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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission file number 000-23213
YOUNG INNOVATIONS, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1718931
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
13705 Shoreline Court East, Earth City, Missouri 63045
(Address of principal executive offices)
(Zip Code)
(314) 344-0010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes...X... No........
Number of shares outstanding of the Registrant's Common Stock at
October 31, 2002:
8,973,106 shares of Common Stock, par value $.01 per share
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 12 $ 82
Trade accounts receivable, net of allowance for doubtful accounts
of $362 and $444 in 2002 and 2001, respectively ...................... 8,656 9,916
Inventories ............................................................ 7,525 7,158
Other current assets ................................................... 2,329 1,848
-------- --------
Total current assets ................................................ 18,522 19,004
-------- --------
Property, plant and equipment, net ....................................... 19,064 18,759
-------- --------
Other assets ............................................................. 480 1,151
-------- --------
Intangible assets, net ................................................... 2,313 307
-------- --------
Goodwill ................................................................. 42,414 44,384
-------- --------
Total assets ........................................................ $ 82,793 $ 83,605
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ................................... $ 87 $ 141
Accounts payable and accrued liabilities ............................... 7,186 6,424
-------- --------
Total current liabilities ........................................... 7,273 6,565
-------- --------
Deferred income taxes .................................................... 4,312 4,312
-------- --------
Long-term debt, less current maturities .................................. 6,087 16,843
-------- --------
Stockholders' equity:
Common stock, voting, $.01 par value per share, 25,000 shares
authorized, 8,914 and 8,921 shares issued and outstanding
in 2002 and 2001, respectively ..................................... 89 89
Additional paid-in capital ............................................. 27,462 27,828
Deferred stock compensation ............................................ (1,355) (1,608)
Retained earnings ...................................................... 55,493 47,361
Common stock in treasury, at cost, 1,305 and 1,418 shares in 2002 and
2001, respectively .................................................. (16,568) (17,785)
-------- --------
Total stockholders' equity .......................................... 65,121 55,885
-------- --------
Total liabilities and stockholders' equity .......................... $ 82,793 $ 83,605
======== ========
The accompanying notes are an integral part of these statements.
2
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------ ------------
Net sales $18,086 $16,760 $52,534 $45,711
Cost of goods sold 8,610 7,865 24,443 21,768
------------- ------------- ------------ ------------
Gross profit 9,476 8,895 28,091 23,943
Selling, general and administrative expenses 4,772 4,882 14,463 13,073
------------- ------------- ------------ ------------
Income from operations 4,704 4,013 13,628 10,870
------------- ------------- ------------ ------------
Other expense (income), net 41 70 297 42
------------- ------------- ------------ ------------
Income before provision for income taxes 4,663 3,943 13,331 10,828
Provision for income taxes 1,819 1,518 5,199 4,169
------------- ------------- ------------ ------------
Net income $2,844 $2,425 $8,132 $6,659
============= ============= ============ ============
Basic earnings per share $0.32 $0.25 $0.92 $0.68
============= ============= ============ ============
Diluted earnings per share $0.30 $0.24 $0.87 $0.66
============= ============= ============ ============
Basic weighted average shares outstanding 8,908 9,828 8,859 9,800
============= ============= ============ ============
Diluted weighted average shares outstanding 9,432 10,080 9,384 10,031
============= ============= ============ ============
The accompanying notes are an integral part of these statements.
3
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income $8,132 $6,659
------------- -------------
Adjustments to reconcile net income to net cash flows from
operating activities --
Depreciation and amortization 1,879 2,322
Deferred income taxes ----- (155)
Loss on disposal of property, plant and equipment 148 -----
Changes in assets and liabilities --
Trade accounts receivable 1,680 960
Inventories (442) (830)
Other current assets (912) (403)
Other assets 671 363
Accounts payable and accrued liabilities 501 (145)
------------- -------------
Total adjustments 3,525 2,112
------------- -------------
Net cash flows from operating activities 11,657 8,771
------------- -------------
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired 431 (9,343)
Purchases of property, plant and equipment (2,199) (6,450)
------------- -------------
Net cash flows from investing activities (1,768) (15,793)
------------- -------------
Cash flows from financing activities:
Borrowings of long-term debt 39,286 13,253
Payments on long- term debt (50,096) (6,574)
Proceeds from stock options exercised 851 617
Purchases of treasury stock ----- (26)
------------- -------------
Net cash flows from financing activities (9,959) 7,270
------------- -------------
Net (decrease) / increase in cash and cash equivalents (70) 248
Cash and cash equivalents, beginning of period 82 -----
------------- -------------
Cash and cash equivalents, end of period $12 $248
============= =============
The accompanying notes are an integral part of these statements.
4
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
GENERAL:
This report includes information in a condensed format and should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company's 2001 Annual Report on Form 10-K. The results of
operations for the nine months ended September 30, 2002 are not necessarily
indicative of the results expected for the full year or any other interim
period.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed, or omitted, pursuant to the rules of
the Securities and Exchange Commission. In our opinion, the statements include
all adjustments necessary (which are of a normal recurring nature) for the fair
presentation of the results of the interim periods presented.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
1. ORGANIZATION:
Young Innovations, Inc. and subsidiaries (the "Company") develops, manufactures
and markets supplies and equipment used by dentists, dental hygienists, dental
assistants and consumers. The Company's product offering includes disposable and
metal prophy angles, prophy cups and brushes, panoramic x-ray machines, dental
handpieces (drills), orthodontic toothbrushes, flavored examination gloves,
children's toothbrushes, children's toothpastes, and moisture control and
infection control products. The Company's manufacturing and distribution
facilities are located in Missouri, California, Indiana, Colorado, Tennessee and
Texas.
On March 12, 2002, the Board of Directors declared a three-for-two stock split
of the Company's Common Stock in the form of a stock dividend payable on March
28, 2002 to shareholders of record as of the close of business on March 22,
2002. All share and per share numbers in this Report give effect to such stock
split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Young Innovations,
Inc. and its direct and indirect wholly owned subsidiaries. All significant
inter-company accounts and transactions are eliminated in consolidation.
REVENUE RECOGNITION
Revenue from the sale of products is recorded at the time title passes,
generally when the products are shipped as our shipping terms are customarily
FOB shipping point. Revenue from the rental of equipment to others is recognized
on a month-to-month basis as the revenue is earned.
PRODUCT RETURNS AND WARRANTIES
The Company generally warrants its products against defects and its most
generous policy provides a two-year parts and labor warranty on X-ray machines.
The policy with respect to sales returns generally provides that a customer may
not return inventory except at the Company's option with the exception of X-ray
machines, which have a 90-day return policy. The Company records an accrual for
the estimated cost of warranty coverage and returns at the time the product is
shipped.
5
3. ACQUISITIONS:
On June 12, 2001 the Company acquired substantially all of the assets and
assumed a portion of the liabilities of the Biotrol and Challenge subsidiaries
of Pro-Dex, Inc. (collectively "Biotrol"). The Company originally paid $9,343 in
cash including transaction costs, with money set aside in escrow pending the
settlement of any indemnification claims. Upon final settlement, the purchase
price was $8,912. The acquisition was financed with borrowings on the Company's
credit facility and cash generated from operations. The acquisition was
accounted for as a purchase transaction. During the second quarter of 2002, the
final purchase price allocation was determined based upon estimates of fair
value of assets and liabilities. This excess of purchase price over the
estimated fair value of net assets acquired (goodwill) was $6,160. In accordance
with SFAS 142, $2,060 of separately identifiable intangible assets, including
trademarks, product formulations, and supplier relationships, were also
recorded. The trademarks have been determined to have indefinite lives. The
remaining intangible assets are being amortized over a period between 5 years
and 40 years. The results of operations for Biotrol are included in the
consolidated financial statements since June 12, 2001.
4. SEGMENT INFORMATION:
Segment information has been prepared in accordance with Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." In 2000, with the acquisition of Plak
Smacker, the Company has two operating segments according to SFAS No. 131:
professional and retail. The professional segment sells products to dentists,
dental hygienists and dental assistants. The retail segment sells products to
consumers through mass merchandisers. There are no significant determinable
assets or interest costs for the retail segment.
The table below is a summary of certain financial information relating to the
two segments:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
----------------------------------------------- -------------------------------------------
PROFESSIONAL RETAIL CONSOLIDATED PROFESSIONAL RETAIL CONSOLIDATED
------------ ------ ------------ ------------ ------ ------------
Net sales.................... $ 16,932 $ 1,154 $ 18,086 $ 49,022 $ 3,512 $ 52,534
Income from operations....... $ 4,593 $ 111 $ 4,704 $ 13,433 $ 195 $ 13,628
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
----------------------------------------------- -------------------------------------------
PROFESSIONAL RETAIL CONSOLIDATED PROFESSIONAL RETAIL CONSOLIDATED
------------ ------ ------------ ------------ ------ ------------
Net sales.................... $ 15,627 $ 1,133 $ 16,760 $ 42,117 $ 3,594 $ 45,711
Income from operations....... $ 3,965 $ 48 $ 4,013 $ 10,636 $ 234 $ 10,870
5. INVENTORIES:
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------- --------
Finished products...................................... $ 4,174 $ 3,340
Work in process........................................ 1,683 2,030
Raw materials and supplies............................. 1,668 1,788
------ -------
Total inventories................................. $ 7,525 $ 7,158
======= =======
6
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
Land................................................................. $ 1,086 $ 1,086
Buildings and improvements........................................... 7,241 7,448
Machinery and equipment.............................................. 16,318 15,350
Equipment rented to others........................................... 5,914 5,257
Construction in progress............................................. 831 605
--- ---
31,390 29,746
Less- Accumulated depreciation....................................... (12,326) (10,987)
-------- --------
Total property, plant and equipment, net.................. $ 19,064 $ 18,759
======== ========
7. GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). In
accordance with SFAS 142, the Company will no longer amortize goodwill and
intangibles which have indefinite lives. Other intangible assets with finite
lives will continue to be amortized over their useful lives.
SFAS 142 also requires that the Company assess goodwill and intangibles with
indefinite lives for impairment at least annually, based on the fair value of
the related reporting unit or intangible asset. On an on-going basis, the
Company anticipates performing its annual impairment assessment in the fourth
quarter of each year.
The impairment test for goodwill is a two-step process. The first step is to
identify when a goodwill impairment has occurred by comparing the fair value of
a reporting unit with its carrying amount, including goodwill. If the fair value
of a reporting unit exceeds its carrying amount, goodwill of the reporting unit
is not considered impaired. If the carrying amount of the reporting unit exceeds
its fair value, the second step of the goodwill test should be performed to
measure the amount of the impairment loss, if any. In this second step, the
implied fair value of the reporting unit's goodwill is compared with the
carrying amount of the goodwill. If the carrying amount of the reporting unit's
goodwill exceeds the implied fair value of that goodwill, an impairment loss
should be recognized in an amount equal to that excess, not to exceed the
carrying amount of the goodwill.
In accordance with the transition rules of SFAS 142, the Company performed the
transitional impairment tests during the first half of 2002. We performed our
transition impairment testing as of January 1, 2002. We established our
reporting units based on our current reporting structure. We then assigned all
existing goodwill and intangible assets to the reporting units. All of the
goodwill was allocated to the reporting units in the professional segment. We
engaged an independent valuation and appraisal firm to assist us with
determining fair values based upon discounted future estimated cash flows and
other valuation techniques. Fair values of the reporting units exceeded their
respective book values. Thus no impairment was identified as of January 1, 2002,
and no Step 2 testing was deemed necessary.
With the finalization of the purchase accounting relating to the acquisition of
Biotrol (acquired June 12, 2001), intangible assets other than goodwill of
$2,060 were identified in accordance with Statement of Financial Accoutning
Standards No.141, Business Combinations. This as well as other purchase price
adjustments and finalization of the purchase accounting resulted in a reduction
in the net carrying value of goodwill from $44,384 at December 31, 2001 to
$42,414 at September 30, 2002. There have been no changes in goodwill related to
impairment losses or write-offs due to sale of businesses.
7
Other intangibles consist of the following, which are all included in the
Professional Segment:
AS OF DECEMBER 31, 2001
-----------------------
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
Patents $ 485 $178 $307
------ ---- ----
Total $ 485 $178 $307
AS OF SEPTEMBER 30, 2002
------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
Patents $ 485 $197 $288
Product formulas 430 13 417
Supplier relationships 130 32 98
------ ---- ----
Total $1,045 $242 $803
Unamortized intangible assets
Trademarks $1,510
------
Total $1,510
The costs of other intangible assets with finite lives are amortized over their
expected useful lives using the straight-line method. The amortization lives are
as follows: 18 to 20 years for patents, 40 years for product formulations and 5
years for supplier relationships. The weighted average life for amortizable
intangible assets is 26 years. Aggregate amortization expense for the nine
months ended September 30, 2002 was $64. Estimated amortization expense for each
of the next five years is as follows:
For the year ended 12/31/02 $ 80
For the year ended 12/31/03 62
For the year ended 12/31/04 62
For the year ended 12/31/05 62
For the year ended 12/31/06 37
SFAS No. 142 does not require retroactive restatement for all periods presented.
However, presented below is a reconciliation of the 2001 statement of income
data previously reported to reflect the impact related to its adoption:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Reported net income $ 2,844 $ 2,425 $ 8,132 $ 6,659
Add: amortization adjustment, net of - $ 243 - $ 671
--------- --------- --------- ---------
related tax
Adjusted net income $ 2,844 $ 2,668 $ 8,132 $ 7,330
========= ========= ========= =========
Reported basic earnings per share $ 0.32 $ 0.25 $ 0.92 $ 0.68
Add: amortization adjustment - $ 0.02 - $ 0.07
--------- --------- --------- ---------
Adjusted basic earnings per share $ 0.32 $ 0.27 $ 0.92 $ 0.75
========= ========= ========= =========
Reported diluted earnings per share $ 0.30 $ 0.24 $ 0.87 $ 0.66
Add: amortization adjustment - $ 0.02 - $ 0.07
--------- --------- --------- ---------
Adjusted diluted earnings per share $ 0.30 $ 0.26 $ 0.87 $ 0.73
========= ========= ========= =========
8
8. CREDIT ARRANGEMENTS AND NOTES PAYABLE:
The Company has a credit arrangement that provides for a three-year, unsecured
revolving credit facility with an aggregate commitment of $40 million.
Borrowings under the arrangement bear interest at rates ranging from LIBOR +1%
to LIBOR +2.25% or Prime to Prime +.5%. Administrative fees for this arrangement
range from .15% to .25% of the unused balance. The agreement is unsecured and
contains various financial and other covenants.
Long-term debt was as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
Revolving credit facility due 2004 with a weighted-average interest
rate of 2.73% at September 30, 2002 and 2.98% at December 31, 2001 $ 6,000 $ 16,700
Capital Lease Obligations 174 284
--- ---
6,174 16,984
Less- current portion 87 141
------- --------
$ 6,087 $ 16,843
======= ========
In certain circumstances, the Company provides recourse for loans for equipment
purchases by customers. Certain banks require the Company to provide recourse to
finance equipment for new dentists and other customers with credit histories
which are not consistent with the banks' lending criteria. Based on the
Company's past experience with respect to these arrangements, it is of the
opinion of management that the fair value of the recourse provided is zero. As
of September 30, 2002, approximately $500 of the equipment financed with various
lenders was subject to such recourse.
9. EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share includes the dilutive effect of stock options and restricted
stock, if any, using the treasury stock method. The following table sets forth
the computation of basic and diluted earnings per share:
THREE MONTHS ENDED
------------------
SEPTEMBER 30, SEPTEMBER 30,
------------- ------------
2002 2001
---- ----
Net income ................................ $ 2,844 $ 2,425
Weighted average shares outstanding for
basic earnings per share .................. 8,908 9,828
Dilutive effect of stock options and
restricted stock .......................... 524 252
Weighted average shares outstanding for
diluted earnings per share ................ 9,432 10,080
Basic earnings per share .................. $ .32 $ .25
Diluted earnings per share ................ $ .30 $ .24
9
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- ------------
2002 2001
---- ----
Net income ............................... $ 8,132 $ 6,659
Weighted average shares outstanding for
basic earnings per share ................. 8,859 9,800
Dilutive effect of stock options and
restricted stock ......................... 525 231
Weighted average shares outstanding for
diluted earnings per share ............... 9,384 10,031
Basic earnings per share ................. $ .92 $ .68
Diluted earnings per share ............... $ .87 $ .66
10. COMMITMENTS AND CONTINGENCIES:
On May 24, 2001, Sultan Dental Products, Ltd. ("Sultan") filed a complaint in
the United States District Court for the Southern District of New York (which
was subsequently dismissed by the plaintiff and refiled in the United States
District Court for the District of New Jersey on October 16, 2001) asserting
that the Young disposable prophy angle infringes a patent that is exclusively
licensed to Sultan. The complaint seeks a permanent injunction and unspecified
damages. The Company believes it has meritorious defenses to the claims and
intends to vigorously defend this matter. In addition, on January 25, 2002, the
Company filed a complaint in the United States District Court for the Eastern
District of Missouri asserting that the manufacture of the Sultan disposable
prophy angle infringes the Company's U.S. Patent No. 5,749,728. The complaint
seeks a permanent injunction and damages. This case has been transferred to the
District of New Jersey and consolidated for pretrial matters with Sultan's case.
The parties are still in the process of completing the court-ordered mediation.
The Company and its subsidiaries from time to time are also parties to various
legal proceedings arising in the normal course of business. Management believes
that none of these proceedings, if determined adversely, would have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
11. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." Under SFAS No. 143, the fair
value of a liability for an asset retirement obligation is required to be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS No. 143 is required to
be implemented by the Company by January 1, 2003. Adoption of SFAS No. 143 is
not expected to have a material impact on the consolidated financial statements
of the Company.
In April 2002, the Financial Accounting Standards Board issued SFAS no. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB Statement No.
13, and Technical Corrections." SFAS No. 145 addresses classification of
extinguishment of debt and requires accounting for lease modifications in the
same manner as sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. SFAS
No. 145 is required to be implemented by the Company by January 1, 2003.
Adoption of SFAS No. 145 is not expected to have a material impact on the
consolidated financial statements of the Company.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." Under SFAS
No. 146, liabilities are recognized for exit and disposal costs only when a
liability is incurred, rather than at the date of an entity's commitment to an
exit plan. SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS No. 146 is not expected to have a
material impact on the consolidated financial statements of the Company.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In December 2001, the SEC requested that all registrants include in their MD&A
their most critical accounting policies, the judgments and uncertainties
affecting the application of those policies, and the likelihood that materially
different amounts would be reported under different conditions using different
assumptions. The SEC indicated that a "critical accounting policy" is one which
is both important to the portrayal of the company's financial condition and
results and requires management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. We believe that the following accounting
policies fit this definition:
Allowance for doubtful accounts - Accounts receivable balances are subject to
credit risk. Management has attempted to reserve for expected credit losses,
sales returns and allowances, and discounts based upon past experience as well
as knowledge of current customer information. We believe that our reserves are
adequate. It is possible, however, that the accuracy of our estimation process
could be impacted by unforeseen circumstances. We continuously review our
reserve balance and refine the estimates to reflect any changes in
circumstances; however, we cannot guarantee that we will accurately estimate
credit losses on these accounts receivable.
Inventory - The Company values inventory at the lower of cost or market.
Management regularly reviews inventory quantities on hand and records a
provision for excess or obsolete inventory based primarily on estimated product
demand and other knowledge related to the inventory. Demand for our products can
fluctuate and our estimates of future product demand may change or be
inaccurate, in which case we may have understated or overstated the provision
required for excess or obsolete inventory. In the future, if our inventory is
determined to be overvalued, we would be required to recognize such costs in our
cost of goods sold at the time of such determination. Likewise, if our inventory
is determined to be undervalued, we may have over-reported our cost of goods
sold in previous periods and would be required to recognize such additional
operating income at the time of sale. Therefore, although we make every effort
to ensure the accuracy of our provision, any significant unanticipated changes
could have a significant impact on the value of our inventory and our reported
operating results.
Legal - The Company and its subsidiaries from time to time are parties to
various legal proceedings arising in the normal course of business. Management,
with the assistance of external legal counsel, performs an analysis of current
litigation and will record liabilities if a loss is probable and can be
reasonably estimated. The Company believes the reserve is adequate, however it
can not guarantee that costs will not be incurred in excess of current
estimates.
RESULTS OF OPERATIONS (In thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
NET SALES
- ---------
Net sales increased $1,326 or 7.9% to $18,086 in the third quarter of 2002 from
$16,760 in the third quarter of 2001. The increase was primarily a result of
increased sales in the Professional Segment, which includes preventive,
infection control and diagnostic product lines. Sales from the three months
ended September 30, 2001 were negatively affected by the events of September 11,
2001.
GROSS PROFIT
- ------------
Gross profit increased $581 or 6.5%, to $9,476 in the third quarter of 2002 from
$8,895 in the third quarter of 2001. The additional gross profit was a result of
the increased net sales. Gross margin decreased slightly to 52.4% of net sales
in the third quarter of 2002 from 53.1% in the third quarter of 2001. The
decrease was primarily a result of the product mix.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
- ---------------------------------------------
SG&A expenses decreased $110 or 2.3% to $4,772 in the third quarter of 2002 from
$4,882 in the third quarter of 2001. The decrease was the result of the
elimination of the amortization of goodwill ($333 in the third quarter of 2001)
starting in 2002 in accordance with the adoption of SFAS 142. The decrease from
SFAS 142 was partially offset by increased legal expenses due to the Sultan
litigation as well as increased other administrative expenses. As a percent of
net sales, SG&A expenses decreased to 26.4% in 2002 from 29.1% in 2001 primarily
as a result of the adoption of SFAS 142.
11
INCOME FROM OPERATIONS
- ----------------------
Income from operations increased $691 or 17.2%, to $4,704 in the third quarter
of 2002 from $4,013 in the third quarter of 2001. The increase was a result of
the items explained above.
OTHER EXPENSE, NET
- ------------------
Other expense, net decreased $29 to $41 in the third quarter of 2002 from $70 in
the third quarter of 2001. The decrease was primarily attributable to a
reduction in interest expense resulting from lower borrowings on the Company's
credit facility.
PROVISION FOR INCOME TAXES
- --------------------------
Provision for income taxes increased $301 for the third quarter of 2002 to
$1,819 from $1,518 in the third quarter of 2001. The effective tax rate in 2002
of 39.0% compares to 38.5% for 2001, reflecting the phase-in of the 35% federal
tax rate, partially offset by the elimination of goodwill amortization expense
in accordance with SFAS 142.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
NET SALES
- ---------
Net sales increased $6,823 or 14.9% to $52,534 for the nine months of 2002 from
$45,711 for the first nine months of 2001. The increase was primarily a result
of the addition of Biotrol sales for the full period ($4,131 of additional
sales) as well as growth in the Professional Segment.
GROSS PROFIT
- ------------
Gross profit increased $4,148 or 17.3%, to $28,091 for the first nine months of
2002 from $23,943 for the first nine months of 2001. Gross profit benefited from
the acquisition of Biotrol and from strong sales in the Professional Segment.
Gross margin increased to 53.5% of net sales for the first nine months of 2002
from 52.4% of net sales for the comparable period in 2001. The increase was
primarily a result of the acquisition of Biotrol in addition to manufacturing
productivity improvements and cost savings associated with the consolidation of
our Sacramento, CA facility into our Earth City, MO operations.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
- ---------------------------------------------
SG&A expenses increased $1,390, or 10.6%, to $14,463 for the first nine months
of 2002 from $13,073 for the first nine months of 2001. The increase resulted
primarily from additional SG&A expenses related to the Biotrol acquisition as
well as other administrative expenses. These additional expenses are partially
offset by the elimination of the amortization of goodwill ($904 for the first
nine months of 2001) starting in 2002 in accordance with the adoption of SFAS
142. As a percent of net sales, SG&A expenses decreased to 27.5% in 2002 from
28.6% in 2001 primarily as a result of the adoption of SFAS 142, which was
partially offset by the expenses associated with the Biotrol acquisition.
INCOME FROM OPERATIONS
- ----------------------
Income from operations increased $2,758 or 25.4%, to $13,628 for the first nine
months of 2002 from $10,870 for the first nine months of 2001. The increase is a
result of the items explained above.
OTHER EXPENSE, NET
- ------------------
Other expense, net increased $255 to $297 for the first nine months of 2002 from
$42 for the comparable period in 2001. The increase was primarily attributable
to $232 of additional interest expense resulting from increased borrowings on
the Company's credit facility as well as $97 of increased expense associated
with the Company's one-third interest in International Assembly, Inc. These
increases were partially offset by $82 of additional rental income in the
comparable period.
PROVISION FOR INCOME TAXES
- --------------------------
Provision for income taxes increased $1,030 in 2002 to $5,199 from $4,169 in
2001. The effective tax rate in 2002 of 39.0% compares to 38.5% for 2001,
reflecting the phase-in of the 35% federal tax rate, partially offset by the
elimination of goodwill amortization expense in accordance with SFAS 142.
12
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through cash
flow from operating activities and, to a lesser extent, through borrowings under
its credit facility. Net cash flow from operating activities was $11,657 and
$8,771 for the first nine months of 2002 and 2001, respectively. Capital
expenditures for property, plant and equipment were $2,199 and $6,450 for the
first nine months of 2002 and 2001, respectively. During the first nine months
of 2001, the Company spent approximately $3,400 for additional land and
buildings at its Earth City, MO and its Ft. Wayne, IN locations. In addition,
the Company spent approximately $3,100 to purchase machinery and equipment,
panoramic X-ray machines to be rented to customers and to fund other capital
expenditures to update various manufacturing operations. Consistent with the
Company's historical capital expenditures, future capital expenditures are
expected to include facility improvements, panoramic X-ray machines for the
Company's rental program, production machinery and information systems.
On November 2, 2001, the Company purchased 1,050 shares of its common stock from
George E. Richmond, its Chairman for approximately $14,900. The purchase was
financed through borrowings under the Company's credit facility.
On June 12, 2001, the Company acquired substantially all of the assets of
Biotrol/Challenge. The Company originally paid $9,343 in cash, with money set
aside in escrow pending the settlement of any indemnification claims. Upon final
settlement, the purchase price was $8,912. The purchase price was financed with
borrowings on the Company's credit facility and with cash flows from operations.
During March 2001, the Company entered into a one-year $20,000 credit agreement.
The agreement was amended in April and September 2001, to extend the term to
three-years and increase the borrowing capacity to $40,000. Borrowings under the
agreement bear interest at rates ranging from LIBOR + 1% to LIBOR + 2.25% or
Prime to Prime + .5%. Administrative fees for this agreement range from .15% to
..25% of the unused balance. The agreement is unsecured, contains various
financial and other covenants as well as limitations on indebtedness. As of
September 30, 2002 and December 31, 2001, the Company was in compliance with all
of these covenants. As of September 30, 2002, the Company had $6,000 in
outstanding borrowings under this agreement and $34,000 available for borrowing.
Management believes through its operating cash flows as well as borrowing
capabilities, the Company has adequate liquidity and capital resources to meet
its needs on a short and long-term basis.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." Under SFAS No. 143, the fair
value of a liability for an asset retirement obligation is required to be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS No. 143 is required to
be implemented by the Company by January 1, 2003. Adoption of SFAS No. 143 is
not expected to have a material impact on the consolidated financial statements
of the Company.
In April 2002, the Financial Accounting Standards Board issued SFAS no. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB Statement No.
13, and Technical Corrections." SFAS No. 145 addresses classification of
extinguishment of debt and requires accounting for lease modifications in the
same manner as sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. SFAS
No. 145 is required to be implemented by the Company by January 1, 2003.
Adoption of SFAS No. 145 is not expected to have a material impact on the
consolidated financial statements of the Company.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." Under SFAS
No. 146, liabilities are recognized for exit and disposal costs only when a
liability is incurred, rather than at the date of an entity's commitment to an
exit plan. SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS No. 146 is not expected to have a
material impact on the consolidated financial statements of the Company.
13
FORWARD-LOOKING STATEMENTS
Investors are cautioned that this report as well as other reports and oral
statements by Company officials may contain certain forward-looking statements
as defined in the Private Securities Litigation and Reform Act of 1995.
Forward-looking statements include statements which are predictive in nature,
which depend upon or refer to future events or conditions and which include
words such as "expects", "anticipates", "intends", "plans", "believes",
"estimates" or similar expressions. These statements are not guaranties of
future performance and the Company makes no commitment to update or disclose any
revisions to forward-looking statements, or any facts, events or circumstances
after the date hereof that may bear upon forward-looking statements. Because
such statements involve risks and uncertainties, actual actions and strategies
and the timing and expected results thereof may differ materially from those
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, those disclosed in the Company's
Annual Report on Form 10-K and other reports filed with the Securities and
Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign exchange rates. From time to time, the
Company finances acquisitions, capital expenditures and its working capital
needs with borrowings under a revolving credit facility. Due to the variable
interest rate feature on the debt, the Company is exposed to interest rate risk.
A theoretical 100 basis point increase in interest rates would have resulted in
approximately $90 and $22 of additional interest expense in the nine month
periods ended September 30, 2002 and 2001, respectively. Alternatively, a 100
basis point decrease in interest rates would have reduced interest expense by
approximately $90 and $22 in the nine month periods ended September 30, 2002 and
2001, respectively.
Sales of the Company's products in a given foreign country can be affected by
fluctuations in the exchange rate. However, the Company sells approximately 6%
of its products outside of the United States. Of these foreign sales,
approximately 97% are denominated in US dollars with the remaining 3%
denominated in Canadian dollars. As a result, the Company does not feel that
foreign currency movements have a material impact on its financial statements.
The Company does not use derivatives to manage its interest rate or foreign
exchange rate risks.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation within 90 days of the filing date of this report, that our
disclosure controls and procedures are effective in ensuring that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. There have been no significant changes in our internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the previous mentioned evaluation.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On May 24, 2001, Sultan Dental Products, Ltd. ("Sultan") filed
a complaint in the United States District Court for the
Southern District of New York (which was subsequently
dismissed by the plaintiff and refiled in the United States
District Court for the District of New Jersey on October 16,
2001) asserting that the Young disposable prophy angle
infringes a patent that is exclusively licensed to Sultan. The
complaint seeks a permanent injunction and unspecified
damages. The Company believes it has meritorious defenses to
the claims and intends to vigorously defend this matter. In
addition, on January 25, 2002, the Company filed a complaint
in the United States District Court for the Eastern District
of Missouri asserting that the manufacture of the Sultan
disposable prophy angle infringes the Company's U.S. Patent
No. 5,749,728. The complaint seeks a permanent injunction and
damages. This case has been transferred to the District of New
14
Jersey and consolidated for pretrial matters with Sultan's
case. The parties are still in the process of completing the
court-ordered mediation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
None.
15
SIGNATURE
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.
YOUNG INNOVATIONS, INC.
November 13, 2002 /s/ Arthur L. Herbst, Jr.
- ---------------------- --------------------------------------------------
Date Arthur L. Herbst, Jr.
Executive Vice President, Chief Operating Officer,
& Chief Financial Officer
16
CERTIFICATIONS
--------------
I, Alfred E. Brennan, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Young
Innovations, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Alfred E. Brennan, Jr.
---------------------------
Alfred E. Brennan, Jr.
Chief Executive Officer
17
I, Arthur L. Herbst, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Young
Innovations, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Arthur L. Herbst, Jr.
--------------------------
Arthur L. Herbst, Jr.
Executive Vice President, Chief Operating Officer,
& Chief Financial Officer
18