken that is specifically prohibited under applicable law, the rules and regulations of any governing governmental agency or national securities exchange, or the terms of the Participant's Employment Agreement, and no adjustment to an Option or SAR shall be made to the extent the same constitutes a "modification" within the meaning of Section 424(h)(3) of the Code, Regulation §1.424-1(a) thereunder or Section 409(A) of the Code or the regulations thereunder.

Continued Employment. Nothing in this Plan or in any Award Agreement hereunder shall confer upon any Participant any right to continue his employment, consulting or similar relationship with the Company, whether as an employee or consultant or otherwise, or shall interfere with or restrict in any way the rights of the Company, which are hereby expressly reserved, to discharge or terminate the relationship with any Participant at any time for any reason whatsoever, subject to the terms of any Employment Agreement entered into by the Participant and the Company.

Tax Withholding. The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Participant of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting, exercise or lapse of any restriction of any Option, Restricted Common Stock, Restricted Stock Unit, Deferred Stock Unit, SAR or Performance Unit. The Committee shall be authorized to establish procedures for election by Participants to satisfy such obligation for the payment of such taxes (i) by delivery of, or transfer of, shares of Common Stock to the Company or (ii) by directing the Company to retain shares of Common Stock otherwise deliverable under an Award. Shares of Common Stock withheld or delivered in accordance with this Section 12.5 shall be valued at Fair Market Value as of such date as may be specified in procedures established by the Committee.

Forfeiture Provisions. Pursuant to its general authority to determine the terms and conditions applicable to Awards, the Committee shall have the right to provide, in the terms of such Award, or to require the Participant to agree by separate written instrument, that the Award shall terminate and any unexercised portion of such Award (whether or not vested) shall be forfeited if (i) a Termination of Employment occurs prior to a specified date, or within a specified time period following receipt or exercise of the Award, (ii) the Participant at any time, or during a specified time period, engages in any activity in competition with the Company, or which is inimical, contrary or harmful to the interests of the Company, as further defined by the Committee or as specified in the Participant's Employment Agreement, or (iii) the Company terminates the Participant with or without cause.

Limitations Applicable to Section 16 Persons and Performance-Based Compensation. Notwithstanding any other provision of this Plan, any Option, Restricted Common Stock, Restricted Stock Unit, Deferred Stock Unit, SARs, Dividend Equivalents, Performance Units or Other Stock-Based Awards granted or awarded to any individual who is then subject to Section 16 of the Exchange Act shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 under the Exchange Act). To the extent permitted by applicable law, Options granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. Furthermore, notwithstanding any other provision of this Plan to the contrary, any Award that is intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements.

Effect of Plan Upon Option and Compensation Plans. The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company. Nothing in this Plan shall be construed to limit the right of the Company (i) to establish any other forms of incentives or compensation for Employees, Non-Employee Directors and Consultants, or (ii) to grant or assume options or other rights otherwise than under this Plan in connection with any proper corporate purpose including but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, limited liability company, firm or association.

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Restrictions. At the time of any Award, the Committee may provide in connection with, and as condition of, any such Award, or the exercise or vesting thereunder, that the shares of Common Stock received as a result of such Award, exercise, or vesting shall be subject to a right of first refusal, pursuant to which the Participant shall be required to offer to the Company any shares that the Participant wishes to sell, or a right of the Company to repurchase such shares of Common Stock, with the price being the then Fair Market Value of the Common Stock, subject to such other terms and conditions as the Committee may specify at the time of such Award.

Compliance with Laws. This Plan, the granting and vesting of Awards under this Plan and the issuance and delivery of shares of Common Stock and the payment of money under this Plan or under Awards awarded hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. No Award under this Plan (or modification thereof) shall provide for the deferral of compensation that violates Section 409A of the Code. If any provision of the Plan or an Award Agreement contravenes any regulations or Treasury guidance promulgated under Section 409A of the Code or could cause an Award to be subject to the interest and penalties under Section 409A of the Code, such provision of the Plan or any Award Agreement shall be modified to maintain, to the maximum extent practicable, the original intent of the applicable provision without violating the provisions of Section 409A of the Code. Moreover, any discretionary authority that the Board or the Committee may have pursuant to the Plan shall not be applicable to an Award that is subject to Section 409A of the Code to the extent such discretionary authority will contravene Section 409A of the Code.

Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Plan.

Governing Law. This Plan and any agreements hereunder shall be administered, interpreted and enforced under the laws of the State of Texas, without regard to that state’s conflicts of laws rules.

Effective Date. The Atrion Corporation 2006 Equity Incentive Plan first became effective on May 22, 2006. This Amended and Restated Atrion Corporation 2006 Equity Incentive Plan shall be effective on the date it is approved by the stockholders of the Company.

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EX-31.1

  Exhibit 31.1

Chief Executive Officer Certification

I, David A. Battat, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Atrion Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over the financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 7, 2018                             

/s/ David A. Battat

David A. Battat

President and

Chief Executive Officer

EX-31.2

  Exhibit 31.2

Chief Financial Officer Certification

I, Jeffery Strickland, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Atrion Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over the financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 7, 2018           

/s/ Jeffery Strickland

Jeffery Strickland

Vice President and

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES – OXLEY ACT OF 2002

Pursuant to 18 U.S.C. § 1350, the undersigned officer of Atrion Corporation (the “Company”), hereby certifies, to such officer’s knowledge, that the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 7, 2018                         

/s/ David A. Battat

David A. Battat

President and Chief Executive Officer

The foregoing certification is made solely for purpose of 18 U.S.C. § 1350 and not for any other purpose.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES – OXLEY ACT OF 2002

Pursuant to 18 U.S.C. § 1350, the undersigned officer of Atrion Corporation (the “Company”), hereby certifies, to such officer’s knowledge, that the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 7, 2018                   

/s/ Jeffery Strickland

Jeffery Strickland

Vice President and

Chief Financial Officer

The foregoing certification is made solely for purpose of 18 U.S.C. § 1350 and not for any other purpose.

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Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2018	Jul. 25, 2018
Document And Entity Information [Abstract]
Entity Registrant Name	ATRION CORP
Entity Central Index Key	0000701288
Document Type	10-Q
Document Period End Date	Jun. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		1,852,756
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2018

XML

Consolidated Statements of Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Income Statement [Abstract]
Revenues	$ 38,847	$ 36,164	$ 78,248	$ 74,669
Cost of goods sold	19,624	18,470	40,074	38,344
Gross profit	19,223	17,694	38,174	36,325
Operating expenses:
Selling	2,045	1,864	4,064	3,612
General and administrative	4,309	4,287	8,537	8,304
Research and development	1,603	1,368	2,941	2,907
Operating Expenses, Total	7,957	7,519	15,542	14,823
Operating income	11,266	10,175	22,632	21,502
Interest and dividend income	411	370	742	519
Other investment income/(losses)	(408)	0	(1,197)	1
Nonoperating Income	3	370	(455)	520
Income before provision for income taxes	11,269	10,545	22,177	22,022
Provision for income taxes	(2,472)	(519)	(4,892)	(2,046)
Net income	$ 8,797	$ 10,026	$ 17,285	$ 19,976
Net income per basic share	$ 4.75	$ 5.44	$ 9.33	$ 10.86
Weighted average basic shares outstanding	1,852	1,844	1,853	1,839
Net income per diluted share	$ 4.74	$ 5.40	$ 9.31	$ 10.76
Weighted average diluted shares outstanding	1,857	1,858	1,856	1,856
Dividends per common share	$ 1.20	$ 1.05	$ 2.40	$ 2.10

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Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Consolidated Statements Of Comprehensive Income
Net Income	$ 8,797	$ 10,026	$ 17,285	$ 19,976
Other Comprehensive Income: Unrealized income on investments, net of tax expense of $204 and $36 in 2017	0	379	0	66
Comprehensive Income	$ 8,797	$ 10,405	$ 17,285	$ 20,042

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Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 36,063	$ 30,136
Short-term investments	24,176	35,468
Accounts receivable	18,269	17,076
Inventories	32,503	29,354
Prepaid expenses and other current assets	2,919	3,199
Total Current Assets	113,930	115,233
Long-term investments	22,208	9,136
Property, plant and equipment	174,322	167,080
Less accumulated depreciation and amortization	104,750	100,711
Property plant and equipment net	69,572	66,369
Other assets and deferred charges:
Patents	1,718	1,778
Goodwill	9,730	9,730
Other	1,624	1,534
Prepaid Expense and Other Assets, Noncurrent, Total	13,072	13,042
Total assets	218,782	203,780
Current liabilities:
Accounts payable and accrued liabilities	9,738	8,876
Accrued income and other taxes	593	746
Total Current Liabilities	10,331	9,622
Line of credit
Other non-current liabilities	10,394	9,770
Stockholders' equity:
Common stock, par value $0.10 per share; authorized 10,000 shares, issued 3,420 shares	342	342
Paid-in capital	49,635	48,730
Accumulated other comprehensive loss	0	(1,215)
Retained earnings	279,807	268,194
Treasury shares,1,567 at June 30, 2018 and 1,568 at December 31, 2017, at cost	(131,727)	(131,663)
Total stockholders' equity	198,057	184,388
Total liabilities and stockholders' equity	$ 218,782	$ 203,780

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Consolidated Balance Sheets (Parenthetical) - $ / shares	Jun. 30, 2018	Dec. 31, 2017
Statement of Financial Position [Abstract]
Common stock, par value	$ 0.10	$ 0.10
Common stock, authorized	10,000	10,000
Common stock, issued	3,420	3,420
Treasury shares, shares	1,567	1,568

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Cash flows from operating activities:
Net income	$ 17,285	$ 19,976
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,455	4,223
Deferred income taxes	(235)	1,009
Stock-based compensation	917	903
Net change in unrealized gains and losses on investments	1,197	0
Net change in accrued interest, premiums, and discounts on investments	(125)	(82)
Other	3	(2)
Total adjustments	23,497	26,027
Changes in operating assets and liabilities:
Accounts receivable	(1,193)	(2,524)
Inventories	(3,149)	(950)
Prepaid expenses	280	(2,841)
Other non-current assets	(90)	81
Accounts payable and accrued liabilities	862	(552)
Accrued income and other taxes	(153)	862
Other non-current liabilities	859	39
Net Cash Provided by (Used in) Operating Activities, Continuing Operations, Total	20,913	20,142
Cash flows from investing activities:
Property, plant and equipment additions	(7,598)	(5,422)
Purchase of investments	(26,887)	(21,911)
Proceeds from maturities of investments	24,035	19,000
Net Cash Provided by (Used in) Investing Activities, Continuing Operations, Total	(10,450)	(8,333)
Cash flows from financing activities:
Shares tendered for employees’ withholding taxes on stock-based compensation	(90)	(7,735)
Dividends paid	(4,446)	(3,873)
Net Cash Provided by (Used in) Financing Activities, Continuing Operations, Total	(4,536)	(11,608)
Net change in cash and cash equivalents	5,927	201
Cash and cash equivalents at beginning of period	30,136	20,022
Cash and cash equivalents at end of period	36,063	20,223
Cash paid for:
Income taxes	5,592	2,295
Non-cash financing activities:
Non-cash effect of stock option exercises	$ 0	$ 10,237

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Consolidated Statements of Shareholders' Equity - 6 months ended Jun. 30, 2018 - USD ($) $ in Thousands	Common Stock	Treasury Stock	Additional Paid-In Capital	Other Comprehensive Income (Loss)	Retained Earnings	Total
Beginning Balance, shares at Dec. 31, 2017	1,852	1,568
Beginning Balance, amount at Dec. 31, 2017	$ 342	$ (131,663)	$ 48,730	$ (1,215)	$ 268,194	$ 184,388
Net income					17,285	17,285
Reclass from adopting ASU 2016-01				1,215	(1,215)	0
Stock-based compensation transactions, shares	1	(1)
Stock-based compensation transactions, amount		$ 26	905			931
Shares surrendered in stock transactions		$ (90)				(90)
Dividends					(4,457)	(4,457)
Ending Balance, Shares at Jun. 30, 2018	1,853	1,567
Ending Balance, Amount at Jun. 30, 2018	$ 342	$ (131,727)	$ 49,635	$ 0	$ 279,807	$ 198,057

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1. Basis of Presentation

6 Months Ended

Jun. 30, 2018

Accounting Policies [Abstract]

Basis of Presentation

The accompanying unaudited consolidated financial statements of Atrion Corporation and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these statements include all normal and recurring adjustments necessary to present a fair statement of our consolidated results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. Preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and notes. Actual results could differ from those estimates. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 ("2017 Form 10-K"). References herein to "Atrion," the "Company," "we," "our," and "us" refer to Atrion Corporation and its subsidiaries.

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2. Inventories

6 Months Ended

Jun. 30, 2018

Inventory Disclosure [Abstract]

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined by using the first-in, first-out method. The following table details the major components of inventories (in thousands):

	June 30,		December 31,
	2018		2017
Raw materials	$	14,267	$	13,545
Work in process		7,837		6,647
Finished goods		10,399		9,162
Total inventories	$	32,503	$	29,354

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3. Income per share

6 Months Ended

Jun. 30, 2018

Earnings Per Share [Abstract]

Income per share

The following is the computation for basic and diluted income per share:

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands, except per share amounts)
Net income	$	8,797	$	10,026	$	17,285	$	19,976
Weighted average basic shares outstanding		1,852		1,844		1,853		1,839
Add: Effect of dilutive securities		5		14		3		17
Weighted average diluted shares outstanding		1,857		1,858		1,856		1,856
Earnings per share:
Basic	$	4.75	$	5.44	$	9.33	$	10.86
Diluted	$	4.74	$	5.40	$	9.31	$	10.76

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. Dilutive securities representing 1,200and 1,027 shares of common stock for the quarters ended June 30, 2018 and 2017, respectively, were excluded from the computation of weighted average diluted shares outstanding because their effect would have been anti-dilutive.

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4. Investments

6 Months Ended

Jun. 30, 2018

Investments Schedule [Abstract]

Investments

As of June 30, 2018, we held investments in certificates of deposit, commercial paper, bonds, mutual funds and equity securities that are required to be measured for disclosure purposes at fair value on a recurring basis. The certificates of deposit, commercial paper and bonds are considered held-to-maturity and are recorded at amortized cost in the accompanying consolidated balance sheet. The equity securities and mutual funds are recorded at fair value in the accompanying consolidated balance sheet. 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):

	Gross Unrealized
	Level		Cost		Gains		Losses			Fair Value
As of June 30, 2018:
Short-term Investments
Certificates of deposit		2		2,021	$	--	$	(4	)	$	2,017
Commercial paper		2		10,977	$	--	$	(9	)	$	10,968
Bonds		2		11,178	$	--	$	(29	)	$	11,149
Long-term Investments
Bonds		2		18,781	$	--	$	(259	)	$	18,522
Mutual funds		1		485	$	--	$	(4	)	$	481
Equity investments		2		5,675	$	--	$	(2,729	)	$	2,946
As of December 31, 2017:
Short-term Investments
Certificates of deposit		2		4,020	$	--	$	(3	)	$	4,017
Commercial paper		2		31,220	$	26	$	(38	)	$	31,208
Bonds		2		6	$	--	$	--		$	6
Mutual funds		1		219	$	3	$	--		$	222
Long-term Investments
Bonds		2		5,000	$	--	$	(75	)	$	4,925
Equity investments		2		5,675	$	--	$	(1,539	)	$	4,136

The above long-term bonds represent investments in various issuers at June 30, 2018. The unrealized losses for these investments relate to a rise in interest rates which resulted in a lower market price for those securities. Only one of these bond investments has been in a loss position for more than 12 months.

The certificate of deposit matures in 5.2 months. The commercial paper securities have maturities ranging from 0.2 months to 3.4 months. The bonds have maturities ranging from 0.4 months to 53.5 months.

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5. Patents and Licenses

6 Months Ended

Jun. 30, 2018

Patents And Licenses

Patents and Licenses

Purchased patents and license fees 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):

June 30, 2018						December 31, 2017
Weighted Average Original Life (years)		Gross Carrying Amount		Accumulated Amortization		Weighted Average Original Life (years)		Gross Carrying Amount		Accumulated Amortization
	15.67	$	13,840	$	12,122		15.67	$	13,840	$	12,062

Aggregate amortization expense for patents and licenses was $30,000 for the three months ended June 30, 2018 and 2017 and $60,000 and $92,000 for the six months ended June 30, 2018 and 2017, respectively.

Estimated future amortization expense for each of the years set forth below ending December 31 is as follows (in thousands):

2019	$	119
2020	$	119
2021	$	119
2022	$	117
2023	$	113

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6. Income Taxes

6 Months Ended

Jun. 30, 2018

Income Taxes

Income Taxes

Income tax expense for the second quarter of 2018 was $2.5 million compared to income tax expense of $519,000 for the same period in the prior year. The effective tax rate for the second quarter of 2018 was 22 percent, compared with 5 percent for the second quarter of 2017. The Tax Cuts and Jobs Act, enacted in December 2017, reduced the corporate federal income tax rate in the United States from 35 percent to 21 percent effective for us on January 1, 2018. The Tax Cuts and Jobs Act also ended the domestic production activities deduction under Section 199 which previously helped lower our effective tax rate by 3 percentage points. The benefit we received from the lower tax rate under the Tax Cuts and Jobs Act was not as large as the excess tax benefits we received in the second quarter of 2017 of $3.0 million from the exercise of stock options together with the benefit from the Section 199 deduction.

We continue to assess the income tax effects of the Tax Cuts and Jobs Act and whether recorded amounts may be affected due to changes in our interpretations and assumptions, as well as regulatory guidance that may be issued.

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7. Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2018

Accounting Changes and Error Corrections [Abstract]

Recent Accounting Pronouncements

Accounting Standards Update 2014-09, Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, also known as ASC 606. This new standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASC 606 replaced most existing revenue recognition guidance in United States Generally Accepted Accounting Principles when it became effective for fiscal years beginning after December 15, 2017. We adopted the new standard on January 1, 2018, using the full retrospective method. Because accounting for revenue from contracts with customers did not materially change for us under the new standard as explained below, prior period consolidated financial statements did not require adjustment.

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 customer requirements which are driven in large part by their customers’ 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.

A summary of revenues by geographic area, based on shipping destination, for the three and six months ended June 30, 2018 and 2017 are as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
United States	$	24,833	$	24,079	$	49,440	$	47,184
Germany		2,291		1,919		4,962		4,956
Other countries less than 5% of revenues		11,723		10,166		23,846		22,529
Total	$	38,847	$	36,164	$	78,248	$	74,669

A summary of revenues by product line for the three and six months ended June 30, of 2018 and 2017 are as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Fluid Delivery	$	18,128	$	15,630	$	36,928	$	33,636
Cardiovascular		13,003		12,222		26,213		23,686
Ophthalmology		2,852		3,762		5,637		7,435
Other		4,864		4,550		9,470		9,912
Total	$	38,847	$	36,164	$	78,248	$	74,669

More than ninety-eight percent of our total revenue in the periods presented herein is pursuant to shipments initiated by a purchase order, which under the new ASC 606 guidance 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 balance sheet.

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 thirty 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 maintain an allowance for doubtful accounts to reflect estimated losses resulting from the failure of customers to make required payments. On an ongoing basis, the collectability of accounts receivable is assessed based upon historical collection trends, current economic factors and the assessment of the collectability of specific accounts. 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. Accounts are written off when it is determined the receivable will not be collected. 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.

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.

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 4 percent of our total revenue in all periods presented herein. A portion of these contracts representing less than 3 percent of our revenues include multiple performance obligations. For such arrangements, we allocate 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. Lease revenues, including embedded leases under certain of these contracts, represent less than 1 percent of our total revenue in all periods presented herein.  

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 to 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 about immaterial contracts under ASC 606 would potentially obscure more useful and important information.

ASU 2016-02, Leases

On February 25, 2016 the FASB issued ASU 2016-02, Leases (ASC 842).  The main objective of this new standard is to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The new leasing standard requires lessees to recognize a right of use asset and lease liability on the balance sheet. Lessor accounting is updated to align with certain changes in the lessee model and the new revenue recognition standard (ASC 606).  Atrion elected to early adopt this new standard as of January 1, 2018, using the modified retrospective approach as required.

As a lessee, Atrion has only two leases for equipment used internally which we account for as operating leases. Upon adoption of ASC 842, we recorded a right-of-use asset and a lease liability for these leases as of January 1, 2018. The monthly expense of $2,025 for these operating leases, which are our only lessee arrangements, is immaterial and therefore all other lessee disclosures under ASC 842 have been omitted.

As a lessor, Atrion has agreements with certain customers for the rental of our equipment for use in hospitals. These arrangements include sales type leases, fixed monthly rentals and rental agreements containing a lease component (embedded lease) and non-lease components. Lease revenues from all of these agreements represented less than 1 percent of our total revenue in the first half of 2018 and in all of 2017.

The fixed monthly rentals and embedded lease arrangements are accounted for as operating leases. Fixed monthly rentals provide for a flat fee each month. For our embedded lease agreements we have chosen under ASC 842 to continue to use a variable basis (based on consumables sold in the period) to allocate and recognize revenue as we have in prior periods because it most closely represents the way in which benefit of the asset is derived.

The lease assets from our sales type leases are recorded in our accounts receivables in the accompanying consolidated balance sheet, and as of June 30, 2018 the balance totaled $517,000. Our equipment being leased as operating leases to our customers is included in our Property Plant and Equipment on our balance sheet. As of June 30, 2018, the cost of this property and related accumulated depreciation was $8.0 million and $5.65 million, respectively. Due to the immaterial amount of revenue from our lessor activity, all other lessor disclosures under ASC 842 have been omitted.

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective of this update is to enhance the reporting model for financial instruments in order to provide users of financial statements with more decision-useful information. Changes to the previous guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments.

The primary impact of this change for us relates to our available-for-sale equity investment and resulted in unrecognized gains and losses from this investment being reflected in our income statement beginning in 2018.  We adopted ASU 2016-01 as of January 1, 2018, applying the update by means of a cumulative-effect adjustment to the balance sheet by reclassifying the balance of our Accumulated Other Comprehensive Loss in the shareholders’ equity section of the balance sheet to Retained Earnings. The balance reclassified of $1,215,000 was a result of prior-period unrealized losses from our equity investment.

In the second quarter of 2018 we recorded an unrealized loss on our equity investment of $412,000 as a result of a decline in the market value of this investment during the quarter. This brings the 2018 year-to-date loss on this investment to $1,190,000. This loss is reflected in other investment income (loss) in our income statement. This change in accounting is expected to create greater volatility in our investment income each quarter in the future.

ASU 2017-08, Receivables – Non-refundable Fees and Other Costs (Subtopic 310-20).

In March 2017, the FASB issued ASU 2017-08, Receivables – Non-refundable Fees and Other Costs (Subtopic 310-20). The main objective of this update is to shorten the period of amortization of the premium on certain callable debt securities to the earliest call date. However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendment is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. We elected to early adopt this amendment as of January 1, 2018. None of our investments in 2017 had any premium paid, so no adjustments were needed for prior-period activity. We do not believe the adoption of this standard will have a material impact on our Financial Statements in 2018 or future periods.

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.

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2. Inventories (Tables)

6 Months Ended

Jun. 30, 2018

Inventory Disclosure [Abstract]

Inventories

	June 30,		December 31,
	2018		2017
Raw materials	$	14,267	$	13,545
Work in process		7,837		6,647
Finished goods		10,399		9,162
Total inventories	$	32,503	$	29,354

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3. Income per share (Tables)

6 Months Ended

Jun. 30, 2018

Earnings Per Share [Abstract]

Computation for Basic and Diluted Income Per Share

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands, except per share amounts)
Net income	$	8,797	$	10,026	$	17,285	$	19,976
Weighted average basic shares outstanding		1,852		1,844		1,853		1,839
Add: Effect of dilutive securities		5		14		3		17
Weighted average diluted shares outstanding		1,857		1,858		1,856		1,856
Earnings per share:
Basic	$	4.75	$	5.44	$	9.33	$	10.86
Diluted	$	4.74	$	5.40	$	9.31	$	10.76

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4. Investments (Tables)

6 Months Ended

Jun. 30, 2018

Investments Schedule [Abstract]

Investments, Held-to-Maturity Securities

	Gross Unrealized
	Level		Cost		Gains		Losses			Fair Value
As of June 30, 2018:
Short-term Investments
Certificates of deposit		2		2,021	$	--	$	(4	)	$	2,017
Commercial paper		2		10,977	$	--	$	(9	)	$	10,968
Bonds		2		11,178	$	--	$	(29	)	$	11,149
Long-term Investments
Bonds		2		18,781	$	--	$	(259	)	$	18,522
Mutual funds		1		485	$	--	$	(4	)	$	481
Equity investments		2		5,675	$	--	$	(2,729	)	$	2,946
As of December 31, 2017:
Short-term Investments
Certificates of deposit		2		4,020	$	--	$	(3	)	$	4,017
Commercial paper		2		31,220	$	26	$	(38	)	$	31,208
Bonds		2		6	$	--	$	--		$	6
Mutual funds		1		219	$	3	$	--		$	222
Long-term Investments
Bonds		2		5,000	$	--	$	(75	)	$	4,925
Equity investments		2		5,675	$	--	$	(1,539	)	$	4,136

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5. Patents and Licenses (Tables)

6 Months Ended

Jun. 30, 2018

Patents And Licenses Tables

Patents and Licenses

June 30, 2018						December 31, 2017
Weighted Average Original Life (years)		Gross Carrying Amount		Accumulated Amortization		Weighted Average Original Life (years)		Gross Carrying Amount		Accumulated Amortization
	15.67	$	13,840	$	12,122		15.67	$	13,840	$	12,062

Future Amortization Expense

2019	$	119
2020	$	119
2021	$	119
2022	$	117
2023	$	113

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7. Recent Accounting Pronouncements (Tables)

6 Months Ended

Jun. 30, 2018

Recent Accounting Pronouncements Tables

Revenues by Geographic Territory

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
United States	$	24,833	$	24,079	$	49,440	$	47,184
Germany		2,291		1,919		4,962		4,956
Other countries less than 5% of revenues		11,723		10,166		23,846		22,529
Total	$	38,847	$	36,164	$	78,248	$	74,669

Revenue by Product Line

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Fluid Delivery	$	18,128	$	15,630	$	36,928	$	33,636
Cardiovascular		13,003		12,222		26,213		23,686
Ophthalmology		2,852		3,762		5,637		7,435
Other		4,864		4,550		9,470		9,912
Total	$	38,847	$	36,164	$	78,248	$	74,669

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2. Inventories (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Inventory Disclosure [Abstract]
Raw materials	$ 14,267	$ 13,545
Work in process	7,837	6,647
Finished goods	10,399	9,162
Total inventories	$ 32,503	$ 29,354

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3. Income Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Earnings Per Share [Abstract]
Net income	$ 8,797	$ 10,026	$ 17,285	$ 19,976
Weighted average basic shares outstanding	1,852	1,844	1,853	1,839
Add: Effect of dilutive securities	5	14	3	17
Weighted average diluted shares outstanding	1,857	1,858	1,856	1,856
Earnings per share:
Basic	$ 4.75	$ 5.44	$ 9.33	$ 10.86
Diluted	$ 4.74	$ 5.40	$ 9.31	$ 10.76

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3. Income per share (Details Narrative) - shares	3 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Earnings Per Share [Abstract]
Shares Excluded from Computation of Weighted average diluted Shares outstanding	1,200	1,027

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4. Investments (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Dec. 31, 2017
Certificates of Deposits [Member] | Short Term Investments [Member]
Schedule of Held-to-maturity Securities [Line Items]
Cost	$ 2,021	$ 4,020
Gross Unrealized Gains	0	0
Gross Unrealized Losses	(4)	(3)
Fair Value	2,017	4,017
Commercial Paper [Member] | Short Term Investments [Member]
Schedule of Held-to-maturity Securities [Line Items]
Cost	10,977	31,220
Gross Unrealized Gains	0	26
Gross Unrealized Losses	(9)	(38)
Fair Value	10,968	31,208
Corporate Bond Securities [Member] | Short Term Investments [Member]
Schedule of Held-to-maturity Securities [Line Items]
Cost	11,178	6
Gross Unrealized Gains	0	0
Gross Unrealized Losses	(29)	0
Fair Value	11,149	6
Corporate Bond Securities [Member] | Long Term Investments [Member]
Schedule of Held-to-maturity Securities [Line Items]
Cost	18,781	5,000
Gross Unrealized Gains	0	0
Gross Unrealized Losses	(259)	(75)
Fair Value	18,522	4,925
Mutual Funds [Member] | Short Term Investments [Member]
Schedule of Held-to-maturity Securities [Line Items]
Cost		219
Gross Unrealized Gains		3
Gross Unrealized Losses		0
Fair Value		222
Mutual Funds [Member] | Long Term Investments [Member]
Schedule of Held-to-maturity Securities [Line Items]
Cost	485
Gross Unrealized Gains	0
Gross Unrealized Losses	(4)
Fair Value	481
Equity Investments [Member] | Long Term Investments [Member]
Schedule of Held-to-maturity Securities [Line Items]
Cost	5,675	5,675
Gross Unrealized Gains	0	0
Gross Unrealized Losses	(2,729)	(1,539)
Fair Value	$ 2,946	$ 4,136

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4. Investments (Details Narrative)	6 Months Ended
	Jun. 30, 2018
Minimum | Commercial Paper [Member]
Schedule of Investments [Line Items]
Securities maturity length	6 days
Minimum | Corporate Bond Securities [Member]
Schedule of Investments [Line Items]
Securities maturity length	12 days
Maximum | Commercial Paper [Member]
Schedule of Investments [Line Items]
Securities maturity length	3 months 12 days
Maximum | Corporate Bond Securities [Member]
Schedule of Investments [Line Items]
Securities maturity length	53 months 15 days
Certificates of Deposits [Member]
Schedule of Investments [Line Items]
Securities maturity length	5 months 6 days

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5. Patents and Licenses (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2018	Dec. 31, 2017
Patents And Licenses Details
Weighted Average Original Life (years)	15 years 8 months 1 day	15 years 8 months 1 day
Gross Carrying Amount	$ 13,840	$ 13,840
Accumulated Amortization	$ 12,122	$ 12,062

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5. Patents and Licenses (Details 1) $ in Thousands	Jun. 30, 2018 USD ($)
Patents And Licenses Details 1
2019	$ 119
2020	119
2021	119
2022	117
2023	$ 113

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5. Patents and Licenses (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Patents And Licenses Details Narrative
Amortization expense for patents and licenses	$ 30	$ 30	$ 60	$ 92

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7. Recent Accounting Pronouncements (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Segment Reporting Information [Line Items]
Revenues	$ 38,847	$ 36,164	$ 78,248	$ 74,669
U S
Segment Reporting Information [Line Items]
Revenues	24,833	24,079	49,440	47,184
Germany
Segment Reporting Information [Line Items]
Revenues	2,291	1,919	4,962	4,956
Other Countries [Member]
Segment Reporting Information [Line Items]
Revenues	$ 11,723	$ 10,166	$ 23,846	$ 22,529

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7. Recent Accounting Pronouncements (Details 1) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Revenue from External Customer [Line Items]
Revenues	$ 38,847	$ 36,164	$ 78,248	$ 74,669
Fluid Delivery [Member]
Revenue from External Customer [Line Items]
Revenues	18,128	15,630	36,928	33,636
Cardiovascular [Member]
Revenue from External Customer [Line Items]
Revenues	13,003	12,222	26,213	23,686
Ophthalmology [Member]
Revenue from External Customer [Line Items]
Revenues	2,852	3,762	5,637	7,435
Other Products [Member]
Revenue from External Customer [Line Items]
Revenues	$ 4,864	$ 4,550	$ 9,470	$ 9,912