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Table of Contents

LOGO

Form 10-Q

YOUNG INNOVATIONS INC—YDNT

Filed: November 09, 2011 (period: September 30, 2011)

Quarterly report which provides a continuing view of a company’s financial position


Table of Contents

Table of Contents

10-Q—SEPTEMBER 30, 2011

 

PART I

  

Item 1. Financial Statements

     2   

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

     14   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     18   

Item 4. Controls and Procedures

     19   

PART II

  

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

     20   

Item 6. Exhibits

     20   

SIGNATURES

     21   

EX-31.1 (SECTION 302 CERTIFICATION—ALFRED BRENNAN)

  

EX-31.2 (SECTION 302 CERTIFICATION—ARTHUR HERBST)

  

EX-32.1 (SECTION 906 CERTIFICATION—A.BRENNAN & A.HERBST)

  

XBRL Content

  


Table of Contents

 

 

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, 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 of

incorporation or organization)

 

(I.R.S. Employer

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  ¨

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  x    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 October 31, 2011:

7,973,320 shares of Common Stock, $0.01 par value per share

 

 

 

 


Table of Contents

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,
2011
    December 31,
2010
 
     (unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 4,000      $ 741   

Trade accounts receivable, net of allowance for doubtful accounts of $280 and $246 in 2011 and 2010, respectively

     13,340        11,721   

Inventories

     17,598        17,260   

Other current assets

     4,805        4,861   
  

 

 

   

 

 

 

Total current assets

     39,743        34,583   
  

 

 

   

 

 

 

Property, plant and equipment, net

     32,726        33,162   

Goodwill

     80,300        80,289   

Other intangible assets

     11,260        11,579   

Other assets

     1,508        2,012   
  

 

 

   

 

 

 

Total assets

   $ 165,537      $ 161,625   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 10,236      $ 10,700   
  

 

 

   

 

 

 

Total current liabilities

     10,236        10,700   
  

 

 

   

 

 

 

Long-term debt

     —          6,100   

Long-term secured borrowing

     22        56   

Deferred income taxes

     17,484        17,417   

Other noncurrent liabilities

     240        248   
  

 

 

   

 

 

 

Total liabilities

     27,982        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

     24,084        24,190   

Retained earnings

     162,607        151,458   

Common Stock in treasury, at cost; 2,220 and 2,248 shares in 2011 and 2010, respectively

     (49,090     (48,484

Accumulated other comprehensive loss

     (148     (162
  

 

 

   

 

 

 

Total stockholders’ equity

     137,555        127,104   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 165,537      $ 161,625   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

2


Table of Contents

YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(unaudited)

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2011     2010     2011     2010  

Net sales

   $ 26,197      $ 26,423      $ 79,548      $ 76,982   

Cost of goods sold

     11,585        11,841        35,325        34,003   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     14,612        14,582        44,223        42,979   

Selling, general and administrative expenses

     8,359        8,501        26,000        25,799   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     6,253        6,081        18,223        17,180   

Interest expense, net

     (49     (81     (177     (263

Other income (expense), net

     100        (62     568        86   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     6,304        5,938        18,614        17,003   

Provision for income taxes

     2,204        2,019        6,476        5,826   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 4,100      $ 3,919      $ 12,138      $ 11,177   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.51      $ 0.49      $ 1.51      $ 1.40   

Diluted earnings per share

   $ 0.51      $ 0.49      $ 1.51      $ 1.39   

Basic weighted average shares outstanding

     8,018        7,953        8,013        7,969   

Diluted weighted average shares outstanding

     8,041        8,013        8,065        8,038   

The accompanying notes are an integral part of these statements.

 

3


Table of Contents

YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

    

Nine Months Ended

September 30,

 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 12,138      $ 11,177   
  

 

 

   

 

 

 

Adjustments to reconcile net income to net cash flows from operating activities:

    

Depreciation and amortization

     3,054        3,177   

Share based compensation expense

     1,389        1,297   

Deferred income taxes

     67        —     

Excess tax benefit from share exercises

     (963     (405

Gain on private equity investment fund

     (493     —     

Gain on sale of building

     (360     —     

Changes in assets and liabilities:

    

Trade accounts receivable

     (1,613     (2,095

Inventories

     (336     (1,130

Other current assets

     64        197   

Other assets

     216        504   

Accounts payable and accrued liabilities

     440        2,707   
  

 

 

   

 

 

 

Total adjustments

     1,465        4,252   
  

 

 

   

 

 

 

Net cash flows from operating activities

     13,603        15,429   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Payments for acquisitions of business and intangible assets

     (55     —     

Purchases of property, plant and equipment

     (2,301     (2,590

Proceeds from sale of building

     431        —     

Proceeds from private equity investment

     778        —     
  

 

 

   

 

 

 

Net cash flows from investing activities

     (1,147     (2,590
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payments on long-term debt

     (16,582     (41,675 )

Borrowings on long-term debt

     10,482        31,896   

Payments on long-term secured borrowings

     (34     (384

Excess tax benefit from share exercises

     963        405   

Proceeds from stock options exercised

     2,230        1,055   

Purchase of treasury stock

     (5,263     (2,642 )

Payment of cash dividends

     (987     (939 )
  

 

 

   

 

 

 

Net cash flows from financing activities

     (9,191     (12,284
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (6     (283 )

Net change in cash and cash equivalents

     3,259        272   

Cash and cash equivalents, beginning of period

     741        67   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 4,000      $ 339   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

4


Table of Contents

YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 and nine months ended September 30, 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 offering includes 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.

 

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Table of Contents

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.” The Company had $37 and $34 of unrecognized tax benefits for the periods ending September 30, 2011 and December 31, 2010, respectively. 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 September 30, 2011 and December 31, 2010 the Company had accrued $21 and $18, respectively, of penalties and interest related to uncertain tax positions.

The Company decreased the amount of unrecognized tax benefits during the nine months ended September 30, 2010 by approximately $58, due to a change in measurement of uncertain tax position recognized in a prior year.

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.

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.

 

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Table of Contents

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 2007.

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 September 30, 2011 and 2010, interest income totaled $9 and $24, respectively, and $32 and $100 for the nine months ended September 30, 2011 and 2010, respectively. For the three months ended September 30, 2011 and 2010, interest expense totaled $58 and $105, respectively, and $209 and $363 for the nine months ended September 30, 2011 and 2010, respectively.

Other Income (Expense), net

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

For the three months ended September 30, 2011, the Company realized approximately $52 of other income related to its private equity investment, and $545 for the nine months ended September 30, 2011.

Supplemental Cash Flow Information

Cash flows from operating activities include $4,240 and $4,700 for the payment of federal and state income taxes and $158 and $219 for the payment of interest or loan charges for the nine months ended September 30, 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 (losses) included in other income, net were $21 and $(62) for the three months ended September 30, 2011 and 2010, respectively and $(16) and $64 for the nine months ended September 30, 2011 and 2010, respectively.

Reclassification

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

3. INVESTMENTS:

On February 21, 2006, the Company invested in a private equity investment fund. At September 30, 2011, the Company has an unfunded capital commitment of up to $300. As of September 30, 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. Additionally, the Company recognized other income of approximately $53 during the second quarter of 2011 from an additional sale of a portion of its private equity investment, which reduced the carrying value by $25 to $1,386. The Company recognized other income of approximately $52 during the third quarter of 2011, related to a distribution of cash, which did not affect the carrying value.

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 $11 and $33 of financing revenue from sales of equipment for the three and nine months ended September 30, 2011. The Company earned $17 and $38 during the three and nine months ended September 30, 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.

 

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On January 16, 2008 the Company transferred a portion of its X-ray equipment loans to a third party for a cash payment of $3,519. The Company subsequently transferred an additional $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 was 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 September 30, 2011, the residual amount of notes receivable transferred to a third party was $241, of which $226 is classified as a short-term notes receivable and $15 as a long-term notes receivable. A corresponding long-term and short-term liability has been recorded, net of the recourse holdback pool of $0, on the Company’s balance sheet.

Notes receivable consist of the following:

 

     September 30,
2011
     December 31,
2010
 

Notes receivable, short-term

   $ 377       $ 593   

Notes receivable, long-term

     41         262   
  

 

 

    

 

 

 

Total notes receivable

   $ 418       $ 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:

 

     September 30,
2011
     December 31,
2010
 

Finished products

   $ 9,798       $ 9,374   

Work in process

     2,872         2,663   

Raw materials and supplies

     4,928         5,223   
  

 

 

    

 

 

 

Total inventories

   $ 17,598       $ 17,260   
  

 

 

    

 

 

 

6. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following:

 

     September 30,
2011
    December 31,
2010
 

Land

   $ 3,411      $ 3,449   

Buildings and improvements

     22,693        22,720   

Machinery and equipment

     30,081        28,055   

Equipment rented to others

     3,396        4,510   

Construction in progress

     1,137        1,476   
  

 

 

   

 

 

 
   $ 60,717      $ 60,210   

Accumulated depreciation

     (27,992     (27,048
  

 

 

   

 

 

 

Total property, plant and equipment, net

   $ 32,726      $ 33,162   
  

 

 

   

 

 

 

 

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Table of Contents

7. GOODWILL AND INTANGIBLE ASSETS:

Goodwill activity is as follows:

 

Balance at December 31, 2010

   $ 80,289   

Foreign currency translation

     11   
  

 

 

 

Balance at September 30, 2011

   $ 80,300   
  

 

 

 

 

     As of September 30, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Amortized intangible assets

        

License agreements

   $ 2,944       $ 542       $ 2,402   

Core technology

     739         263         476   

Trademarks

     50         3         47   

Patents

     2,270         1,441         829   

Product formulas

     430         111         319   

Customer relationships

     813         602         211   

Non-compete agreements

     519         400         119   

Supplier relationships

     399         399         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 8,164       $ 3,761       $ 4,403   

Intangible assets not subject to amortization

        

Trademarks

   $ 6,857       $ —         $ 6,857   
  

 

 

    

 

 

    

 

 

 

Total

   $ 6,857       $ —         $ 6,857   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 15,021       $ 3,761       $ 11,260   
  

 

 

    

 

 

    

 

 

 

 

     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   
  

 

 

    

 

 

    

 

 

 

Total

   $ 6,857       $ —         $ 6,857   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 14,966       $ 3,387      $ 11,579   
  

 

 

    

 

 

    

 

 

 

 

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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, certain trademarks, licensing 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 September 30, 2011 and 2010 was $125 and $143, respectively, and $402 and $444 for the nine months ended September 30, 2011 and 2010, respectively. Estimated amortization expense for each of the next five years is as follows:

 

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 July 22, 2011, the Company entered into a new credit facility. The new credit facility increased the aggregate commitment from $60,000 to $70,000; this agreement expires in July 2016. The Company has $70,000 available under the line of credit at September 30, 2011. Borrowings under the arrangement bear interest at rates ranging from LIBOR +1.25% to LIBOR +1.75% or Prime +0% to Prime +.50%, depending on the Company’s level of indebtedness. Commitment fees for this arrangement range from 0.175% to 0.275% of the unused balance. Borrowings under the previous arrangement had interest rates ranging from LIBOR +2.00% to LIBOR +2.50% or Prime +0.50% to Prime +1.00% and commitment fees from 0.25% to 0.50% of the unused balance. The agreement is unsecured and contains various financial and other covenants. As of September 30, 2011, the Company was in compliance with these covenants.

Long-term debt was as follows:

 

     September 30,
2011
     December 31,
2010
 

Revolving credit facility due 2016 with a weighted-average interest rate of 0% and 2.65% at September 30, 2011 and December 31, 2010, respectively

   $ —         $ 6,100   

Less—current portion

     —           —     
  

 

 

    

 

 

 
   $ —         $ 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 share based award 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.

 

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Stock Options

During the three months ended September 30, 2011 and 2010, the Company recorded pre-tax compensation expense of $0 and $14 related to the Company’s stock option shares, and $6 and $64 for the nine months ended September 30, 2011 and 2010, respectively. The total aggregate intrinsic value of options exercised during the three months ended September 30, 2011 and 2010 was $829 and $36, respectively, and $1,233 and $989 for the nine months ended September 30, 2011 and 2010, respectively. Payments received upon the exercise of stock options for the three months ended September 30, 2011 and 2010 totaled $1,469 and $35, respectively, and $2,230 and $1,055 for the nine months ended September 30, 2011 and 2010, respectively. The related excess tax benefit realized related to these exercises was $460 and $13 for the three months ended September 30, 2011 and 2010, respectively, and $963 and $405 for the nine months ended September 30, 2011 and 2010, respectively. 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 or the nine months ended September 30, 2011 or 2010.

The following table summarizes stock option activity for the nine months ended September 30, 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

     (159   $ 14.07         

Forfeited or expired

     —        $ —           
  

 

 

         

Outstanding at September 30, 2011

     418      $ 33.39         2.70       $ 130   
  

 

 

         

Exercisable at September 30, 2011

     418      $ 33.39         2.70       $ 130   
  

 

 

         

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

 

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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. The Company recorded pre-tax compensation expense of $463 and $412 for the three months ended September 30, 2011 and 2010, respectively, and $1,383 and $1,233 for the nine months ended September 30, 2011 and 2010, respectively related to the Company’s non-vested equity shares. As of September 30, 2011, there was approximately $3,083 of unrecognized compensation cost related to non-vested equity shares which will be amortized over the weighted-average remaining requisite service period of 2.83 years. The Company issues share grants from treasury.

The following table details the status and changes in non-vested equity shares for the nine months ended September 30, 2011:

 

0000000000 0000000000
     Shares(000)     Weighted-Average
Grant Date Fair
Value
 

Non-vested equity shares, January 1, 2011

     193      $ 21.62   

Granted

     56      $ 30.31   

Vested

     (71   $ 23.07   

Forfeited

     —        $ —     
  

 

 

   

Non-vested equity shares, September 30, 2011

     178      $ 23.75   
  

 

 

   

10. COMPREHENSIVE INCOME:

Comprehensive income for the three and nine months ended September 30, 2011 and 2010 was computed as follows:

 

     Three Months  Ended
September 30,
     Nine Months Ended
September 30,
 
     2011     2010      2011      2010  

Net income

   $ 4,100      $ 3,919       $ 12,138       $ 11,177   

Foreign currency translation adjustments, net of tax

     (215     271         14         (230
  

 

 

   

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 3,885      $ 4,190       $ 12,152       $ 10,947   
  

 

 

   

 

 

    

 

 

    

 

 

 

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 had paid him $50 each year. The Company paid him $25 during the three months ended September 30, 2011 and $75 for the nine months ended September 30, 2011.

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 during the period. Diluted earnings per share (Diluted EPS) 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:

 

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     Three Months  Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (unaudited)      (unaudited)  

Net income

   $ 4,100       $ 3,919       $ 12,138       $ 11,177   

Weighted average shares outstanding for basic earnings per share

     8,018         7,953         8,013         7,969   

Dilutive effect of stock options and restricted stock

     23         60         52         69   

Weighted average shares outstanding for diluted earnings per share

     8,041         8,013         8,065         8,038   

Basic earnings per share

   $ 0.51       $ 0.49       $ 1.51       $ 1.40   

Diluted earnings per share

   $ 0.51       $ 0.49       $ 1.51       $ 1.39   

13. COMMITMENTS AND CONTINGENCIES:

In certain circumstances, the Company provides recourse for loans on equipment purchased by customers. Certain banks require the Company to provide recourse to finance 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 September 30, 2011 and December 31, 2010, no equipment financed with various lenders was 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. 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 $344 and $293 at September 30, 2011 and 2010, respectively. The following is a roll forward of the Company’s warranty accrual:

 

     Nine Months  Ended
September 30,
 
     2011     2010  
     (unaudited)  

Balance, beginning of period

   $ 293      $ 292   

Accruals for warranties issued during the year

     237        158   

Warranty settlements made during the year

     (186     (157
  

 

 

   

 

 

 

Balance, end of period

   $ 344      $ 293   
  

 

 

   

 

 

 

14. SUBSEQUENT EVENTS:

On October 18, 2011 the Board of Directors declared a quarterly dividend of $0.04 per share and a special dividend of $1.00 per share, both of which are payable December 15, 2011 to shareholders of record on November 15, 2011.

 

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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 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 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.

 

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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. A liability for the removal costs of the rented X-ray machines is capitalized and amortized over four years.

Stock compensation – Under the provisions of ASC 718, “Compensation- Stock Compensation,” share-based compensation cost is recognized within the financial statements at the grant date based on the award’s fair-value. Stock option fair value is 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 and Liabilities Acquired 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 805 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 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.

 

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

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

Net Sales

Net sales decreased $226 or 0.9% to $26,197 in the third quarter of 2011 from $26,423 in the third quarter of 2010. The demand for consumable products was negatively affected by the ongoing weak economy, as well as the timing of orders for certain products. In addition, we continued to experience a solid increase in demand for our diagnostic product line. Consumable product sales include preventive, infection control, endodontic, micro-applicator and home care product lines. A weaker U.S. dollar positively impacted international sales by approximately $136.

Gross Profit

Gross profit increased $30 or 0.2% to $14,612 in the third quarter of 2011 compared to $14,582 in the third quarter of 2010. Gross margin percentage increased to 55.8% in 2011 from 55.2% in 2010. The increase in gross margin percentage is primarily attributable to the mix of products sold.

Selling, General, and Administrative Expenses

SG&A expenses decreased $142 or 1.7% to $8,359 in the third quarter of 2011 compared to $8,501 in the third quarter 2010 primarily due to lower personnel expenses. As a percentage of net sales, SG&A expenses decreased modestly to 31.9% in the third quarter of 2011 compared to 32.2% in the third quarter of 2010.

Income from Operations

Income from operations increased $172 or 2.8% to $6,253 in the third quarter of 2011 compared to $6,081 in the third quarter of 2010. The change was a result of the factors explained above.

Interest Expense, net

Interest expense, net decreased $32 to $49 in the third quarter of 2011 from $81 in the third quarter of 2010. The decrease was primarily attributable to lower interest rates and no borrowings on the Company’s credit facility.

Other (Expense) Income, net

Other (expense) income, net increased $162 to $100 in the third quarter of 2011 from ($62) in the third quarter of 2010. This increase was primarily attributable to distributions received from the Company’s investment in a private equity fund and foreign exchange transaction gains on inventory purchases by the Company’s Irish subsidiary.

Provision for Income Taxes

Provision for income taxes increased $185 for the third quarter of 2011 to $2,204 from $2,019 in the third 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 third quarter of 2011 was 34.96% versus 34.00% in the third quarter of 2010. The Company’s partial reinvestment of foreign earnings was partly offset by an overall state tax rate increase in 2011. Additionally, the effective tax rate in the third quarter of 2010 reflected a benefit related to a change in measurement of a prior period uncertain tax position.

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

Net Sales

Net sales increased $2,566 or 3.3% to $79,548 in the first nine months of 2011 from $76,982 in the first nine months of 2010. Sales growth for the first nine months was attributed to a strong increase in the sales of diagnostic equipment and solid performance from our consumable products. Consumable product sales include preventive, infection control, endodontic, micro-applicators and home care product lines. A weaker U.S. dollar positively impacted international sales by approximately $352.

 

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Gross Profit

Gross profit increased $1,244 or 2.9% to $44,223 in the first nine months of 2011 compared to $42,979 in the first nine months of 2010. Gross margin slightly decreased to 55.6% of net sales in the first nine months of 2011 compared to 55.8% in the first nine months of 2010. The increase in gross margin dollars is a result of higher sales volume, while the change in gross margin percentage is primarily attributable to the mix of products sold.

Selling, General, and Administrative Expenses

SG&A expenses increased $201 or 0.8% to $26,000 in the first nine months of 2011 from $25,799 in the first nine months of 2010. SG&A was positively impacted by the gain from the sale of the Brownsville, Texas facility, which was mainly offset by increased sales and marketing expenses. As a percent of net sales, SG&A expenses decreased to 32.7% in the first nine months of 2011 compared to 33.5% in the first nine months of 2010 due to sales increasing faster than expenses.

Income from Operations

Income from operations increased $1,043 or 6.1% to $18,223 in the first nine months of 2011 compared to $17,180 in the first nine months of 2010. The change was a result of the factors explained above.

Interest Expense, net

Interest expense, net decreased $86 to $177 in the first nine months of 2011 from $263 in the first nine months of 2010. The decrease was primarily attributable to reduced interest expense resulting from lower borrowings on the Company’s credit facility.

Other (Expense) Income, net

Other income, net was $568 in the first nine months of 2011 compared to $86 in the first nine months of 2010. This change was primarily attributable to gains from sales of portions of the Company’s investment in a private equity fund, in addition to a distribution received from the fund.

Provision for Income Taxes

Provision for income taxes increased $651 in the first nine months of 2011 to $6,476 from $5,826 in the first nine months of 2011 as a result of higher pre-tax income and a slight increase in the effective tax rate. The effective tax rate in the first nine months of 2011 was 34.80% compared to 34.26% in the first nine months of 2010. The Company’s partial reinvestment of foreign earnings was offset by an overall state tax rate increase in 2011. Additionally, the effective tax rate in 2010 reflected a benefit related to a change in measurement of a prior period uncertain tax position.

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 $13,603 and $15,429 for the first nine months of 2011 and 2010, respectively. Net capital expenditures for property, plant and equipment were $2,301 and $2,590 for the nine 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.

The Company maintains a credit agreement with a borrowing capacity of $70,000, which expires in July 2016. Borrowings under the agreement bear interest at rates ranging from LIBOR + 1.25% to LIBOR + 1.75%, or Prime + 0% to Prime +.50%, depending on the Company’s level of indebtedness. Commitment fees for this agreement range from .175% to .275% of the unused balance. The agreement is unsecured and contains various financial and other covenants. As of September 30, 2011, the Company was in compliance with all of these covenants and had $0 in outstanding borrowings under this agreement with $70,000 available for borrowing. Management believes through its operating cash flows as well as borrowing capabilities that 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.

 

 

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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 $0 and $51 of additional interest expense in the three months ended September 30, 2011 and 2010, respectively, and $31 and $91 in the nine months ended September 30, 2011 and 2010, respectively. Alternatively, a 100 basis point decrease in interest rates would have reduced interest expense by approximately $0 and $51 in the three months ended September 30, 2011 and 2010, respectively, and $31 and $91 in the nine months ended September 30, 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 nine months ended September 30, 2011, the Company sold less than 16% of its products outside of the United States. Of these foreign sales, 44 % was 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.

 

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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 September 30, 2011 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

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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
 

July 2011

     1       $ 28.43         1         499   

August 2011

     42       $ 28.50         42         457   

September 2011

     63       $ 27.29         63         394   

Total Third Quarter 2011

     106       $ 27.91         106         394   

 

(1) On July 19, 2011, the Board of Directors announced a share repurchase program authorizing the purchase of up to 500 shares. This program replaces an existing authorization that was set to expire July 31, 2011. This new authorization will expire July 31, 2012.

 

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

 

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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.
November 9, 2011     /s/ Alfred E. Brennan, Jr.
    Alfred E. Brennan, Jr.
    Chief Executive Officer

 

    /s/ Arthur L. Herbst, Jr.
    Arthur L. Herbst, Jr.
    President and Chief Financial Officer

 

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