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EX-32.1 - CERTIFICATION - A. BRENNAN & A. HERBST - YOUNG INNOVATIONS INCy48794_10qx321.htm
EX-31.2 - CERTIFICATION - ARTHUR HERBST - YOUNG INNOVATIONS INCy48794_10qx312.htm
EX-31.1 - CERTIFICATION - ALFRED BRENNAN - YOUNG INNOVATIONS INCy48794_10qx311.htm

 
 
Form 10-Q
 
YOUNG INNOVATIONS INC - YDNT
 
Filed: May 10, 2011 (period: March 31, 2011)
 
Quarterly report which provides a continuing view of a company's financial position
 


 
 

 
 
 
 
Table of Contents
 
 
10-Q - MARCH 31, 2011

PART I

Item 1.                      Financial Statements.
Item 2.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.                      Quantitative and Qualitative Disclosures About Market Risk.
Item 4.                      Controls and Procedures.

PART II


Item 2.                      Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6.                      Exhibits.
SIGNATURES

EX-31.1 (SECTION 302 CERTIFICATION)

EX-31.2 (SECTION 302 CERTIFICATION)

EX-32.1 (SECTION 906 CERTIFICATION)




 
 

 
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 March 31, 2011

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 000-23213

YOUNG INNOVATIONS, INC.
(Exact name of registrant as specified in its charter)
 
Missouri
 
43-1718931
(State or other jurisdiction
 
(I.R.S. Employer Identification No.)
of incorporation or organization)
   

 
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 [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [_] No [_]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]

Number of shares outstanding of the registrant’s Common Stock at April 30, 2011:
8,021,323 shares of Common Stock, $0.01 par value 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)
 

   
March 31, 
   
December 31,
   
2011 
   
2010 
   
(unaudited) 
     
Assets
         
 Current assets:
         
  Cash and cash equivalents
$
799
 
$
741
  Trade accounts receivable, net of allowance for doubtful accounts of $235
     and $246 in 2011 and 2010, respectively 
 
 12,913
   
 11,721
  Inventories
 
17,501
   
17,260
  Other current assets
 
5,119
   
 4,861
     Total current assets
 
36,332
   
34,583
Property, plant and equipment, net
 
32,849
   
33,162
Goodwill
 
80,358
   
80,289
Other intangible assets
 
11,476
   
11,579
Other assets
 
1,652
   
2,012
     Total assets
$
162,667
 
$
161,625
           
Liabilities and Stockholders’ Equity
         
Current liabilities:
    Accounts payable and accrued liabilities
$
10,095
 
$
10,700
Total current liabilities
 
10,095 
   
10,700 
Long-term debt
 
3,742
   
6,100
Long-term secured borrowing
 
106 
   
56 
Deferred income taxes
 
17,427 
   
17,417 
Other noncurrent liabilities
 
246 
   
248
      Total liabilities
 
31,616 
   
34,521
Stockholders’ equity:
         
  Common stock, voting, $.01 par value, 25,000 shares authorized,
10,219 shares issued in 2011 and 2010
 
102 
   
 102
  Additional paid-in capital
 
23,588
   
24,190
  Retained earnings
 
155,109
   
151,458
  Common stock in treasury, at cost; and 2,199 shares in 2011 and 2,248 in
    2010, respectively
 
(47,766) 
   
 (48,484)
Accumulated other comprehensive (loss)  income
 
 18
   
 (162)
    Total stockholders' equity
 
131,051
   
 127,104
      Total liabilities and stockholders' equity
$
162,667
 
$
161,625
         
 
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
March 31,
 
   
2011
   
2010
 
             
Net sales
 
$
26,024
   
$
24,782
 
Cost of goods sold
   
11,561
     
10,980
 
Gross profit
   
14,463
     
13,802
 
Selling, general and administrative expenses
   
8,697
     
8,395
 
Income from operations
   
5,766
     
5,407
 
Interest expense, net
   
(73)
     
(101)
 
Other income, net
   
433
     
84
 
Income before provision for income taxes
   
6,126
     
5,390
 
Provision for income taxes
   
2,126
     
1,832
 
Net income
 
$
4,000
   
$
3,558
 
Basic earnings per share
 
$
0.50
   
$
0.45
 
Diluted earnings per share
 
$
0.50
   
$
0.44
 
Basic weighted average shares outstanding
   
8,010
     
7,984
 
Diluted weighted average shares outstanding
   
8,074
     
8,060
 
                 
                 
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)
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
  Net income
 
$
4,000
   
$
3,558
 
   Adjustments to reconcile net income to net cash flows from operating activities:
               
   Depreciation and amortization
   
1,083
     
1,012
 
   Share based compensation expense
   
452
     
441
 
   Deferred income taxes
   
10
     
-
 
   Excess tax benefit from share exercises
   
(360)
     
(122) 
 
   Gain on private equity investment fund
   
(440)
     
-
 
   Changes in assets and liabilities, net of acquisitions :
               
        Trade accounts receivable
   
(1,157)
     
(712)
 
        Inventories
   
(203)
     
835
 
        Other current assets
   
(223)
     
81
 
        Other assets
   
98
     
204
 
        Accounts payable and accrued liabilities
   
(301)
     
2,245
 
             Total adjustments
   
(1,041)
     
3,984
 
             Net cash flows from operating activities
   
2,959
     
7,542
 
                 
Cash flows from investing activities:
               
   Payments for acquisitions of intangible assets
   
(55) 
     
-
 
   Purchases of property, plant and equipment
   
(528)
     
(1,077
)
   Proceeds from private equity investment
   
703 
     
­-
 
             Net cash flows from investing activities
   
            120
     
(1,077
)
                 
Cash flows from financing activities:
               
   Payments on long-term debt
   
(9,368)
     
(19,318
)
   Borrowings on long-term debt
   
7,010
     
13,844
 
   Payments of long-term secured borrowings
   
(34)
     
(94
)
   Excess tax benefit/ (deficit) from share exercises
   
360
     
122
 
   Proceeds from stock options exercised
   
458
     
212
 
   Purchase of treasury stock
   
(1,133)
     
(534
)
   Payment of cash dividends
   
(345)
     
(310
)
           Net cash flows from financing activities
   
(3,052)
     
(6,078
)
                 
  Effect of exchange rate changes on cash and cash equivalents
   
31
     
(62)
 
                 
  Net change in cash and cash equivalents
   
58
     
325
 
  Cash and cash equivalents, beginning of period
   
741
     
67
 
  Cash and cash equivalents, end of period
 
$
799
   
$
392
 
                 
                                 The accompanying notes are an integral part of these statements.
               
                 
 
4
 
 
 

 


 


YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(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 our Annual Report on Form 10-K for the year ended December 31, 2010.  The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results expected for the full year or any other interim period.

The accompanying condensed 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 information at December 31, 2010 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 its subsidiaries (“the Company”) develops, manufactures and markets supplies and equipment used by dentists, dental hygienists, dental assistants and consumers.  The Company's product offerings include disposable and metal prophylaxis (“prophy”) angles, prophy cups and brushes, dental micro-applicators, panoramic X-ray machines, moisture control products, infection control products, dental handpieces (drills) and related components, endodontic systems, orthodontic toothbrushes, flavored examination gloves, children's toothbrushes, and children's toothpastes.  The Company’s manufacturing and distribution facilities are located in Missouri, Illinois, California, Indiana, Wisconsin and Ireland.

2.          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Young Innovations, Inc. and its direct and indirect wholly owned subsidiaries.  All significant intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.  Actual results could differ from those estimates.  Some of the more significant estimates include allowances for doubtful accounts, inventory valuation reserves, rebate accruals, warranty reserves, liabilities for incentive compensation, and uncertain income tax positions.
 
5
 
 
 

 


 


Revenue Recognition

Revenue from the sale of products is recorded at the time title passes, generally when the products are shipped, as the Company’s 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. The Company generally requires payment within 30 days from the date of invoice and offers cash discounts for early payment. For certain acquired businesses that offer different terms, the Company migrates these customers to the terms referred above over time. 

The Company offers discounts to its distributors if certain conditions are met. Customer allowances, volume discounts and rebates, and other short-term incentive programs are recorded as a reduction in reported revenues at the time of sale. The Company reduces product revenue for the estimated redemption of annual rebates on certain current product sales. Customer allowances and rebates are estimated based on historical experience and known trends.

The policy with respect to sales returns generally provides that a customer may not return inventory, except at the Company’s option. 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 Company owns X-ray equipment rented on a month-to-month basis to customers. 

The Company complies with the disclosure requirements of ASC Topic 605, “Revenue Recognition” (that is, gross versus net presentation) for tax receipts on the face of its income statements. The scope of this guidance includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes (gross receipts taxes are excluded). The Company presents such taxes on a net basis.

Fair Value of Financial Instruments

Financial instruments consist principally of cash, accounts receivable, notes receivable, accounts payable and debt.  The estimated fair value of these instruments approximates their carrying value.  Due to the short term nature of the notes receivable, book value approximates fair value.

Income Taxes

The Company uses an estimated annual effective income tax rate to compute the quarterly tax provision pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 270, “Interim Reporting”, and ASC 740, “Income Taxes.”  Calculation of the estimated annual effective income tax rate requires significant judgment and is affected by, among others, variances in expected operating income for the year, projections of income earned and taxed in foreign jurisdictions, variances in non-deductible expenses, and changes in tax rates. The year-to-date effect of the change is recorded in the current period when the Company’s estimate of the annual effective income tax rate changes.

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740, “Income Taxes.”  As of March 31, 2011 and December 31, 2010, the Company had $34 of unrecognized tax benefits. The entire amount of unrecognized tax benefits would favorably impact the effective income tax rate if recognized. Penalties and interest related to unrecognized tax benefits are included in income tax expense.  As of March 31, 2011 and December 31, 2010, the Company had accrued $18 of penalties and interest related to uncertain tax positions.  For the three months ended March 31, 2011 and 2010, the Company did not record any interest and penalties.

The Company is not aware of any other tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.
 
6
 
 
 

 
The Company has provided a deferred tax liability for United States income taxes on the undistributed earnings of its foreign subsidiary that will not be permanently invested.  For 2011, the Company anticipates that a portion of the earnings from its foreign subsidiary will remain permanently invested, as the funds will be used for facility expansion.

The Company and its subsidiaries are subject to domestic federal and state income taxes as well as foreign income taxes. With certain exceptions, the Company is no longer subject to U.S. federal, state, and local or non-U.S. income tax examinations by tax authorities for years prior to 2006.

Interest Expense, net

Interest expense, net includes interest paid related to borrowings on the Company’s credit facility and secured borrowing, as well as interest income earned on various investments and notes receivable.  For the three months ended March 31, 2011 and 2010, interest income totaled $13 and $35, and interest expense totaled $86 and $136, respectively.

Other Income, net
 
Other income, net includes foreign currency transaction gain/loss and other miscellaneous income, all of which are not directly related to the Company’s primary business.

During the first quarter of 2011, the Company recognized other income of approximately $440 from the sale of a portfolio company of its private equity investment.

Supplemental Cash Flow Information

Cash flows from operating activities include $22 and $267 for the payment of federal and state income taxes and $62 and $74 for the payment of interest or loan charges for the three months ended March 31, 2011 and 2010, respectively.

Foreign Currency Translation

The translation of financial statements into U.S dollars has been performed in accordance with ASC 830 “Foreign Currency Matters.”  The local currency for all entities included in the condensed consolidated financial statements has been designated as the functional currency.  Non-U.S. dollar denominated assets and liabilities have been translated into U.S. dollars at the rate of exchange prevailing at the balance sheet date.  Revenues and expenses have been translated at the weighted average of exchange rates in effect during the quarter.  Translation adjustments are recorded in accumulated other comprehensive income (loss).  Net currency transaction gains included in other income, net were $1 and $61 for the three months ended March 31, 2011 and 2010, respectively.

Reclassification

Certain prior year amounts have been reclassified to conform with current year presentation.

3.          INVESTMENTS:

On February 21, 2006, the Company invested in a private equity investment fund.  At March 31, 2011, the Company has an unfunded capital commitment of up to $300.  As of March 31, 2011, the total capital commitment paid by the Company was $1,950.  The Company accounts for its investment using the cost method. 

During the first quarter of 2011, the Company recognized other income of approximately $440 from the sale of a portion of its private equity investment, which reduced the carrying value of the investment by $260 to $1,411. The Company may receive additional amounts in the future related to excess funds being released from escrow or a potential additional earn-out based on financial performance.

4.          NOTES RECEIVABLE:

The Company offers various financing options to its X-ray equipment customers, including notes payable to the Company.  The X-ray equipment is used to secure the notes.  The Company earned $22 of financing revenue from sales of equipment for the three months ended March 31, 2011.  The Company did not earn financing revenue from the sale of equipment for the three months ended March 31, 2010. These transactions are recorded as a sale upon the transfer of title to the purchaser, which generally occurs at the time of shipment, at an amount equal to the sales price of non-financed sales.  Interest on these notes was accrued as earned and recorded as interest income.
 
 
  7

 

On January 16, 2008, the Company transferred a majority of its X-ray equipment loans to a third party for a cash payment of $3,519.  The Company transferred $4,154 of the notes receivable portfolio for a purchase price of $4,140.  Of the purchase price, $621 is subject to a recourse holdback pool that has been established with respect to the limited recourse the third party has on the loans.  On May 5, 2008, the Company transferred additional X-ray equipment loans to a third party for a cash payment of $235.  There is an additional $42 subject to a recourse holdback pool.  As the transactions do not qualify as sales of assets under ASC Topic 860 “Transfers and Servicing” the transactions have been treated as financing and the loans remain on the Company’s balance sheet.  As the third party receives payments on the transferred notes, the Company reduces the corresponding notes receivable and secured borrowing balances.  As of March 31, 2011, the residual amount of notes receivable transferred to a third party was $489, of which $383 is classified as a short-term notes receivable and $106 as a long-term notes receivable.  A corresponding long-term and short-term liability has been recorded, net of the recourse holdback pool of $9, on the Company’s balance sheet.

 
8




 
 

 

Notes receivable consist of the following:
   
March 31,
   
December 31,
 
   
2011
   
2010
 
       
Notes receivable, short-term
 
$
540
   
$
593
 
Notes receivable, long-term
   
160
     
262
 
                 
Total notes receivable
 
$
700
   
$
855
 

Notes receivable are included in other current assets and other assets in the accompanying condensed consolidated balance sheets.

5.          INVENTORIES:

Inventories consist of the following:
   
March 31,
   
December 31,
 
   
2011
   
2010
 
       
Finished products                                                                   .
 
$
9,239
   
$
9,374
 
Work in process
   
2,906
     
2,663
 
Raw materials and supplies
   
5,356
     
5,223
 
Total inventories
 
$
17,501
   
$
17,260
 

6.          PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following:
   
March 31,
   
December 31,
 
   
2011
   
2010
 
       
Land                                                                                    
 
$
3,449
   
$
3,449
 
Buildings and improvements                                                                                    
   
22,841
     
22,720
 
Machinery and equipment                                                                                    
   
28,875
     
28,055
 
Equipment rented to others                                                                                    
   
4,174
     
4,510
 
Construction in progress                                                                                    
   
1,368
     
1,476
 
   
$
60,707
   
$
60,210
 
                 
Accumulated depreciation                                                                                    
   
(27,858)
     
(27,048)
 
Total property, plant and equipment, net                                                                       
 
$
32,849
   
$
33,162
 

7.          GOODWILL AND INTANGIBLE ASSETS:

Goodwill activity is as follows:
       
Balance at December 31, 2010
 
$
80,289
 
Foreign currency translation
   
69
 
Balance at March 31, 2011
 
$
80,358
 

 
9

 
 

 

 
   
As of March 31, 2011
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
 
Amortized intangible assets
                 
     License agreements
 
$
2,944
   
$
500
   
$
2,444
 
     Core technology
   
739
     
240
     
499
 
     Patents
   
2,320
     
1,353
     
967
 
     Product formulas
   
430
     
106
     
324
 
     Customer relationships
   
813
     
567
     
246
 
     Non-compete agreements
   
519
     
380
     
139
 
     Supplier relationships
   
399
     
399
     
-
 
          Total
 
$
8,164
   
$
3,545
   
$
4,619
 
                         
Intangible assets not subject to amortization
                       
     Trademarks
   
6,857
     
-
     
6,857
 
          Total
 
6,857
   
-
   
6,857
 
          Total intangible assets
 
$
15,021
   
$
3,545
   
$
11,476
 



   
As of December 31, 2010
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
 
Amortized intangible assets
                 
     License agreements
 
$
2,944
   
$
448
   
$
2,496
 
     Core technology
   
739
     
229
     
510
 
     Patents
   
2,265
     
1,301
     
964
 
     Product formulas
   
430
     
103
     
327
 
     Customer relationships
   
813
     
549
     
264
 
     Non-compete agreements
   
519
     
371
     
148
 
     Supplier relationships
   
399
     
386
     
13
 
          Total
 
$
8,109
   
$
3,387
   
$
4,722
 
                         
Intangible assets not subject to amortization
                       
     Trademarks
   
6,857
     
-
     
6,857
 
           
 
$
6,857
   
$
     
$
6,857
 
          Total intangible assets
 
$
14,966
   
$
3,387
   
$
11,579
 


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: 10 to 25 years for patents, license agreements and core technology; 40 years for product formulations; and 5 to 8 years for supplier and customer relationships.  Non-compete agreements are amortized over the length of the signed agreement.  The weighted average life for amortizable intangible assets is 16 years.  Aggregate amortization expense for the three months ended March 31, 2011 and 2010 was $158 and $150, respectively.  Estimated amortization expense for each of the next five years is as follows:

 
10

 
 

 

For the year ending 12/31/11                                                          $541
For the year ending 12/31/12                                                          $476
For the year ending 12/31/13                                                          $476
For the year ending 12/31/14                                                          $402
For the year ending 12/31/15                                                          $286

8.           CREDIT ARRANGEMENTS AND NOTES PAYABLE:

On May 21, 2009, the Company renewed its credit facility.  The new credit facility reduced the aggregate commitment from $75,000 to $60,000 and expires in July 2012.  The Company has $56,258 available under the line of credit at March 31, 2011.  Borrowings under the arrangement bear interest at rates ranging from LIBOR + 2.00% to LIBOR +2.50% or Prime + .50% to Prime + 1.00%, depending on the Company’s level of indebtedness.  Commitment fees for this arrangement range from .25% to .50% of the unused balance.  The agreement is unsecured and contains various financial and other covenants.  As of March 31, 2011 and December 31, 2010 the Company was in compliance with these covenants.

Long-term debt was as follows:
 
March 31,
   
December 31,
 
   
2011
   
2010
 
Revolving credit facility due 2012 with a weighted-average interest
rate of 2.75% and 2.65% at March 31, 2011 and December 31, 2010, respectively
 
$
3,742
   
$
6,100
 
Less - current portion
   
--
     
--
 
   
$
3,742
   
$
6,100
 

9.          SHARE-BASED COMPENSATION:

The Company adopted the 1997 Stock Option Plan (the “1997 Plan”) effective in November 1997 and amended the Plan in 1999 and 2001.  A total of 1,725 shares of Common Stock were reserved for issuance under this plan which is administered by the compensation committee of the Board of Directors (“Compensation Committee”).  The Company adopted the 2006 Long-Term Incentive Plan (“the 2006 Plan”) effective in May 2006.  The 2006 Plan is intended to be a successor to the 1997 Plan.  A total of 700 shares were authorized for grant under the 2006 Plan.  Awards under the 2006 Plan may be stock options, stock appreciation rights, restricted stock, restricted stock units, and other equity awards.

Any employee of the Company or its affiliates, any consultant whom the Compensation Committee determines is significantly responsible for the Company’s success and future growth and profitability, and any member of the Board of Directors, may be eligible to receive awards under the 2006 Plan.  The purpose of the 2006 Plan is to: (a) attract and retain highly competent persons as employees, directors, and consultants of the Company; (b) provide additional incentives to such employees, directors, and consultants by aligning their interests with those of the Company’s shareholders; and (c) promote the success of the business of the Company.  The Compensation Committee establishes vesting schedules for each option issued under the Plan.  Under the 1997 Plan, outstanding options generally vested over a period of up to four years while non-vested equity shares vested over five years.  Under the 2006 Plan, outstanding options generally vest over a period of up to three years while non-vested equity shares vest over one, two, three, four and five year periods.  All outstanding options expire ten years from the date of grant under the 1997 Plan and five years from the date of grant under the 2006 Plan.

Stock Options

During the three months ended March 31, 2011 and 2010, the Company recorded pre-tax compensation expense of $6 and $37 related to the Company’s stock option shares.   The total aggregate intrinsic value of options exercised during the three months ended March 31, 2011 and 2010 was $236 and $200, respectively. 
 
11




 
 

 

Payments received upon the exercise of stock options for the three months ended March 31, 2011 and 2010 totaled $458 and $212, respectively.  The related tax benefit realized related to these exercises was $360 and $122 for the three months ended March 31, 2011 and 2010.  The Company issues shares from treasury upon share option exercises.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. There were no stock options granted during the three months ended March 31, 2011 or 2010.
 
 The following table summarizes stock option activity for the three months ended March 31, 2011:
                     
Options
 
Shares
(000)
   
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term
 
Aggregate
Intrinsic Value
($000)
 
Outstanding at January 1, 2011
   
577
   
$
28.08
         
Granted
   
--
     
--
         
Exercised
   
(32)
   
$
14.25
         
Forfeited or expired
   
--
     
--
         
Outstanding at March 31, 2011
   
545
   
$
28.90
 
2.58 yrs
 
$
2,542
 
Exercisable at March 31, 2011
   
545
   
$
28.90
 
2.58 yrs
 
$
2,542
 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Companies’ closing stock price on the last trading day of the first quarter of 2011 and the exercise price, multiplied by the number of in-the-money options).

Non-Vested Equity Shares
 
Under the 2006 Plan, non-vested equity share units and restricted stock may be awarded or sold to participants under terms and conditions established by the Compensation Committee.  The Company calculates compensation cost for restricted stock grants to employees and non-employee directors by using the fair market value of its Common Stock at the date of grant and the number of shares issued. This compensation cost is amortized over the applicable vesting period.  During the three months ended March 31, 2011 and 2010, the Company recorded pre-tax compensation expense of $446 and $404, respectively, related to the Company’s non-vested equity shares.  As of March 31, 2011, there was approximately $3,976 of unrecognized compensation cost related to non-vested equity shares which will be amortized over the weighted-average remaining requisite service period of 1.85 years.  The Company issues share grants from treasury.
 
The following table details the status and changes in non-vested equity shares for the three months ended March 31, 2011:
 
   
Shares
(000)
   
Weighted-Average
Grant Date
Fair Value
 
Non-vested equity shares, January 1, 2011
   
193
   
$
21.62
 
Granted
   
54
   
$
30.30
 
Vested
   
(65)
   
$
22.72
 
Forfeited
   
--
     
--
 
Non-vested equity shares, March 31, 2010
   
182
   
$
23.78
 

10.
          COMPREHENSIVE INCOME:

Comprehensive income for the three and nine months ended March 31, 2011 and 2010 was computed as follows:

   
Three Months Ended
March 31,
   
   
2011
   
2010
   
                   
Net income
 
$
4,000
   
$
3,588
   
Foreign currency translation adjustments, net of tax
   
180
     
  (235)
 
   
Comprehensive income
 
4,180
   
3,323
     

11.          RELATED-PARTY TRANSACTIONS:

The Company has an employment agreement with George E. Richmond, the Company’s Vice Chairman and principal stockholder.  On February 25, 2010, the Company increased his annual salary from $50 to $100 which was effective January 1, 2010.  This increase was offset by the termination of the consulting agreement between Mr. Richmond and the Company effective December 31, 2009, which paid him $50 each year in 2009 and 2008.  The Company paid him $25 during the three months ended March 31, 2011 and 2010.


 
12




 
 

 

12.          EARNINGS PER SHARE:

Basic earnings per share (Basic EPS) is computed by dividing net income by the weighted average number of shares of Common Stock outstanding and total number of shares of restricted stock during the period.  Diluted earnings per share (Diluted EPS) includes the dilutive effect of stock options, if any, using the treasury stock method.  The following table sets forth the computation of basic and diluted earnings per share:

   
Three Months Ended
March 31,
   
   
2011
   
2010
   
                   
Net income
 
$
4,000
   
$
3,588
   
Weighted average shares outstanding for basic earnings per share
   
8,010
     
7,984
     
Dilutive effect of stock options and restricted stock
   
64
     
76
     
Weighted average shares outstanding for diluted earnings per share
   
8,074
     
8,060
     
Basic earnings per share
 
$
0.50
   
$
0.45
     
Diluted earnings per share
 
$
0.50
   
$
0.44
     
Dividends declared per share
 
$
0.04
   
$
0.04
     

13.          COMMITMENTS AND CONTINGENCIES:

In certain circumstances, the Company provides recourse for loans for X-ray equipment purchases by customers. Certain banks require the Company to provide recourse to finance X-ray equipment for new dentists and other customers with credit histories that are not consistent with the banks' lending criteria. In the event that a bank requires recourse on a given loan, the Company would assume the bank’s security interest in the equipment securing the loan.  As of March 31, 2011 and December 31, 2010, no equipment financed with various lenders were subject to recourse.  Recourse on a given loan is generally for the life of the loan.  Based on the Company's past experience with respect to these arrangements, it is the opinion of management that the fair value of the recourse provided is minimal and not material to the results of operations or financial position of the Company.

The Company and its subsidiaries, from time to time, are 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.

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.  Historically, the level of product returns has not been significant.  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 accrual for warranty costs was $326 and $277 at March 31, 2011 and 2010, respectively.  The following is a roll forward of the Company’s warranty accrual:

 
13




 
 

 

 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
       
Balance, December 31
 
$
           293 
   
$
292
 
Accruals for warranties issued during the quarter
   
             45 
     
180
 
Warranty settlements made during the quarter
   
(12)
     
(195
)
Balance, March 31
 
$
           326 
   
$
277
 

14.          SUBSEQUENT EVENTS:
   
On May 10, 2011, the Board declared a quarterly dividend of $0.04 per share, payable June 15, 2011to shareholders of record on May 23, 2011.

In April 2011, the Company closed on the sale of its Brownsville, Texas facility.  The gain on the sale will affect diluted earnings per share by approximately $0.03.


 
14




 
 

 

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

Critical Accounting Policies

The SEC has requested that all registrants include in their MD&A a description of 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.  The Company believes that the following accounting policies fit this definition:

Allowance for doubtful accounts –Accounts receivable balances are subject to credit risk.  Management has reserved for expected credit losses, sales returns and allowances, and discounts based upon past experience, as well as knowledge of current customer information.  The Company believes that its reserves are adequate.  It is possible, however, that the accuracy of our estimation process could be impacted by unforeseen circumstances.  The Company continuously reviews its reserve balance and refines the estimates to reflect any changes in circumstances.

Inventory – The Company values inventory at the lower of cost or market on a first-in, first-out (FIFO) basis.  Inventory values are based upon standard costs, which approximate actual costs.  Management regularly reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on estimated product demand and other information related to the inventory, including planned introduction of new products and changes in technology.  If demand for the Company’s products is significantly different than management’s expectations, the value of inventory could be materially impacted.  Inventory write-downs are included in cost of goods sold.

Goodwill and other intangible assets – In accordance with Accounting Standards Codification (“ASC”)  Topic 350, “Intangibles- Goodwill and Other,” goodwill and other intangible assets with indefinite useful lives are reviewed by management for impairment at least annually, or whenever events or changes in circumstances indicate the carrying amount may not be recoverable.  If indicators of impairment are present, the determination of the amount of impairment would be based on management’s judgment as to the future operating cash flows to be generated from the assets.  ASC Topic 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC Topic 360, “Property, Plant, and Equipment.”

Revenue Recognition - Revenue from the sale of products is recorded at the time title passes, generally when the products are shipped, as the Company’s shipping terms are customarily FOB shipping point. 

The Company generally requires payment within 30 days from the date of invoice and offers cash discounts for early payment.  For certain acquired businesses that offer different terms, the Company migrates these customers to the terms referred above over time. 

The Company offers discounts to its distributors if certain conditions are met.  Customer allowances, volume discounts and rebates, and other short-term incentive programs are recorded as a reduction in reported revenues at the time of sale.  The Company reduces product revenue for the estimated redemption of annual rebates on certain current product sales. Customer allowances and rebates are estimated based on historical experience and known trends.

The policy with respect to sales returns generally provides that a customer may not return inventory except at the Company’s option.  Historically, the level of product returns has not been significant.  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 Company owns X-ray equipment rented on a month-to-month basis to customers. 

Stock compensation - In accordance with ASC Topic 718, “Stock Compensation,” compensation cost is recognized within the financial statements based on the awards’ fair-value at the grant date.  Stock option fair value is

 
15
 
 
 

 

calculated by an option pricing model, and is recognized as expense ratably over the requisite service period. The option pricing models require judgmental assumptions including: volatility, forfeiture rates, and expected option life. If any of the assumptions used in the model change significantly, share-based compensation expense may differ in the future from that recorded in the current period.  The Company uses the Black-Scholes option pricing model.  Compensation expense is also recognized for restricted stock using the fair market value of our Common Stock at the date of grant.

Assets Acquired and Liabilities Assumed in Business Combinations – The Company periodically acquires businesses.  All business acquisitions completed subsequent to January 1, 2009 are accounted for under the provisions of ASC Topic 805, “Business Combinations,” which requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date.  It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in the periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recorded as income tax expense.  The changes related to income taxes also impact the accounting for acquisitions completed prior to the effective date of ASC 805.  In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life.  Acquisitions completed prior to this adoption were made using the purchase method.  Future acquisitions will be impacted using the provisions of the new accounting standard.

RESULTS OF OPERATIONS (In thousands, except per share data)

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

Net Sales
Net sales increased $1,242 or 5.0% to $26,024 in the first quarter of 2011 from $24,782 in the first quarter of 2010.  The sales increase was driven by strong growth for our diagnostic products, as well as solid demand for our consumable products, which include preventive, infection control, endodontic, micro-applicators and home care product lines.

Gross Profit
Gross profit increased $661 or 4.8% to $14,463 in the first quarter of 2011 compared to $13,802 in the first quarter of 2010.  The gross margin percentage of 55.6% in the first quarter of 2011 changed slightly from 55.7% in the first quarter of 2010.  The increase in gross margin dollars was a result of higher sales volume, while the slight change in gross margin percentage is primarily attributable to the mix of products sold.

Selling, General, and Administrative Expenses
SG&A expenses increased $302 or 3.6% to $8,697 in the first quarter of 2011 compared to $8,395 in the first quarter of 2010, primarily due to higher marketing costs. As a percentage of net sales, SG&A expenses decreased modestly to 33.4% in the first quarter of 2011 compared to 33.9% in the first quarter of 2010, primarily due to sales increasing faster than expenses.
 
Income from Operations
Income from operations increased $359 or 6.6% to $5,766 in the first quarter of 2011 compared to $5,407 in the first quarter of 2010.  The change was a result of the factors described above.

Interest Expense, net
Interest expense, net decreased $28 to $73 in the first quarter of 2011 from $101 in the first quarter of 2010.  The decrease was primarily attributable to lower borrowings on the Company's credit facility.

 
16




 
 

 

Other Income, net
Other income, net increased $349 to $433 in the first quarter of 2011 from $84 in the first quarter of 2010.  The increase was primarily attributable to a gain from the sale of a portion of its private equity investment.

Provision for Income Taxes
Provision for income taxes increased $294 for the first quarter of 2011 to $2,126 from $1,832 in the first quarter of 2010 as a result of higher pre-tax income and an increase in the effective tax rate.  The effective tax rate in the first quarter of 2011 was 34.7% compared to 34.0% in the first quarter of 2010.  The rate increase was primarily due to a higher Illinois corporate tax rate for 2011 and a one-time tax benefit that occurred in the first quarter of 2010, which resulted from a change in measurement of a prior period uncertain tax position.  These items were partially offset by the Company’s partial reinvestment of foreign earnings.

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 $2,959 and $7,542 for the first three months of 2011 and 2010, respectively.  Operating cash flow decreased in 2011 when compared to 2010 primarily due to a decrease in accounts payable as a result of the timing of vendor payments, planned increases in inventory, as well as an increase in accounts receivable resulting from increased sales.  The timing of collections did not adversely impact the aging of receivables.  Net capital expenditures for property, plant and equipment were $528 and $1,077 for the three months of 2011 and 2010, respectively.  Total cash flow benefited from a gain from the sale of a portfolio company of the Company’s private equity investment fund and an increase in net income.

The Company maintains a credit agreement with a borrowing capacity of $60,000, which expires in July 2012.  Borrowings under the agreement bear interest at rates ranging from LIBOR + 2.0% to LIBOR + 2.5%, or Prime, depending on the Company’s level of indebtedness.  Commitment fees for this agreement range from .25% to .5% of the unused balance. The agreement is unsecured and contains various financial and other covenants.  As of March 31, 2011, the Company was in compliance with all of these covenants.  During the three months ended March 31, 2011, the Company borrowed under the credit facility to finance investments in facilities and for working capital needs.  At March 31, 2011, the Company had $3,742 in outstanding borrowings under this agreement and $56,258 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.


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 SEC.

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. 

 
17




 
 

 

A theoretical 100 basis point increase in interest rates would have resulted in approximately $49 and $112 of additional interest expense in the three month periods ended March 31, 2011 and 2010, respectively.  Alternatively, a 100 basis point decrease in interest rates would have reduced interest expense by approximately $49 and $112 in the three month periods ended March 31, 2011 and 2010, respectively.

Sales of the Company’s products in a given foreign country can be affected by fluctuations in the exchange rate.  For the three months ended March 31, 2011, the Company sold less than 16% of its products outside of the United States.  Of these foreign sales, 50% were denominated in Euros and 3% in Canadian dollars.  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.

Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and that the information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during the quarterly period ended March 31, 2011 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 
18




 
 

 


 

PART II
OTHER INFORMATION


Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.



 
ISSUER PURCHASES OF EQUITY SECURITIES (in thousands, except per share data) (1)


 
 
 
 
 
 
 
      Period
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Program
   
Maximum Number of Shares that May Yet Be Purchased Under the Program
 
March 2011
   
16
   
$
30.40
     
16
     
500
 
Total First Quarter 2011
   
16
   
$
30.40
     
16
     
500
 


(1)  
The share repurchase program authorizing the purchase of up to 500,000 shares was announced July 19, 2010. The authorization will expire July 31, 2011 and replaces the previous share repurchase program which expired in July 2010.



Item 6.
Exhibits.


 
Exhibits.

31.1  Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
         Section 302 of the Sarbanes-Oxley Act of 2002.

31.2  Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
         Section 302 of the Sarbanes-Oxley Act of 2002.

32.1  Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
         Section 906 of the Sarbanes-Oxley Act of 2002.


 
 
19


 
 

 


 


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.

 

 
 
YOUNG INNOVATIONS, INC.
   
 
/s/     Alfred E. Brennan, Jr.
May 10, 2011
------------------------------------------------------------
Date
Alfred E. Brennan, Jr.
 
Chief Executive Officer
   
 
/s/     Arthur L. Herbst, Jr.
 
------------------------------------------------------------
 
Arthur L. Herbst, Jr.
 
President and Chief Financial Officer


 
20