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,
  2009


or


[    ]
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the Transition Period
    from    to





Commission
File Number 0-10763




Atrion
Corporation


(Exact
Name of Registrant as Specified in its Charter)








Delaware
            
            63-0821819(State
      or Other Jurisdiction of Incorporation or
    Organization)
            
            (I.R.S.
      Employer Identification No.)




One Allentown Parkway, Allen,
Texas  75002
   (972) 390-9800
 (Registrant’s
Telephone Number, Including Area Code)









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





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





Large
accelerated filer  o                                                      Accelerated
filerx                              Non-accelerated
filero                                       Smaller
reporting company   o







Indicate
by check whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).o Yesx 
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
      17, 2009Common
      stock, Par Value $0.10 per share
            
            1,979,171











ATRION CORPORATION AND
SUBSIDIARIES








TABLE OF
CONTENTS










PART
      I.   Financial Information
            2


Item 1. 
       Financial StatementsConsolidated
      Statements of Income (Unaudited) For
      the Three and Six months Ended June
      30, 2009 and 2008
            3Consolidated
      Balance Sheets (Unaudited) June
      30, 2009 and December 31, 2008
            4Consolidated
      Statements of Cash Flows (Unaudited) For
      the Six months Ended June
      30, 2009 and 2008
            5Notes
      to Consolidated Financial Statements (Unaudited)
            6Item 2.   Management's
      Discussion and Analysis of Financial
      Condition and Results of Operations
            10Item 3.   Quantitative
      and Qualitative Disclosures About Market Risk
            15Item 4.Controls
      and Procedures
            15PART
      II.  Other Information
            16Item 1.Legal Proceedings
            16Item 1A.Risk Factors
            16Item 4.    Submission of Matters to a Vote of
      Security Holders
            16Item
      6.    Exhibits
            16SIGNATURES
            17










1























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
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in
      thousands, except per share amounts)Revenues
                    
                    $
                    26,001
                    
                    
                    $
                    24,242
                    
                    
                    $
                    51,048
                    
                    
                    $
                    48,844Cost
      of goods sold
                    
                    
                    13,970
                    
                    
                    
                    13,137
                    
                    
                    
                    27,929
                    
                    
                    
                    27,059Gross
      profit
                    
                    
                    12,031
                    
                    
                    
                    11,105
                    
                    
                    
                    23,119
                    
                    
                    
                    21,785Operating
      expenses:Selling
                    
                    
                    1,516
                    
                    
                    
                    1,646
                    
                    
                    
                    3,009
                    
                    
                    
                    3,345General
      and administrative
                    
                    
                    2,718
                    
                    
                    
                    2,505
                    
                    
                    
                    5,434
                    
                    
                    
                    5,245Research
      and development
                    
                    
                    760
                    
                    
                    
                    823
                    
                    
                    
                    1,531
                    
                    
                    
                    1,6104,994
                    
                    
                    
                    4,974
                    
                    
                    
                    9,974
                    
                    
                    
                    10,200Operating
      income
                    
                    
                    7,037
                    
                    
                    
                    6,131
                    
                    
                    
                    13,145
                    
                    
                    
                    11,585Other
      income:Interest
      income
                    
                    
                    127
                    
                    
                    
                    49
                    
                    
                    
                    229
                    
                    
                    
                    85Other
      income
                    
                    
                    --
                    
                    
                    
                    1
                    
                    
                    
                    1
                    
                    
                    
                    1127
                    
                    
                    
                    50
                    
                    
                    
                    230
                    
                    
                    
                    86Income
      before provision for income taxes
                    
                    
                    7,164
                    
                    
                    
                    6,181
                    
                    
                    
                    13,375
                    
                    
                    
                    11,671Provision
      for income taxes
                    
                    
                    (2,507
                    )
                    
                    
                    (2,046
                    )
                    
                    
                    (4,584
                    )
                    
                    
                    (3,880
                    )Net
      income
                    
                    $
                    4,657
                    
                    
                    $
                    4,135
                    
                    
                    $
                    8,791
                    
                    
                    $
                    7,791Income
      per basic share
                    
                    $
                    2.35
                    
                    
                    $
                    2.10
                    
                    
                    $
                    4.45
                    
                    
                    $
                    3.99Weighted
      average basic shares outstanding
                    
                    
                    1,980
                    
                    
                    
                    1,965
                    
                    
                    
                    1,977
                    
                    
                    
                    1,954Income
      per diluted share
                    
                    $
                    2.30
                    
                    
                    $
                    2.06
                    
                    
                    $
                    4.37
                    
                    
                    $
                    3.89Weighted
      average diluted shares outstanding
                    
                    
                    2,021
                    
                    
                    
                    2,005
                    
                    
                    
                    2,012
                    
                    
                    
                    2,004Dividends
      per common share
                    
                    $
                    0.30
                    
                    
                    $
                    0.24
                    
                    
                    $
                    0.60
                    
                    
                    $
                    0.48




The
accompanying notes are an integral part of these statements.


3








ATRION
CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (Unaudited)


June
      30,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008Assets
                                      
                                      (in
      thousands)Current
      assets:Cash and cash equivalents
                                      
                                      $
                                      13,942
                                      
                                      
                                      $
                                      12,056Short-term investments
                                      
                                      
                                      7,790
                                      
                                      
                                      
                                      4,692Accounts receivable
                                      
                                      
                                      11,810
                                      
                                      
                                      
                                      10,875Inventories
                                      
                                      
                                      18,786
                                      
                                      
                                      
                                      20,169Prepaid expenses
                                      
                                      
                                      1,369
                                      
                                      
                                      
                                      719Deferred income taxes
                                      
                                      
                                      596
                                      
                                      
                                      
                                      59654,293
                                      
                                      
                                      
                                      49,107Long-term
      investments
                                      
                                      
                                      4,420
                                      
                                      
                                      
                                      --Property,
      plant and equipment
                                      
                                      
                                      97,289
                                      
                                      
                                      
                                      94,364Less
      accumulated depreciation and amortization
                                      
                                      
                                      43,779
                                      
                                      
                                      
                                      40,99453,510
                                      
                                      
                                      
                                      53,370Other
      assets and deferred charges:Patents
                                      
                                      
                                      1,717
                                      
                                      
                                      
                                      1,863Goodwill
                                      
                                      
                                      9,730
                                      
                                      
                                      
                                      9,730Other
                                      
                                      
                                      1,211
                                      
                                      
                                      
                                      1,28312,658
                                      
                                      
                                      
                                      12,876$
                                      124,881
                                      
                                      
                                      $
                                      115,353Liabilities and Stockholders’
      EquityCurrent
      liabilities:Accounts payable and accrued liabilities
                                      
                                      $
                                      6,151
                                      
                                      
                                      $
                                      5,482Accrued income and other taxes
                                      
                                      
                                      690
                                      
                                      
                                      
                                      7316,841
                                      
                                      
                                      
                                      6,213Line
      of credit
                                      
                                      
                                      --
                                      
                                      
                                      
                                      --Other
      non-current liabilities
                                      
                                      
                                      8,816
                                      
                                      
                                      
                                      8,298Stockholders’
      equity:Common shares, par value $0.10 per share; authorized 10,000 shares, issued
      3,420 shares
                                      
                                      
                                      342
                                      
                                      
                                      
                                      342Paid-in capital
                                      
                                      
                                      19,975
                                      
                                      
                                      
                                      19,130Accumulated other comprehensive loss
                                      
                                      
                                      (533
                                      )
                                      
                                      
                                      (533
                                      )Retained earnings
                                      
                                      
                                      125,151
                                      
                                      
                                      
                                      117,554Treasury shares,1,441 at June 30, 2009 and 1,452 at December 31, 2008, at
      cost
                                      
                                      
                                      (35,711
                                      )
                                      
                                      
                                      (35,651
                                      )Total stockholders’ equity
                                      
                                      
                                      109,224
                                      
                                      
                                      
                                      100,842$
                                      124,881
                                      
                                      
                                      $
                                      115,353







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






4
  ATRION
CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)


Six months
      EndedJune 30,2009
                                          
                                          
                                          2008(In
      thousands)Cash
      flows from operating activities:Net income
                                          
                                          $
                                          8,791
                                          
                                          
                                          $
                                          7,791Adjustments to reconcile net income to net cash provided by operating
      activities:Depreciation and amortization
                                          
                                          
                                          3,221
                                          
                                          
                                          
                                          3,054Deferred income taxes
                                          
                                          
                                          469
                                          
                                          
                                          
                                          242Stock-based compensation
                                          
                                          
                                          331
                                          
                                          
                                          
                                          327Other
                                          
                                          
                                          --
                                          
                                          
                                          
                                          3712,812
                                          
                                          
                                          
                                          11,451Changes in operating assets and liabilities:Accounts receivable
                                          
                                          
                                          (935
                                          )
                                          
                                          
                                          (2,515
                                          )Inventories
                                          
                                          
                                          1,383
                                          
                                          
                                          
                                          (2,844
                                          )Prepaid expenses
                                          
                                          
                                          (650
                                          )
                                          
                                          
                                          316Other non-current assets
                                          
                                          
                                          72
                                          
                                          
                                          
                                          (189
                                          )Accounts payable and accrued liabilities
                                          
                                          
                                          669
                                          
                                          
                                          
                                          124Accrued income and other taxes
                                          
                                          
                                          (41
                                          )
                                          
                                          
                                          1,347Other non-current liabilities
                                          
                                          
                                          49
                                          
                                          
                                          
                                          (98
                                          )13,359
                                          
                                          
                                          
                                          7,593Cash
      flows from investing activities:Property, plant and equipment additions
                                          
                                          
                                          (3,215
                                          )
                                          
                                          
                                          (3,515
                                          )Purchases of investments
                                          
                                          
                                          (7,518
                                          )
                                          
                                          
                                          --(10,733
                                          )
                                          
                                          
                                          (3,515
                                          )Cash
      flows from financing activities:Exercise of stock options
                                          
                                          
                                          445
                                          
                                          
                                          
                                          525Shares tendered for employees’ taxes on
      stock-based  compensation
                                          
                                          
                                          (70
                                          )
                                          
                                          
                                          (870
                                          )Tax benefit related to stock options
                                          
                                          
                                          73
                                          
                                          
                                          
                                          1,481Dividends paid
                                          
                                          
                                          (1,188
                                          )
                                          
                                          
                                          (942
                                          )(740
                                          )
                                          
                                          
                                          194Net
      change in cash and cash equivalents
                                          
                                          
                                          1,886
                                          
                                          
                                          
                                          4,272Cash
      and cash equivalents at beginning of period
                                          
                                          
                                          12,056
                                          
                                          
                                          
                                          3,531Cash
      and cash equivalents at end of period
                                          
                                          $
                                          13,942
                                          
                                          
                                          $
                                          7,803Cash
      paid for:Income taxes
                                          
                                          $
                                          4,104
                                          
                                          
                                          $
                                          261
   The
accompanying notes are an integral part of these financial
statements.


5
 ATRION
      CORPORATION AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


(1)           Basis
of Presentation


In the
opinion of management, all adjustments necessary for a fair presentation of results of operations for the periods presented have been included in
the accompanying unaudited consolidated financial statements of Atrion
Corporation and its subsidiaries (the “Company”). Such adjustments consist of
normal recurring items. The accompanying financial statements have been prepared
in accordance with the instructions to Form 10-Q and include the information and
notes required by such instructions. Accordingly, the consolidated financial
statements and notes thereto should be read in conjunction with the financial
statements and notes included in the Company’s 2008 Annual Report on Form
10-K.








(2)           Inventories


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





June
      30,
                      
                      
                      December
      31,2009
                      
                      
                      2008Raw
      materials
                      
                      $
                      7,766
                      
                      
                      $
                      8,978Work
      in process
                      
                      
                      4,598
                      
                      
                      
                      4,579Finished
      goods
                      
                      
                      6,422
                      
                      
                      
                      6,612Total
      inventories
                      
                      $
                      18,786
                      
                      
                      $
                      20,169





(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 30,2009
                
                
                2008
                
                
                2009
                
                
                2008(in
      thousands, except per share amounts)Net
      income
                
                $
                4,657
                
                
                $
                4,135
                
                
                $
                8,791
                
                
                $
                7,791Weighted
      average basic shares outstanding
                
                
                1,980
                
                
                
                1,965
                
                
                
                1,977
                
                
                
                1,954Add:  Effect
      of dilutive securities
                
                
                41
                
                
                
                40
                
                
                
                35
                
                
                
                50Weighted
      average diluted shares outstanding
                
                
                2,021
                
                
                
                2,005
                
                
                
                2,012
                
                
                
                2,004





Earnings
      per share:Basic
                    
                    $
                    2.35
                    
                    
                    $
                    2.10
                    
                    
                    $
                    4.45
                    
                    
                    $
                    3.99Diluted
                    
                    $
                    2.30
                    
                    
                    $
                    2.06
                    
                    
                    $
                    4.37
                    
                    
                    $
                    3.89





Outstanding
options that were not included in the diluted income per share calculation
because their effect would be anti-dilutive totaled 16,000 shares for the
three-month and six-month periods ended June 30, 2009 and 2008.


6
 ATRION
      CORPORATION AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





(4)          
Investments


As of
June 30, 2009, the Company held certain investments that are required to be
measured for disclosure purposes at fair value on a recurring basis. These
investments are considered Level 2 assets as defined by SFAS 157, Fair Value Measurements. The
Company considers as current assets those investments which will mature or are
likely to be sold in the next 12 months. The remaining investments are
considered non-current assets. The amortized cost and fair value of the
Company’s investments that are being accounted for as held-to-maturity
securities, and the related gross unrealized gains and losses, were as follows
as of June 30, 2009 ( in thousands):








Gross
      UnrealizedCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Fair
      ValueShort-term
      Investments:Corporate
      bonds
                  
                  $
                  4,154
                  
                  
                  $
                  21
                  
                  
                  
                  —
                  
                  
                  $
                  4,175Bank
      certificates of deposit
                  
                  
                  3,006
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,006Municipal
      tax-exempt bonds
                  
                  
                  630
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  630Short-term
      investment securities held to maturity
                  
                  $
                  7,790
                  
                  
                  $
                  21
                  
                  
                  
                  —
                  
                  
                  $
                  7,811Long-term
      InvestmentsCorporate
      bonds
                  
                  $
                  4,420
                  
                  
                  $
                  25
                  
                  
                  $
                  (5
                  )
                  
                  $
                  4,440





At June
30, 2009, the length of time until maturity for the short-term securities ranged
from two to nine months. At June 30, 2009, the length of time until maturity for
the long-term securities ranged from 19 to 26 months.


(5)          
Subsequent Events


Effective
the third quarter of 2009, the Company has implemented Statement of Financial
Accounting Standards No. 165, Subsequent Events, (“FAS
165”). FAS 165 provides guidance to establish general standards of accounting
for and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The adoption of
this statement did not have a material impact on the Company’s consolidated
financial statements. The Company evaluated all events or transactions that
occurred after June 30, 2009 up through August 4, 2009, the date the Company
issued these financial statements. During this period the Company did not have
any material recognizable subsequent events.


7
 ATRION
      CORPORATION AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





(6)
            Pension
      Benefits


The
components of net periodic pension cost for the Atrion Corporation Cash Balance
Plan (the “Plan”) are as follows (in thousands):





Three
      Months ended
                      June
      30,
                    
                    
                    Six
      Months ended
                      June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Service
      cost
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    --Interest
      cost
                    
                    
                    54
                    
                    
                    
                    56
                    
                    
                    
                    108
                    
                    
                    
                    112Expected
      return on assets
                    
                    
                    (54
                    )
                    
                    
                    (55
                    )
                    
                    
                    (108
                    )
                    
                    
                    (110
                    )Prior
      service cost amortization
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --Actuarial
      loss
                    
                    
                    8
                    
                    
                    
                    8
                    
                    
                    
                    16
                    
                    
                    
                    16Net
      periodic pension cost
                    
                    $
                    8
                    
                    
                    $
                    9
                    
                    
                    $
                    16
                    
                    
                    $
                    18





In
September 2007, the Company terminated the Plan. Participants accrued pension
benefits through December 31, 2007, but did not accrue any additional benefits
under the Plan after that date. However, participants will continue to earn
interest credits on their account balances until the Plan has settled all its
obligations with respect to termination. The Company believes that the Plan is
adequately funded to cover its settlement obligations. The Company will
recognize its remaining net unrecognized actuarial loss as a settlement loss at
the final pay out. The final pay out for the Plan termination will likely occur
in the second half of 2009 after all regulatory approvals are
received.





(7)
            Recent
      Accounting Pronouncements





In June
2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities. This FSP concluded that instruments containing
rights to nonforfeitable dividends granted in share-based payment transactions
are participating securities prior to vesting and, therefore, should be included
in the earnings allocations in computing basic earnings per share (EPS) under
the two-class method. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, with prior period retrospective
application. The Company’s adoption of this FSP on January 1, 2009 had no
material impact on the Company’s consolidated financial statements.





In April
2009, the FASB issued three new FSP’s relating to fair value accounting; FAS
157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly, FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, and FSP FAS 107-1/APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. These FSPs impact certain aspects of fair value
measurement and related disclosures. The provisions of these FSPs are effective
beginning in the second quarter of 2009. The Company’s adoption of these FSP’s
had no material effect on the Company’s consolidated financial
statements.






8


ATRION
      CORPORATION AND SUBSIDIARIES
 NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS
 (Unaudited)


In June
2009, the FASB approved the FASB Accounting Standards
Codification (the “Codification”) as the single source of authoritative
nongovernmental U.S. GAAP to be launched on July 1, 2009. The Codification does
not change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All existing accounting standard documents will
be superseded and all other accounting literature not included in the
Codification will be considered nonauthoritative. The Codification is effective
for interim and annual periods ending after September 15, 2009. The Codification
is effective for the Company in the interim period ending September 30, 2009 and
the Company does not expect the adoption to have a material impact on the
Company’s consolidated financial statements.





From time
to time, new accounting pronouncements applicable to the Company are issued by
the FASB or other standards setting bodies, which the Company will adopt as of
the specified effective date. Unless otherwise discussed, the Company believes
the impact of recently issued standards that are not yet effective will not have
a material impact on its consolidated financial statements upon
adoption.





9


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





Overview





The
Company develops and manufactures products primarily for medical applications.
The Company markets components to other equipment manufacturers for
incorporation in their products and sells finished devices to physicians,
hospitals, clinics and other treatment centers. The Company’s medical products
primarily serve the fluid delivery, cardiovascular, and ophthalmology markets.
The Company’s other medical and non-medical products include instrumentation and
disposables used in dialysis, contract manufacturing and valves and inflation
devices used in marine and aviation safety products.




The
Company's products are used in a wide variety of applications by numerous
customers. The Company encounters competition in all of its markets and competes
primarily on the basis of product quality, price, engineering, customer service
and delivery time.




The
Company's strategy is to provide a broad selection of products in the areas of
its expertise. Research and development efforts are focused on improving current
products and developing highly-engineered products that meet customer needs and
have the potential for broad market applications and significant sales. Proposed
new products may be subject to regulatory clearance or approval prior to
commercialization and the time period for introducing a new product to the
marketplace can be unpredictable. The Company also focuses on controlling costs
by investing in modern manufacturing technologies and controlling purchasing
processes. The Company has been successful in consistently generating cash from
operations and has used that cash to reduce indebtedness, to fund capital
expenditures, to repurchase stock and to pay dividends.




The
Company's strategic objective is to further enhance its position in its served
markets by:




·  Focusing
on customer needs;


·  Expanding
existing product lines and developing new products;


·  Maintaining
a culture of controlling cost; and


· Preserving
and fostering a collaborative, entrepreneurial management
structure.




For the
three months ended June 30, 2009, the Company reported revenues of $26.0
million, operating income of $7.0 million and net income of $4.7 million, up 7
percent, 15 percent and 13 percent, respectively, from the three months ended
June 30, 2008. For the six months ended June 30, 2009, the Company reported
revenues of $51.0 million, operating income of $13.1 million and net income of
$8.8 million, up 5 percent, 13 percent and 13 percent, respectively, from the
six  months ended June 30, 2008.





Over the
past ten years, the Company has achieved meaningful annual increases in
operating revenues, operating income, net income from continuing operations and
diluted earnings per share from continuing operations. During this ten-year
period, the Company has been able to achieve this growth even during declines in
economic activity. The United States and world economies have recently
deteriorated at an unprecedented pace. This resulting decline in global demand
makes it difficult to make accurate predictions for 2009 results. The Company
expects to achieve at least modest growth in diluted earnings per share for the
second half of 2009 as compared to the second half of 2008, but is unable to
predict at what level.






10





Results
for the three months ended June 30, 2009





Consolidated
net income totaled $4.7 million, or $2.35 per basic and $2.30 per diluted share,
in the second quarter of 2009. This is compared with consolidated net income of
$4.1 million, or $2.10 per basic and $2.06 per diluted share, in the second
quarter of 2008. The income per basic share computations are based on weighted
average basic shares outstanding of 1,979,797 in the 2009 period and 1,964,700
in the 2008 period. The income per diluted share computations are based on
weighted average diluted shares outstanding of 2,021,473 in the 2009 period and
2,004,924 in the 2008 period.





Consolidated
revenues of $26.0 million for the second quarter of 2009 were 7 percent higher
than revenues of $24.2 million for the second quarter of 2008. This increase was
generally attributable to higher sales volumes and increased
prices.





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





Three
      Months ended
                    June
      30,2009
                  
                  
                  2008Fluid
      Delivery
                  
                  $
                  9,493
                  
                  
                  $
                  8,648Cardiovascular
                  
                  
                  7,279
                  
                  
                  
                  7,116Ophthalmology
                  
                  
                  5,596
                  
                  
                  
                  3,588Other
                  
                  
                  3,633
                  
                  
                  
                  4,890Total
                  
                  $
                  26,001
                  
                  
                  $
                  24,242








Cost of
goods sold of $14.0 million for the second quarter of 2009 was $833,000 higher
than in the comparable 2008 period. The primary contributor to this increase for
the second quarter of 2009 was increased sales volume partially offset by
improved manufacturing efficiencies. The Company’s cost of goods sold in the
second quarter of 2009 was 53.7 percent of revenues compared with 54.2 percent
of revenues in the second quarter of 2008.





Gross
profit of $12.0 million in the second quarter of 2009 was $926,000, or 8
percent, higher than in the comparable 2008 period. The Company’s gross profit
percentage in the second quarter of 2009 was 46.3 percent of revenues compared
with 45.8 percent of revenues in the second quarter of 2008. The increase in
gross profit percentage in the 2009 period compared to the 2008 period was
primarily related to improved product mix and improved manufacturing
efficiencies.





The
Company’s second quarter 2009 operating expenses of $5.0 million were $20,000
higher than the operating expenses for the second quarter of 2008. This increase
was comprised of a $212,000 increase in General and Administrative (G&A)
expenses, largely offset by a $130,000 decrease in selling (Selling) expenses
and a $62,000 decrease in Research and Development (R&D) expenses. The
increase in G&A expenses for the second quarter of 2009 was principally
attributable to increased compensation partially offset by reduced travel and
outside services. The decrease in Selling expenses for the second quarter of
2009 was primarily related to decreased compensation, promotion, and
travel-related expenses partially offset by an increase in bad debt expense. The
decrease in R&D costs was primarily related to reduced new product testing
costs for new products which are currently under development and evaluation.
Operating income in the second quarter of 2009 increased $906,000, to $7.0
million, a 15 percent increase over operating income in the quarter ended June
30, 2008. Operating income was 27 percent of revenues in the second quarter of
2009 compared to 25 percent of revenues in the second quarter of 2008. The major
contributors to the operating income improvement in the second quarter of 2009
were the previously mentioned increase in gross profit partially offset by the
slight increase in operating expenses.






11





Income
tax expense for the second quarter of 2009 was $2.5 million compared to income
tax expense of $2.0 million for the same period in the prior year. The effective
tax rate for the second quarter of 2009 was 35.0 percent, compared with 33.1
percent for the second quarter of 2008. The increase in the effective tax rate
for 2009 is primarily a result of benefits from tax incentives for R&D
expenditures being a smaller percentage of taxable income and an increase in
state income taxes. The Company expects the effective tax rate for the remainder
of 2009 to be within a range of 33.0 to 34.0 percent.





Results
for the six months ended June 30, 2009





Consolidated
net income totaled $8.8 million, or $4.45 per basic and $4.37 per diluted share,
in the first six months of 2009. This is compared with consolidated net income
of $7.8 million, or $3.99 per basic and $3.89 per diluted share, in the first
six months of 2008. The income per basic share computations are based on
weighted average basic shares outstanding of 1,976,860 in the 2009 period and
1,954,050 in the 2008 period. The income per diluted share computations are
based on weighted average diluted shares outstanding of 2,012,179 in the 2009
period and 2,004,006 in the 2008 period.





Consolidated
revenues of $51.0 million for the first six months of 2009 were 5 percent higher
than revenues of $48.8 million for the first six months of 2008. This increase
was generally attributable to higher sales volumes and increased
prices.





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





Six
      Months ended
                    June
      30,2009
                  
                  
                  2008Fluid
      Delivery
                  
                  $
                  18,149
                  
                  
                  $
                  16,896Cardiovascular
                  
                  
                  14,491
                  
                  
                  
                  14,584Ophthalmology
                  
                  
                  10,530
                  
                  
                  
                  7,368Other
                  
                  
                  7,878
                  
                  
                  
                  9,996Total
                  
                  $
                  51,048
                  
                  
                  $
                  48,844









12





Cost of
goods sold of $27.9 million for the first six months of 2009 was $870,000 higher
than in the comparable 2008 period. The primary contributor to this increase for
the first six months of 2009 was increased sales volume partially offset by
improved manufacturing efficiencies. The Company’s cost of goods sold in the
first six months of 2009 was 54.7 percent of revenues compared with 55.4 percent
of revenues in the first six months of 2008.





Gross
profit of $23.1 million in the first six months of 2009 was $1.3 million, or 6
percent, higher than in the comparable 2008 period. The Company’s gross profit
percentage in the first six months of 2009 was 45.3 percent of revenues compared
with 44.6 percent of revenues in the first six months of 2008. The increase in
gross profit percentage in the 2009 period compared to the 2008 period was
primarily related to improved product mix and improved manufacturing
efficiencies.





The
Company’s first six months 2009 operating expenses of $10.0 million were
$226,000 lower than the operating expenses for the first six months of 2008.
This decrease was comprised of a $336,000 decrease in Selling expenses and a
$79,000 decrease in R&D expenses partially offset by a $189,000 increase in
G&A expenses. The decrease in Selling expenses for the first six months of
2009 was primarily related to decreased compensation, promotion, outside
services, and travel-related expenses partially offset by an increase in bad
debt expense. The decrease in R&D costs was primarily related to reduced
prototype expenses. The increase in G&A expenses for the first six months of
2009 was principally attributable to increased compensation partially offset by
decreased travel-related expenses. Operating income in the first six months of
2009 increased $1.6 million, to $13.1 million, a 13 percent increase over
operating income in the six months ended June 30, 2008. Operating income was 26
percent of revenues in the first six months of 2009 compared to 24 percent of
revenues in the first six months of 2008. The previously mentioned increase in
gross profit coupled with the decrease in operating expenses were the major
contributors to the operating income improvement in the first six months of
2009.





Income
tax expense for the first six months of 2009 was $4.6 million compared to income
tax expense of $3.9 million for the same period in the prior year. The effective
tax rate for the first six months of 2009 was 34.3 percent, compared with 33.2
percent for the first six months of 2008. The increase in the effective tax rate
for 2009 is primarily a result of benefits from tax incentives for R&D
expenditures being a smaller percentage of taxable income and an increase in
state income taxes. The Company expects the effective tax rate for the remainder
of 2009 to be within a range of 33.0 to 34.0 percent.




Liquidity
and Capital Resources




The
Company has a $25.0 million revolving credit facility (the “Credit Facility”)
with a money center bank to be utilized for the funding of operations and for
major capital projects or acquisitions, subject to certain limitations and
restrictions. Borrowings under the Credit Facility bear interest that is payable
monthly at 30-day, 60-day or 90-day LIBOR, as selected by the Company, plus one
percent. The Company had no outstanding borrowings under its Credit Facility at
June 30, 2009 or at December 31, 2008. The Credit Facility, which expires
November 12, 2012, and may be extended under certain circumstances, contains
various restrictive covenants, none of which is expected to impact the Company’s
liquidity or capital resources. At June 30, 2009, the Company was in compliance
with all financial covenants and had $25.0 million available for borrowing under
the Credit Facility. The Company believes that the bank providing the Credit
Facility is highly-rated and that the entire $25.0 million under the Credit
Facility is currently available to the Company. If that bank were unable to
provide such funds, the Company believes that such inability would not impact
the Company’s ability to fund operations.





13






At June 30, 2009, the Company had $26.2
million in cash and cash equivalents and short-term and long-term investments,
an increase of $9.4 million from December 31, 2008. The principal contributor to
this increase was the cash generated by operating activities of $13.4 million,
which was partially offset by payments for acquisitions of property, plant, and
equipment of $3.2 million and the payment of dividends of $1.2
million





As of
June 30, 2009, the Company had working capital of $47.5 million, including $13.9
million in cash and cash equivalents. The $4.6 million increase in working
capital during the first six months of 2009 was primarily related to increases
in cash and short-term investments partially offset by decreases to inventories
and an increase in accounts payable and accrued liabilities. The decrease in
inventories was primarily related to the Company’s consumption of raw materials
purchased in 2008 under a program to hedge against future price increases. The
increase in accounts payable and accrued liabilities is primarily related to
routine amounts due to suppliers partially offset by reductions in accrued
compensation.





Cash
flows from operating activities generated $13.4 million for the six months ended
June 30, 2009 as compared to $7.6 million for the six months ended June 30,
2008. The 2009 increase was primarily attributable to increased operational
results, and more favorable cash requirements for working capital related to
inventories and accounts receivables, as compared to the 2008 period. During the
first six months of 2009, the Company expended $3.2 million for the addition of
property and equipment and $7.5 million for short-term and long-term
investments. During the first six months of 2009, stock option activities
generated $448,000 of cash and the Company paid dividends of $1.2
million.





Although
the recent distress in the financial markets and the global economy in general
has not had a significant impact on the Company’s liquidity, the Company
continues to monitor the financial markets and general global economic
conditions. In the current credit and financial markets, many companies are
finding it difficult to gain access to capital resources. In spite of the
current economic conditions, the Company believes that its $21.7 million in
cash, cash equivalents and short-term investments, $4.4 million in long-term
investments, cash flows from operations and available borrowings of up to $25.0
million under the Company’s Credit Facility will be sufficient to fund the
Company’s cash requirements for at least the foreseeable future. The Company
believes that its strong financial position would allow it to access equity or
debt financing should that be necessary and its capital resources should not be
materially impacted by the current economic crisis. Additionally, the Company
believes that its cash and cash equivalents, short-term investments and
long-term investments, as a whole, will continue to increase in
2009.


14





Forward-Looking
Statements


Statements
in this Management’s Discussion and Analysis that are forward-looking are based
upon current expectations, and actual results may differ materially. Therefore,
the inclusion of such forward-looking information should not be regarded as a
representation by the Company that the objectives or plans of the Company would
be achieved. Such statements include, but are not limited to, the Company’s
expectations regarding the Company’s ability to achieve at least modest growth
in diluted earnings per share for the second half of 2009, the effective tax
rate for the remainder of 2009, the Company’s ability to fund its cash
requirements for the foreseeable future with its current assets, long-term
investments, cash flow and borrowings under the Credit Facility, the Company’s
access to equity and debt financing, the impact of the current economic crisis
on the Company’s capital resources and the increase in cash, cash equivalents,
short-term investments and long-term investments in 2009. Words such as
“anticipates,” “believes,” “expects,” “estimated” and variations of such words
and similar expressions are intended to identify such forward-looking
statements. Forward-looking statements contained herein involve numerous risks
and uncertainties, and there are a number of factors that could cause actual
results or future events to differ materially, including, but not limited to,
the following: changing economic, market and business conditions; acts of war or
terrorism; the effects of governmental regulation; the impact of
competition and new technologies; slower-than-anticipated introduction of new
products or implementation of marketing strategies; implementation of new
manufacturing processes or implementation of new information systems; the
Company’s ability to protect its intellectual property; changes in the prices of
raw materials; changes in product mix; intellectual property and
product  liability claims and product recalls; the ability to attract
and retain qualified personnel; 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 the Company to alter its marketing, capital expenditures
or other budgets, which in turn may affect the Company’s results of operations
and financial condition.





Item 3.
            Quantitative
      and Qualitative Disclosures About Market
Risk





For the
quarter ended June 30, 2009, the Company did not experience any material changes
in market risk exposures that affect the quantitative and qualitative
disclosures presented in the Company’s 2008 Annual Report on Form
10-K.





Item
      4.
            Controls
      and Procedures





The
Company’s management, with the participation of the Company’s Chief Executive
Officer and its Chief Financial Officer, evaluated the Company’s disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of June 30, 2009. Based upon this evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company’s disclosure
controls and procedures are effective. There were no changes in the Company’s
internal control over financial reporting for the quarter ended June 30, 2009
that have materially affected or are reasonably likely to materially affect the
Company’s internal control over financial reporting.


15





PART II





OTHER
INFORMATION


Item
1.                      Legal
Proceedings




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





Item
1A.                   Risk
Factors




There
were no material changes to Risk Factors disclosed in our annual report on Form
10-K for the year ended December 31, 2008.





Item
4.                      Submission
of Matters to a Vote of Security Holders




The
Company held its 2009 Annual Meeting of Stockholders on May 21, 2009 at its
offices in Allen, Texas. At such meeting, the Company’s stockholders ratified
the appointment of Grant Thornton LLP as independent accountants with 1,764,438
shares voted for ratification, 4,360 voted against, 98 abstentions and no broker
non-votes. The voting with respect to the nominees for election as directors was
as follows:





Nominee
                Votes For
                Votes WithheldHugh
      J. Morgan, Jr.
                1,720,136
                48,761





The terms
of the following directors continued after the meeting: Roger F.
Stebbing, John P. Stupp, Jr., Ronald N. Spaulding, and Emile A.
Battat.





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





16


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
      3, 2009
            By:/s/ Emile A.
      BattatEmile A. BattatChairman andChief Executive OfficerDate:  August 3, 2009
            By:/s/ Jeffery
      StricklandJeffery StricklandVice President andChief
      Financial Officer