Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2019

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)

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

Title of each class		Trading Symbol		Name of each exchange on which registered
Common stock, Par Value $0.10 per share		ATRI		The Nasdaq Stock Market LLC

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. x 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). x 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 ☐

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, 2019
Common stock, Par Value $0.10 per share		1,854,829

ATRION CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

PART I. Financial Information		1

	Item 1. Financial Statements	2

	Consolidated Statements of Income (Unaudited) For the Three and Six Months Ended June 30, 2019 and 2018	2

	Consolidated Balance Sheets (Unaudited) June 30, 2019 and December 31, 2018	3

	Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2019 and 2018	4

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) For the Three and Six Months Ended June 30, 2019 and 2018	5

	Notes to Consolidated Financial Statements (Unaudited)	7

	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 3 . Quantitative and Qualitative Disclosures About Market Risk	17

	Item 4. Controls and Procedures	17

PART II. Other Information		17

	Item 1. Legal Proceedings	17

	Item 1A. Risk Factors	17

	Item 6. Exhibits	18

SIGNATURES		19

Exhibit Index		20

P ART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

ATRION CORPORATION AND SUBSIDIARIES

C ONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months EndedJune 30,						Six Months EndedJune 30,
	2019			2018			2019			2018
	(in thousands, except per share amounts)
Revenues	$	40,103		$	38,847		$	81,717		$	78,248
Cost of goods sold		21,511			19,624			44,422			40,074
Gross profit		18,592			19,223			37,295			38,174
Operating expenses:
Selling		2,098			2,045			4,482			4,064
General and administrative		4,304			4,309			8,490			8,537
Research and development		1,224			1,603			2,319			2,941
		7,626			7,957			15,291			15,542
Operating income		10,966			11,266			22,004			22,632

Interest and dividend income		388			411			854			742
Other investment income (losses)		354			(408	)		681			(1,197	)
		742			3			1,535			( 455	)

Income before provision for income taxes		11,708			11,269			23,539			22,177
Provision for income taxes		(2,044	)		( 2,472	)		(4,437	)		(4,892	)

Net income	$	9,664		$	8,797		$	19,102		$	17,285

Net income per basic share	$	5.21		$	4.75		$	10.30		$	9.33
Weighted average basic shares outstanding		1,854			1,852			1,854			1,853

Net income per diluted share	$	5.18		$	4.74		$	10.25		$	9.31
Weighted average diluted shares outstanding		1,864			1,857			1,863			1,856

Dividends per common share	$	1.35		$	1.20		$	2.70		$	2.40

The accompanying notes are an integral part of these statements.

ATRION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

Assets	June 30,2019			December 31,2018
	(in thousands)
Current assets:
Cash and cash equivalents	$	49,602		$	58,753
Short-term investments		25,595			9,684
Accounts receivable		20,368			17,014
Inventories		34,590			33,572
Prepaid expenses and other current assets		2,931			3,242
		133,086			122,265

Long-term investments		23,051			21,048

Property, plant and equipment		191,045			181,582
Less accumulated depreciation and amortization		111,324			106,689
		79,721			74,893

Other assets and deferred charges:
Patents		1,599			1,659
Goodwill		9,730			9,730
Other		1,564			1,621
		12,893			13,010

Total assets	$	248,751		$	231,216
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	10,143		$	9,601
Accrued income and other taxes		799			619
		10,942			10,220

Line of credit		—			—

Other non-current liabilities		12,549			10,229

Stockholders’ equity:
Common stock, par value $0.10 per share; authorized 10,000 shares, issued 3,420 shares		342			342
Paid-in capital		51,332			50,391
Retained earnings		305,846			291,761
Treasury shares,1,565 at June 30, 2019 and 1,567 at December 31, 2018, at cost		(132,260	)		(131,727	)
Total stockholders’ equity		225,260			210,767


Total liabilities and stockholders’ equity	$	248,751		$	231,216

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

ATRION CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2019				2018
				(in thousands)
Cash flows from operating activities:
Net income	$	19,102			$	17,285
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization		5,209				4,455
Deferred income taxes		1,408				(235	)
Stock-based compensation		980				917
Net change in unrealized gains and losses on investments		(364	)			1,197
Net change in accrued interest, premiums, and discounts on investments		173				(125	)
Other		(6	)			3
		26,502				23,497

Changes in operating assets and liabilities:
Accounts receivable		(3,354	)			(1,193	)
Inventories		(1,018	)			(3,149	)
Prepaid expenses		311				280
Other non-current assets		57				(90	)
Accounts payable and accrued liabilities		542				862
Accrued income and other taxes		180				(153	)
Other non-current liabilities		912				859
		24,132				20,913

Cash flows from investing activities:
Property, plant and equipment additions		(9,977	)			(7,598	)
Purchase of investments		(45,843	)			(26,887	)
Proceeds from maturities of investments		28,121				24,035
		(27,699	)			(10,450	)

Cash flows from financing activities:
Shares tendered for employees’ withholding taxes on stock-based compensation		(579	)			(90	)

Dividends paid		(5,005	)			(4,446	)
		(5,584	)			(4,536	)

Net change in cash and cash equivalents		(9,151	)			5,927
Cash and cash equivalents at beginning of period		58,753				30,136
Cash and cash equivalents at end of period	$	49,602			$	36,063


Cash paid for:
Income taxes	$	2,104			$	5,592

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

ATRION CORPORATION AND SUBSIDIARIES

C onsolidated statementS of changes in stockholders’ equity

(Unaudited)

	For the Three Months ended June 30, 2019 and 2018
	Common Stock					Treasury Stock
	Shares Outstanding			Amount		Shares			Amount			Additional Paid-in Capital		Retained Earnings			Total
Balances, April 1, 2018		1,852		$	342		1,568		$	(131,658	)	$	49,044	$	273,240		$	190,968

Net income															8,798			8,798
Stock-based compensation transactions		1					(1	)		21			591					612
Shares surrendered in stock transactions										(90	)							(90	)
Dividends															(2,231	)		(2,231	)
Balances, June 30, 2018		1,853		$	342		1,567		$	(131,727	)	$	49,635	$	279,807		$	198,057

Balances, April 1, 2019		1,853		$	342		1,567		$	(131,721	)	$	50,772	$	298,690		$	218,083

Net income															9,664			9,664
Stock-based compensation transactions		3					(3	)		40			560					600
Shares surrendered in stock transactions		(1	)				1			(579	)							(579	)
Dividends															(2,508	)		(2,508	)
Balances, June 30, 2019		1,855		$	342		1,565		$	(132,260	)	$	51,332	$	305,846		$	225,260

ATRION CORPORATION AND SUBSIDIARIES

Consolidated statementS of changes in stockholders’ equity

(Unaudited)

	For the Six Months ended June 30, 2019 and 2018
	Common Stock					Treasury Stock
	Shares Outstanding			Amount		Shares			Amount			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Balances, January 1, 2018		1,852		$	342		1,568		$	(131,663	)	$	48,730	$	(1,215	)	$	268,194		$	184,388

Net income																		17,285			17,285
Reclass from adopting ASO 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	$	--		$	279,807		$	198,057
Balances, January 1, 2019		1,853		$	342		1,567		$	(131,727	)	$	50,391	$	--		$	291,761		$	210,767

Net income																		19,102			19,102
Stock-based compensation transactions		3					(3	)		46			941								987
Shares surrendered in stock transactions		(1	)				1			(579	)										(579	)
Dividends																		(5,017	)		(5,017	)
Balances, June 30, 2019		1,855		$	342		1,565		$	(132,260	)	$	51,332	$	--		$	305,846		$	225,260

The accompanying notes are an integral part of these financial statements

ATRION CORPORATION AND SUBSIDIARIES

N otes 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, 2018 (“2018 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,
	2019		2018
Raw materials	$	15,565	$	14,994
Work in process		8,611		7,214
Finished goods		10,414		11,364
Total inventories	$	34,590	$	33,572

(3)

Income per share

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

	Three Months EndedJune 30,				Six Months EndedJune 30,
(1)	2019		2018		2019		2018
	(in thousands, except per share amounts)
Net income	$	9,664	$	8,797	$	19,102	$	17,285
Weighted average basic shares outstanding		1,854		1,852		1,854		1,853
Add: Effect of dilutive securities		10		5		9		3
Weighted average diluted shares outstanding		1,864		1,857		1,863		1,856
Earnings per share:
Basic	$	5.21	$	4.75	$	10.30	$	9.33
Diluted	$	5.18	$	4.74	$	10.25	$	9.31

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 zero and 1,200 shares of common stock for the quarters ended June 30, 2019 and 2018, 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, 2019, we held investments in commercial paper, bonds and equity securities that are required to be measured for disclosure purposes at fair value on a recurring basis. The 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, 2019:
Money market		1		23,240	$	—	$	—		$	23,240
Commercial paper		2		14,467	$	2	$	—		$	14,469
Bonds		2		36,321	$	203	$	—		$	36,524
Mutual funds		1		936	$	38	$	—		$	974
Equity investments		2		5,675	$	—	$	(2,609	)	$	3,066

As of December 31, 2018:
Money market		1		12,319	$	—	$	—		$	12,319
Commercial paper		2		4,393	$	—	$	—		$	4,393
Bonds		2		25,922	$	—	$	(211	)	$	25,711
Mutual funds		1		795	$	—	$	(121	)	$	674
Equity investments		2		5,675	$	—	$	(2,814	)	$	2,861

ATRION CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The above long-term bonds represent investments in various issuers at June 30, 2019.

The commercial paper has maturities from less than a month to 4 months. The bonds have maturities from less than a month to 40 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, 2019

December 31, 2018

Weighted Average Original Life (years)

GrossCarryingAmount

AccumulatedAmortization

Weighted Average Original Life (years)

GrossCarryingAmount

AccumulatedAmortization

15.67

13,840

12,241

15.67

13,840

12,181

Aggregate amortization expense for patents and licenses was $30,000 in each of the three months ended June 30, 2019 and 2018 and $60,000 in each of the six months ended June 30, 2019 and 2018.

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

2020	$	119
2021	$	119
2022	$	117
2023	$	113
2024	$	113

(6)

Revenues

We recognize revenue when performance 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.

ATRION CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

A summary of revenues by geographic area, based on shipping destination, for the three and six months ended June 30, 2019 and 2018 are as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
United States	$	25,006	$	24,833	$	51,995	$	49,440
Germany		2,095		2,291		4,259		4,962
Other countries less than 5% of revenues		13,002		11,723		25,463		23,846
Total	$	40,103	$	38,847	$	81,717	$	78,248

A summary of revenues by product line for the three and six months ended June 30, 2019 and 2018 are as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Fluid Delivery	$	18,285	$	18,128	$	36,446	$	36,928
Cardiovascular		14,579		13,003		29,999		26,213
Ophthalmology		1,817		2,852		4,100		5,637
Other		5,422		4,864		11,172		9,470
Total	$	40,103	$	38,847	$	81,717	$	78,248

The vast majority (98%) of our revenue is driven by a purchase order (our “contract”) and recognized at a single point in time when the performance obligation of the product being shipped is satisfied, rather than recognized over time, and is presented as a receivable on the balance sheet. Payment is typically due within 30 days.

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. An account is written off when we determine the receivable will not be collected. Historically, bad debt has been immaterial.

We have elected to recognize the cost of 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 because our returns and warranty obligations have been very low due to our focus on quality control.

We do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount for 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 would potentially obscure more useful and important information.

ATRION CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(7)

Recent Accounting Pronouncements

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. This change in accounting is expected to create greater volatility in our investment income each quarter in the future.

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.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We develop and manufacture products primarily for medical applications. We market components to other equipment manufacturers for incorporation in their products and sell finished devices to physicians, hospitals, clinics and other treatment centers. Our medical products primarily serve the fluid delivery, cardiovascular and ophthalmology markets. Our other medical and non-medical products include instrumentation and disposables used in valves and inflation devices used in marine and aviation safety products.

Our products are used in a wide variety of applications by numerous customers. We encounter competition in all of our markets and compete primarily on the basis of design, product quality, price, customer service and delivery time.

Our strategy is to provide a broad selection of products in the areas of our expertise. Research and development efforts are focused on improving current products and developing highly-engineered products that meet customer needs and serve niche markets with meaningful sales potential. Proposed new products may be subject to regulatory clearance or approval prior to commercialization and the time period for introducing a new product to the marketplace can be unpredictable. We also focus on controlling costs by investing in modern manufacturing technologies and controlling purchasing processes. We have been successful in consistently generating cash from operations and have used that cash to reduce 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, respectful and entrepreneurial culture.

For the three months ended June 30, 2019, we reported revenues of $40.1 million, operating income of $11.0 million and net income of $9.7 million, up 3 percent, down 3 percent and up 10 percent, respectively, from the three months ended June 30, 2018. For the six months ended June 30, 2019, we reported revenues of $81.7 million, operating income of $22.0 million and net income of $19.1 million, up 4 percent, down 3 percent and up 11 percent, respectively, from the six months ended June 30, 2018.

Results for the three months ended June 30, 2019

Consolidated net income totaled $9.7 million, or $5.21 per basic and $5.18 per diluted share, in the second quarter of 2019. This is compared with consolidated net income of $8.8 million, or $4.75 per basic and $4.74 per diluted share, in the second quarter of 2018. The income per basic share computations are based on weighted average basic shares outstanding of 1,854,000 in the 2019 period and 1,852,000 in the 2018 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,864,000 in the 2019 period and 1,857,000 in the 2018 period.

Consolidated revenues of $40.1 million for the second quarter of 2019 were 3 percent higher than revenues of $38.8 million for the second quarter of 2018. This increase was primarily attributable to increased volumes of our cardiovascular products partially offset by decreased volumes of our ophthalmology products.

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

	Three Months endedJune 30,
	2019		2018

Fluid Delivery	$	18,285	$	18,128
Cardiovascular		14,579		13,003
Ophthalmology		1,817		2,852
Other		5,422		4,864
Total	$	40,103	$	38,847

Cost of goods sold of $21.5 million for the second quarter of 2019 was 10 percent higher than cost of goods sold of $19.6 million for the second quarter of 2018 primarily due to higher sales volumes, a less favorable product sales mix and increased manufacturing costs partially offset by the impact of continued cost improvement projects. Our cost of goods sold in the second quarter of 2019 was 53.6 percent of revenues compared with 50.5 percent of revenues in the second quarter of 2018.

Gross profit of $18.6 million in the second quarter of 2019 was $631,000, or 3 percent, lower than in the comparable 2018 period. Our gross profit percentage in the second quarter of 2019 was 46.4 percent of revenues compared with 49.5 percent of revenues in the second quarter of 2018. The decrease in gross profit percentage in the 2019 period compared to the 2018 period was primarily related to the less favorable product sales mix and increased manufacturing costs partially offset by cost improvement projects mentioned above.

Our second quarter 2019 operating expenses of $7.6 million were $331,000 lower than the operating expenses for the second quarter of 2018. This decrease was attributable to a $379,000 decrease in Research and Development, or R&D, expenses and a $5,000 decrease in General and Administrative, or G&A, expenses partially offset by a $53,000 increase in Selling expenses. The decrease in R&D expenses was primarily related to decreased compensation, decreased outside services and decreased materials and supplies costs. The increase in Selling expenses was principally attributable to increased compensation and commissions partially offset by decreased travel and decreased outside services.

Operating income in the second quarter of 2019 decreased $300,000 to $11.0 million, a 3 percent decrease compared to our operating income in the quarter ended June 30, 2018. Operating income was 27 percent of revenues for the second quarter of 2019 and 29 percent of revenues for the second quarter of 2018.

Other investment income in the second quarter of 2019 was $354,000 compared with an investment loss of $408,000 in the second quarter of 2018. We adopted ASU 2016-01 as of January 1, 2018 (see Note 7). For the second quarter of 2019 we recorded unrealized gains on equity investments of $354,000 as a result of increases in the market value of investments during the quarter. For the second quarter of 2018 we recorded unrealized losses on equity investments of $408,000 as a result of a drop in the market value of investments during the quarter.

Income tax expense was $2.0 million for the second quarter of 2019 compared with $2.5 million for the second quarter of 2018. The effective tax rate for the second quarter of 2019 was 17.5 percent, compared with 21.9 percent for the second quarter of 2018. The decrease in the 2019 period effective tax rate was primarily related to increased tax benefits from stock compensation and foreign sales transactions. We expect the effective tax rate for the remainder of 2019 to be approximately 20.0 percent.

Results for the six months ended June 30, 2019

Consolidated net income totaled $19.1 million, or $10.30 per basic and $10.25 per diluted share, in the first six months of 2019. This is compared with consolidated net income of $17.3 million, or $9.33 per basic and $9.31 per diluted share, in the first six months of 2018. The income per basic share computations are based on weighted average basic shares outstanding of 1,854,000 in the 2019 period and 1,853,000 in the 2018 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,863,000 in the 2019 period and 1,856,000 in the 2018 period.

Consolidated revenues of $81.7 million for the first six months of 2019 were 4 percent higher than revenues of $78.2 million for the first six months of 2018. This increase was primarily attributable to increased volumes of our cardiovascular products partially offset by decreased volumes of our ophthalmology products.

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

	Six Months endedJune 30,
	2019		2018

Fluid Delivery	$	36,446	$	36,928
Cardiovascular		29,999		26,213
Ophthalmology		4,100		5,637
Other		11,172		9,470
Total	$	81,717	$	78,248

Cost of goods sold of $44.4 million for the first six months of 2019 was $4.4 million higher than in the comparable 2018 period. The primary contributor to the increase in our cost of goods sold was increased volumes, a less favorable product sales mix and increased manufacturing costs partially offset by the impact of continued cost improvement projects in the first six months of 2019. Our cost of goods sold in the first six months of 2019 was 54.4 percent of revenues compared with 51.2 percent of revenues in the first six months of 2018.

Gross profit of $37.3 million in the first six months of 2019 was $879,000, or 2 percent, lower than in the comparable 2018 period. Our gross profit percentage in the first six months of 2019 was 45.6 percent of revenues compared with 48.8 percent of revenues in the first six months of 2018. The decrease in gross profit percentage in the 2019 period compared to the 2018 period was primarily related to the less favorable product sales mix and increased manufacturing costs partially offset by cost improvement projects mentioned above.

Operating expenses of $15.3 million for the first six months 2019 were $251,000 lower than the operating expenses for the first six months of 2018. This decrease was comprised of a $622,000 decrease in R&D expenses, a $47,000 decrease in G&A expenses and a $418,000 increase in Selling expenses. The decrease in R&D expenses was primarily related to decreased compensation, decreased outside services and decreased materials and supplies costs partially offset by increased regulatory costs. The decrease in G&A expenses for the first six months of 2019 was principally attributable to decreased outside services partially offset by increased information technology costs. The increase in Selling expenses was principally attributable to increased compensation and commissions partially offset by decreased travel and decreased outside services.

Operating income in the first six months of 2019 decreased $628,000 to $22.0 million, a 3 percent decrease from our operating income in the six months ended June 30, 2018. Operating income was 27 percent of revenues in the first six months of 2019 and 29 percent of revenues in the first six months of 2018.

Interest and dividend income for the first six months of 2019 was $854,000, compared with $742,000 for the same period in the prior year. Increased levels of investment and increased interest rates were the primary reasons for the increase.

Other investment income for the first six months of 2019 was $681,000 compared with an investment loss of $1.2 million in the first six months of 2018. We adopted ASU 2016-01 as of January 1, 2018 (see Note 7). For the first six months of 2019 we recorded unrealized gains on equity investments of $681,000 as a result of increases in the market value of these investments during the 2019 period. For the first six months of 2018 we recorded unrealized losses on equity investments of $1.2 million as a result of declines in the market value of these investment during the 2018 period.

Income tax expense for the first six months of 2019 was $4.4 million compared to income tax expense of $4.9 million for the same period in the prior year. The effective tax rate for the first six months of 2019 was 18.8 percent, compared with 22.1 percent for the first six months of 2018. The decrease in the 2019 period effective tax rate was primarily related to increased tax benefits from stock compensation and foreign sales transactions.

Liquidity and Capital Resources

As of June 30, 2019, we had a $75.0 million revolving credit facility with a money center bank pursuant to which the lender is obligated to make advances until February 28, 2022. We had no outstanding borrowings under our credit facility at June 30, 2019. 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, 2019, we were in compliance with all financial covenants

At June 30, 2019, we had a total of $98.2 million in cash and cash equivalents, short-term investments and long-term investments, an increase of $8.8 million from December 31, 2018. The principal contributor to this increase was operating results.

Cash flows from operating activities of $24.1 million for the six months ended June 30, 2019 were primarily comprised of net income plus the net effect of non-cash expenses, increases in other non-current liabilities and increases in accounts payable and accrued liabilities partially offset by increases in accounts receivable and increases in inventories. During the six months of 2019, we expended $10.0 million for the addition of property and equipment, $45.8 million for the purchase of investments and $5.0 million for dividends. During the same period, maturities of investments generated $28.1 million in cash.

At June 30, 2019, we had working capital of $122.1 million, including $49.6 million in cash and cash equivalents and $25.6 million in short-term investments. The $10.1 million increase in working capital during the first six months of 2019 was primarily related to an increase in short-term investments and accounts receivable. This increase was partially offset by decreases in cash and cash-equivalents and increases in accounts payable and accrued liabilities. The increase in short-term investments was primarily related to operating results and the decrease in cash and cash equivalents. The increase in accounts receivable was primarily related to increased revenues for the second quarter of 2019 as compared to the fourth quarter of 2018. The increases in accounts payable and accrued liabilities are primarily related to the timing of payments for replenishment of inventories and operating expenses.

We believe that our $98.2 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 2019

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 2019, 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 2019. 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, 2019, we did not experience any material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in our 2018 Form 10-K.

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, 2019. 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, 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

P ART 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 2018 Form 10-K.

Item 6.

Exhibits

Exhibit Number		Description
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

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, 2019	By:	/s/ David A. Battat
		David A. Battat
		President and Chief Executive Officer

Date: August 7, 2019	By:	/s/ Jeffery Strickland
		Jeffery Strickland
		Vice President and Chief Financial Officer
		(Principal Accounting and Financial Officer)

Exhibit Index

Exhibit Number		Description
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