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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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, 2012:

7,916,202 shares of Common Stock, $0.01 par value per share

 

 

 


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,
2012
    December 31,
2011
 
     (unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 15,038      $ 1,031   

Trade accounts receivable, net of allowance for doubtful accounts of $248 and $250 in 2012 and 2011, respectively

     13,004        12,066   

Inventories

     17,625        17,161   

Other current assets

     4,676        4,729   
  

 

 

   

 

 

 

Total current assets

     50,343        34,987   
  

 

 

   

 

 

 

Property, plant and equipment, net

     31,134        32,272   

Goodwill

     80,248        80,254   

Other intangible assets

     10,817        11,130   

Other assets

     813        1,143   
  

 

 

   

 

 

 

Total assets

   $ 173,355      $ 159,786   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 10,470      $ 9,134   
  

 

 

   

 

 

 

Total current liabilities

     10,470        9,134   
  

 

 

   

 

 

 

Long-term debt

     —          650   

Long-term secured borrowing

     —          9   

Deferred income taxes

     19,374        19,534   

Other noncurrent liabilities

     202        206   
  

 

 

   

 

 

 

Total liabilities

     30,046        29,533   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common Stock, voting, $.01 par value, 25,000 shares authorized, 10,219 shares issued in 2012 and 2011; 7,916 shares outstanding in 2012 and 7,868 shares outstanding in 2011

     102        102   

Additional paid-in capital

     25,643        24,708   

Retained earnings

     170,601        158,647   

Common Stock in treasury, at cost; 2,303 shares in 2012 and 2,351 in 2011, respectively

     (52,750     (52,924

Accumulated other comprehensive loss

     (287     (280
  

 

 

   

 

 

 

Total stockholders’ equity

     143,309        130,253   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 173,355      $ 159,786   
  

 

 

   

 

 

 

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
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Net sales

   $ 27,123      $ 26,197      $ 81,931      $ 79,548   

Cost of goods sold

     12,097        11,585        36,311        35,325   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     15,026        14,612        45,620        44,223   

Selling, general and administrative expenses

     8,395        8,359        26,354        26,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     6,631        6,253        19,266        18,223   

Interest expense, net

     (59     (49     (172     (177

Other income, net

     7        100        749        568   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     6,579        6,304        19,843        18,614   

Provision for income taxes

     2,282        2,204        6,945        6,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 4,297      $ 4,100      $ 12,898      $ 12,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.54      $ 0.51      $ 1.63      $ 1.51   

Diluted earnings per share

   $ 0.54      $ 0.51      $ 1.63      $ 1.51   

Basic weighted average shares outstanding

     7,905        8,018        7,887        8,013   

Diluted weighted average shares outstanding

     7,914        8,041        7,891        8,065   

The accompanying notes are an integral part of these statements.

 

3


YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012      2011     2012     2011  

Net income

   $ 4,297       $ 4,100      $ 12,898      $ 12,138   

Foreign currency translation adjustments, net of tax

     75         (215     (7     14   
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 4,372       $ 3,885      $ 12,891      $ 12,152   
  

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

4


YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 12,898      $ 12,138   
  

 

 

   

 

 

 

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

    

Depreciation and amortization

     2,941        3,054   

Share based compensation expense

     1,367        1,389   

Deferred income taxes

     (160     67  

Excess tax benefit from share exercises

     (97     (963

Gain on private equity investment fund

     (694     (545

Gain on sale of building

     —          (360

Changes in assets and liabilities:

    

Trade accounts receivable

     (962     (1,613

Inventories

     (467     (336

Other current assets

     66        64   

Other assets

     12        216   

Accounts payable and accrued liabilities

     1,467        492   
  

 

 

   

 

 

 

Total adjustments

     3,473        1,465   
  

 

 

   

 

 

 

Net cash flows from operating activities

     16,371        13,603   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Payments for acquisitions of business and intangible assets, net of cash acquired

     —          (55 )

Purchases of property, plant and equipment

     (1,497     (2,301

Proceeds from sale of building

     —          431  

Proceeds from private equity investment

     1,008        778  
  

 

 

   

 

 

 

Net cash flows from investing activities

     (489     (1,147
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payments on long-term debt

     (1,100     (16,582

Borrowings on long-term debt

     450        10,482   

Payments on long-term secured borrowings

     (9     (34

Excess tax benefit from share exercises

     97        963   

Proceeds from stock options exercised

     3,252        2,230   

Purchase of treasury stock

     (3,615     (5,263

Payment of cash dividends

     (947     (987
  

 

 

   

 

 

 

Net cash flows from financing activities

     (1,872     (9,191
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (3     (6

Net change in cash and cash equivalents

     14,007        3,259   
  

 

 

   

 

 

 

Cash and cash equivalents, beginning of period

     1,031        741   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 15,038      $ 4,000   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

5


YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(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, 2011. The results of operations for the three and nine months ended September 30, 2012 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, 2011 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, evaluation of goodwill for impairment, rebate accruals, warranty reserves, liabilities for incentive compensation, and uncertain income tax positions.

 

6


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.

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 of unrecognized tax benefits for both periods ending September 30, 2012 and December 31, 2011, 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, 2012 and December 31, 2011 the Company had accrued $20 and $21, respectively, of penalties and interest related to uncertain tax positions.

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.

 

7


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 2008.

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, 2012 and 2011, interest income totaled $4 and $9, respectively, and $10 and $32 for the nine months ended September 30, 2012 and 2011, respectively. For the three months ended September 30, 2012 and 2011, interest expense totaled $63 and $58, respectively, and $182 and $209 for the nine months ended September 30, 2012 and 2011, respectively.

Other Income, net

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

The Company realized approximately $0 and $52 of other income related to its private equity investment for the three months ended September 30, 2012 and 2011, respectively, and $694 and $545 for the nine months ended September 30, 2012 and 2011, respectively.

Supplemental Cash Flow Information

Cash flows from operating activities include $6,113 and $4,240 for the payment of federal, state, and foreign income taxes and $94 and $158 for the payment of interest or loan charges related to borrowings on the Company’s credit facility for the nine months ended September 30, 2012 and 2011, 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 loss. Net currency transaction gains (losses) included in Other income, net were $(19) and $21 for the three months ended September 30, 2012 and 2011, respectively and $(20) and $(16) for the nine months ended September 30, 2012 and 2011, respectively.

3. INVESTMENTS:

On February 21, 2006, the Company invested in a private equity investment fund. At September 30, 2012, the Company has an unfunded capital commitment of up to $300, with a total capital commitment paid by the Company of $1,950. The Company accounts for its investment using the cost method.

During the third quarter of 2012, the Company received no distributions from its private equity investment. The total year-to-date distributions related to the private equity investment, as of September 30, 2012 includes the receipt of $1,008 of cash, of which $694 was recognized as investment income. The total carrying value of the private equity investment was $727 and $1,386 as of September 30, 2012 and 2011, respectively. During the third quarter of 2011, the Company recognized other income of approximately $52.

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 of the underlying investment.

 

8


4. INVENTORIES:

Inventories consist of the following:

 

     September 30,
2012
     December 31,
2011
 

Finished products

   $ 9,710       $ 9,428   

Work in process

     2,961         2,870   

Raw materials and supplies

     4,954         4,863   
  

 

 

    

 

 

 

Total inventories

   $ 17,625       $ 17,161   
  

 

 

    

 

 

 

5. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following:

 

     September 30,
2012
     December 31,
2011
 

Land

   $ 3,411       $ 3,411   

Buildings and improvements

     22,632         22,635   

Machinery and equipment

     30,059         30,115   

Equipment rented to others

     2,250         3,018   

Construction in progress

     1,296         431   
  

 

 

    

 

 

 
   $ 59,648       $ 59,610   

Accumulated depreciation

     28,514         27,338   
  

 

 

    

 

 

 

Total property, plant and equipment, net

   $ 31,134       $ 32,272   
  

 

 

    

 

 

 

 

9


6. GOODWILL AND INTANGIBLE ASSETS:

Goodwill activity is as follows:

 

Balance at December 31, 2011

   $ 80,254   

Foreign currency translation

     (6
  

 

 

 

Balance at September 30, 2012

   $ 80,248   
  

 

 

 

 

     As of September 30, 2012  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Other intangibles consist of the following:

        

Amortized intangible assets

        

License agreements

   $ 2,944       $ 670       $ 2,274   

Core technology

     739         307         432   

Trademarks

     50         5         45   

Patents

     2,270         1,613         657   

Product formulas

     430         122         308   

Customer relationships

     813         672         141   

Non-compete agreements

     519         416         103   

Supplier relationships

     399         399         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 8,164       $ 4,204       $ 3,960   

Intangible assets not subject to amortization

        

Trademarks

   $ 6,857       $ —         $ 6,857   
  

 

 

    

 

 

    

 

 

 

Total

   $ 6,857       $ —         $ 6,857   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 15,021       $ 4,204       $ 10,817   
  

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Other intangibles consist of the following:

        

Amortized intangible assets

        

License agreements

   $ 2,944       $ 587       $ 2,357   

Core technology

     739         274         465   

Trademarks

     50         3         47   

Patents

     2,270         1,509         761   

Product formulas

     430         114         316   

Customer relationships

     813         619         194   

Non-compete agreements

     519         386         133   

Supplier relationships

     399         399         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 8,164       $ 3,891       $ 4,273   

Intangible assets not subject to amortization

        

Trademarks

   $ 6,857       $ —         $ 6,857   
  

 

 

    

 

 

    

 

 

 

Total

   $ 6,857       $ —         $ 6,857   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 15,021       $ 3,891       $ 11,130   
  

 

 

    

 

 

    

 

 

 

 

10


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, 2012 and 2011 was $122 and $124, respectively, and $379 and $426 for the nine months ended September 30, 2012 and 2011, respectively. Estimated amortization expense for each of the next five years is as follows:

 

For the year ending 12/31/12

   $ 505   

For the year ending 12/31/13

     505   

For the year ending 12/31/14

     416   

For the year ending 12/31/15

     290   

For the year ending 12/31/16

     289   

7. CREDIT ARRANGEMENTS AND NOTES PAYABLE:

The Company has a credit facility that allows for aggregate borrowings of $70,000 and expires in July 2016. 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. The agreement is unsecured and contains various financial and other covenants. As of September 30, 2012 and December 31, 2011, the Company was in compliance with these covenants. Also, at September 30, 2012, the Company had no outstanding borrowing under this agreement and $70,000 available for borrowing.

Long-term debt was as follows:

 

     September 30,
2012
     December 31,
2011
 

Revolving credit facility due 2012 with a weighted-average interest of 0% and 3.25% at September 30, 2012 and December 31, 2011, respectively

   $ —         $ 650   

Less—current portion

     —           —     
  

 

 

    

 

 

 
   $ —         $ 650   
  

 

 

    

 

 

 

8. 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 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.

 

11


Stock Options

During the three months ended September 30, 2012 and 2011, the Company recorded no pre-tax compensation expense related to the Company’s stock option shares, and $0 and $6 for the nine months ended September 30, 2012 and 2011, respectively. The total aggregate intrinsic value of options exercised during the three months ended September 30, 2012 and 2011 was $392 and $829, respectively, and $823 and $1,233 for the nine months ended September 30, 2012 and 2011, respectively. Payments received upon the exercise of stock options for the three months ended September 30, 2012 and 2011 totaled $1,182 and $1,469, respectively, and $3,252 and $2,230 for the nine months ended September 30, 2012 and 2011, respectively. The related excess tax benefit realized related to these exercises and restricted stock vesting was $28 and $460 for the three months ended September 30, 2012 and 2011, respectively, and $97 and $963 for the nine months ended September 30, 2012 and 2011, respectively. The Company issues shares from treasury upon share option exercises.

The following table summarizes stock option activity for the nine months ended September 30, 2012:

 

Options

   Shares
(000)
    Weighted-Average
Exercise Price
     Weighted-Average Remaining
Contractual Term
     Aggregate
Intrinsic Value
($000)
 

Outstanding at January 1, 2012

     407      $ 33.54         2.50       $ 120   

Granted

     —        $ —           —           —     

Exercised

     (107   $ 30.48         —           —     

Forfeited or expired

     (16   $ 29.15         —           —     
  

 

 

         

Outstanding at September 30, 2012

     284      $ 34.93         2.28       $ 1,187   
  

 

 

         

Exercisable at September 30, 2012

     284      $ 34.93         2.28       $ 1,187   
  

 

 

         

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 2012 and the exercise price, multiplied by the number of in-the-money options).

 

12


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 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 $457 and $463 for the three months ended September 30, 2012 and 2011, respectively, and $1,367 and $1,389 for the nine months ended September 30, 2012 and 2011, respectively related to the Company’s non-vested equity shares. As of September 30, 2012, there was approximately $3,127 of unrecognized compensation cost related to non-vested equity shares which will be amortized over the weighted-average remaining requisite service period of 2.42 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, 2012:

 

     Shares(000)     Weighted-Average
Grant Date Fair
Value
 

Non-vested equity shares, January 1, 2012

     176      $ 23.79   

Granted

     67      $ 29.60   

Vested

     (77   $ 24.02   

Forfeited

     (2   $ 28.99   
  

 

 

   

Non-vested equity shares, September 30, 2012

     164      $ 25.97   
  

 

 

   

9. RELATED-PARTY TRANSACTIONS:

The Company has an employment agreement with George E. Richmond, the Company’s Vice Chairman and principal stockholder, which includes an annual salary of $100. On May 8, 2012, the agreement was modified to decrease his annual salary from $100 to $50. The Company paid him $13 and $25 during the three months ended September 30, 2012 and 2011 and $58 and $75 for the nine months ended September 30, 2012 and 2011.

10. 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, if any, using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  
     (unaudited)      (unaudited)  

Net income

   $ 4,297       $ 4,100       $ 12,898       $ 12,138   

Weighted average shares outstanding for basic earnings per share

     7,905         8,018         7,887         8,013   

Dilutive effect of stock options

     9         23         4         52   

Weighted average shares outstanding for diluted earnings per share

     7,914         8,041         7,891         8,065   

Basic earnings per share

   $ 0.54       $ 0.51       $ 1.63       $ 1.51   

Diluted earnings per share

   $ 0.54       $ 0.51       $ 1.63       $ 1.51   

 

13


11. COMMITMENTS AND CONTINGENCIES:

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 $378 and $344 at September 30, 2012 and 2011, respectively. The following is a roll forward of the Company’s warranty accrual:

 

     Nine Months Ended
September 30,
 
     2012     2011  
     (unaudited)  

Balance, beginning of period

   $ 360      $ 293   

Accruals for warranties issued during the year

     200        237   

Warranty settlements made during the year

     (182     (186
  

 

 

   

 

 

 

Balance, end of period

   $ 378      $ 344   
  

 

 

   

 

 

 

12. SUBSEQUENT EVENTS:

On October 23, 2012, the Board of Directors declared a quarterly dividend of $0.04 per share, payable December 14, 2012 to shareholders of record on November 15, 2012.

13. NEW ACCOUNTING STANDARDS:

Adopted Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) NO. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This update eliminated the option for entities to present components of other comprehensive income (OCI) in a statement of stockholder’s equity, and now, gives entities the option to present components of net income and other comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. This update was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The update also included a requirement for an entity to present on the face of the financial statements reclassification adjustments for items that are reclassified from the other comprehensive income to net income in the statement(s) where the components of net income and the components of the other comprehensive income are presented. This reclassification requirement was subsequently deferred by ASU No. 2011-12. As such, the Company added a separate but consecutive Statement of Comprehensive Income on page 4 of this Quarterly Report Form 10-Q.

During 2012, there have been no additional issued or newly applicable accounting pronouncements that have a significant impact on the Company’s financial statements.

 

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 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.

 

15


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 and is recognized ratably over the requisite service period.

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.

 

16


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

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Net Sales

Net sales increased $926 or 3.5 % to $27,123 in the third quarter of 2012 from $26,197 in the third quarter of 2011. The sales increase was driven by strong growth of our diagnostic product line as well as solid demand from our consumables products. Consumable products include preventive, infection control, endodontic, micro-applicators and home care product lines. Sales were negatively impacted by approximately $195 due to a stronger U.S. Dollar.

Gross Profit

Gross profit increased $414 or 2.8% to $15,026 in the third quarter of 2012 compared to $14,612 in the third quarter of 2011. Gross margin slightly decreased to 55.4% of net sales in the third quarter of 2012 compared to 55.8% in the third quarter of 2011. The increase in gross margin dollars was primarily the 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 slightly by $36 or 0.4% to $8,395 in the third quarter of 2012 compared to $8,359 in the third quarter of 2011. Spending was relatively consistent between the two periods. As a percentage of net sales, SG&A expenses decreased slightly to 31.0% in the third quarter of 2012 compared to 31.9% in the third quarter of 2011 due to sales increasing faster than expenses.

Income from Operations

Income from operations increased $378 or 6.0% to $6,631 in the third quarter of 2012 compared to $6,253 in the third quarter of 2011. The change was a result of the factors described above.

Interest Expense, net

Net interest expense increased $10 to $59 in the third quarter of 2012 from $49 in the third quarter of 2011. The majority of expenses relate to bank charges associated with the line of credit. As of September 30, 2012 and 2011, the Company had no outstanding borrowings.

Other Income, net

Net other income decreased $93 to $7 in the third quarter of 2012, from $100 in the third quarter of 2011. The decrease was primarily attributable to a gain from the Company’s investment in a private equity fund in 2011.

Provision for Income Taxes

Provision for income taxes increased $78 for the third quarter of 2012 to $2,282 from $2,204 in the third quarter of 2011 as a result of higher pre-tax income. The effective tax rate in the third quarter of 2012 was 34.68% versus 34.96% in the third quarter of 2011. The 2012 tax rate benefited from a larger tax deduction related to domestic production activities, which was partially offset by an increase in tax-related to foreign earnings and slightly higher tax rates.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net Sales

Net sales increased $2,383 or 3.0% to $81,931 in the first nine months of 2012 from $79,548 in the first nine months of 2011. Sales growth for the first nine months was attributed to the strong increase in sales of diagnostic equipment and solid performance from our consumable products. Consumable products include preventive, infection control, endodontic, micro-applicators and home care product lines. Sales were negatively impacted by approximately $495 due to a stronger U.S. Dollar.

 

17


Gross Profit

Gross profit increased $1,397 or 3.2% to $45,620 in the first nine months of 2012 compared to $44,223 in the first nine months of 2011. The gross margin percentage of 55.7% in the first nine months of 2012 was relatively consistent with 55.6% in first nine months of 2011. The increase in gross margin dollars was a result of higher sales volume.

Selling, General, and Administrative Expenses

SG&A expenses increased $354 or 1.4% to $26,354 in the first nine months of 2012 from $26,000 in the first nine months of 2011. The 2011 figures were positively impacted by the gain from sale of the Brownsville, Texas facility. As a percent of net sales, SG&A expenses decreased to 32.2% in the first nine months of 2012 compared to 32.7% in the first nine months of 2011 due to sales increasing faster than expenses.

Income from Operations

Income from operations increased $1,043 or 5.7% to $19,266 in the first nine months of 2012 compared to $18,223 in the first nine months of 2011. The change was a result of the items explained above.

Interest Expense, net

Interest expense, net decreased $5 to $172 in the first nine months of 2012 from $177 in the first nine months of 2011. The majority of expenses relate to bank charges associated with the line of credit. As of September 30, 2012 and 2011, the Company had no outstanding borrowings.

Other Income, net

Other income, net increased $181 to $749 in the first nine months of 2012 from $568 in the first nine months of 2011. The increase was primarily attributable to higher gains from the Company’s private equity investment during 2012.

Provision for Income Taxes

Provision for income taxes increased $468 in the first nine months of 2012 to $6,945 from $6,476 in the first nine months of 2011 primarily as a result of higher pre-tax income and a slight increase in the effective tax rate year to date. The effective tax rate in the first nine months of 2012 was 35.00% compared to 34.79% in the first nine months of 2011. The 2012 tax rate reflects an increase in tax related to foreign earnings and slightly higher tax rates, which are partially offset by a larger deduction related to domestic production activities.

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 $16,371 and $13,603 for the first nine months of 2012 and 2011, respectively. Net capital expenditures for property, plant and equipment were $1497 and $2,301 for the nine months of 2012 and 2011, respectively. Operating cash flow increased in 2012 when compared to 2011 primarily due to an increase in income, as well as an increase in accounts payable as a result of the timing of vendor payments and decrease in accounts receivable based on timing of sales activity.

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, 2012, 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.

 

18


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 no additional interest expense in the three months ended September 30, 2012 and 2011, and an additional $3 and $31 in the nine months ended September 30, 2012 and 2011, respectively. Alternatively, a 100 basis point decrease in interest rates would have resulted in no reduction of interest expense in the three months ended September 30, 2012 and 2011, and resulted in a reduction of $3 and $31 in the nine months ended September 30, 2012 and 2011, 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, 2012, the Company sold less than 18% of its products outside of the United States. Of these foreign sales, 37% was denominated in Euros and 2% 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.

 

19


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, 2012 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

20


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
 

Total Third Quarter 2012

     —         $ —           —           408   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) On February 6, 2012, 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, 2012. This new authorization will expire February 28, 2013.

 

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
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Lable Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

21


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, 2012  

/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

 

22