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.