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, 2005  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 is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes
        X
        No ___  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___NoX  Number of shares outstanding of the Registrants Common Stock at October 31, 2005: 8,894,000 shares of Common Stock, par value $.01 per share   1          PART I FINANCIAL INFORMATION  Item 1. Financial Statements. YOUNG INNOVATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)   September 30,
        December 31,2005
        2004(unaudited)AssetsCurrent assets:Cash and cash equivalents
        $   8,105
        
        $   2,552Trade accounts receivable, net of allowance for doubtful accounts of  $525
and $451 in 2005 and 2004, respectively
        9,374
        
        9,976Inventories
        10,707
        
        10,942Other current assets
        3,879
        
        3,640Total current assets
        32,065
        
        27,110Property, plant and equipment, net
        22,071
        
        22,137Goodwill, net
        52,690
        
        52,617Other intangible assets, net
        7,162
        
        6,105Other assets
        1,938
        
        1,860Total assets
        115,926
        
        $109,829Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued liabilities
        $   9,266
        
        7,639Net liabilities of discontinued operations
        --
        
        43Total current liabilities
        9,266
        
        7,682Deferred income taxes
        7,010
        
        7,010Stockholders equity:Common stock, voting, $.01 par value per share, 25,000 shares authorized,
8,894 and 9,038 shares issued and outstanding in 2005 and 2004, respectively
        90
        
        90Additional paid-in capital
        28,901
        
        29,033Deferred stock compensation
        (345)
        
        (598)Retained earnings
        93,982
        
        83,884Common stock in treasury, at cost, 1,293 and 1,146 shares in 2005 and
2004, respectively
        (22,978)
        
        (17,272)Total stockholders equity
        99,650
        
        95,137Total liabilities and stockholders equity
        115,926
        
        $109,829       The accompanying notes are an integral part of these statements.   2          YOUNG INNOVATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (unaudited)   THREE MONTHS ENDED
        
        NINE MONTHS ENDEDSeptember 30,
        
        September 30,2005
        
        2004
        
        2005
        
        2004Net sales
        
        
        
        
        $   21,616
        
        $    20,891
        
        $   63,156
        
        $   57,123Cost of goods sold
        
        
        
        9,811
        
        9,185
        
        28,929
        
        25,880Gross profit
        
        
        
        
        11,805
        
        11,706
        
        34,227
        
        31,243Selling, general and administrative expenses
        5,657
        
        5,721
        
        16,950
        
        16,724Income from operations
        
        
        
        6,148
        
        5,985
        
        17,277
        
        14,519Other income, net
        
        
        
        96
        
        80
        
        351
        
        96Income before provision for income taxes
        
        
        6,244
        
        6,065
        
        17,628
        
        14,615Provision for income taxes
        
        
        2,076
        
        2,320
        
        6,430
        
        5,591Income from continuing operations
        
        
        4,168
        
        3,745
        
        11,198
        
        9,024Income from discontinued operations
        
        
        --
        
        49
        
        --
        
        100Net income
        
        
        
        
        $   4,168
        
        $   3,794
        
        $   11,198
        
        $   9,124Basic earnings per share
        
        
        
        $0.47
        
        $0.42
        
        $1.25
        
        $1.01Basic earnings per share from continuing operations
        0.47
        
        0.41
        
        1.25
        
        1.00Basic earnings per share from discontinued operations
        --
        
        0.01
        
        --
        
        0.01Diluted earnings per share
        
        
        
        $0.45
        
        $0.40
        
        $1.20
        
        $0.97Diluted earnings per share from continuing operations
        0.45
        
        0.39
        
        1.20
        
        0.96Diluted earnings per share from discontinued operations
        --
        
        0.01
        
        --
        
        0.01Basic weighted average shares outstanding
        
        
        8,902
        
        9,039
        
        8,974
        
        9,037Diluted weighted average shares outstanding
        
        
        9,255
        
        9,389
        
        9,332
        
        9,412The accompanying notes are an integral part of these statements.     3       YOUNG INNOVATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) NINE MONTHS ENDEDSEPTEMBER 302005
        
        2004Cash flows from operating activities:
        
        $11,198
        
        $9,124Net incomeAdjustments to reconcile net income to net cash flows fromoperating activities --Depreciation and amortization
        
        2,298
        
        2,440Loss on disposal of property, plant and equipment
        
        --
        
        119Changes in assets and liabilities --Trade accounts receivable
        
        582
        
        2,292Inventories
        
        61
        
        (2,248)Other current assets
        
        (167)
        
        (821)Other assets
        
        (774)
        
        (1,081)Accounts payable and accrued liabilities
        
        1,500
        
        236Other
        
        238
        
        --Total adjustments
        
        3,738
        
        937Net cash flows from operating activities
        
        14,936
        
        10,061Cash flows from investing activities:Payments for acquisitions, net of cash acquired
        
        --
        
        (1,545)Purchases of property, plant and equipment and intangibles
        
        (2,646)
        
        (3,932)Proceeds from sale of IAI
        
        200
        
        --Net cash flows from investing activities
        
        (2,446)
        
        (5,477)Cash flows from financing activities:Proceeds from borrowings of long-term debt
        
        --
        
        9,568Payments on long-term debt
        
        --
        
        (12,420)Proceeds from stock options exercised
        
        176
        
        412Payment of cash dividend
        
        (1,102)
        
        (1,107)Purchase of treasury stock, net
        
        (6,011)Net cash flows from financing activities
        
        (6,937)
        
        (3,547)Net increase (decrease) in cash and cash equivalents
        
        5,553
        
        1,037Cash and cash equivalents, beginning of period
        
        2,552
        
        938Cash and cash equivalents, end of period
        
        $8,105
        
        $1,975The accompanying notes are an integral part of these statements.   4        YOUNG INNOVATIONS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 (In thousands, except per share data)  GENERAL:  This report includes information in a condensed format and should be read in conjunction with the audited consolidated financial statements and footnotes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004. The results of operations for the three and nine months ended September 30, 2005 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, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  1.
        ORGANIZATION:  Young Innovations, Inc. and subsidiaries (the Company) develops, manufactures and markets supplies and equipment used to facilitate the practice of dentistry and to promote oral health. The Companys product offerings include disposable and metal prophylaxis (prophy) angles, prophy cups and brushes, panoramic X-ray machines, dental handpieces (drills) and related components, orthodontic toothbrushes, flavored examination gloves, childrens toothbrushes, childrens toothpastes,  moisture control products, infection control products, and ultrasonic systems and obturation products used in endodontic surgeries (root canal procedures). The Companys manufacturing and distribution facilities are located in Missouri, California, Indiana, Colorado, Tennessee, Texas and Canada. Export sales were less than 10% of total net sales for 2004 and 2003.  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 inter-company 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.  Revenue Recognition  Revenue from the sale of products is recorded at the time title passes, generally when the products are shipped as our shipping terms are customarily FOB shipping point. Young employs a variety of promotional activities, including, but not limited to, rebate programs, free goods offers, off-invoice pricing discounts, and free shipping promotions. The Companys income statement classification and expense recognition and measurement for these promotional activities is in accordance with the provisions of EITF 01-9:Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of  5      the Vendors Products).The Company generally warrants its products against defects and its most generous policy provides a two-year parts and labor warranty on X-ray machines. The policy with respect to sales returns generally provides that a customer may not return inventory except at the Companys option with the exception of X-ray machines, which have a 90-day return policy.  The Company owns X-ray equipment rented on a month-to-month basis to customers. Revenue from the rental of equipment to others is recognized on a month-to-month basis as the revenue is earned. A liability for the removal costs of the rented X-ray machines is capitalized and amortized over four years. A liability for the removal costs of the purchased X-ray machines expected to be returned to the Company is included in accounts payable and accrued liabilities at September 30, 2005 and December 31, 2004.  The Company offers various financing options to its customers purchasing X-ray machines, including notes payable to the Company and financing through third parties. The equipment purchased is used to secure the notes. 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 is accrued as earned and recorded as interest income.  Supplemental Cash Flow Information  Cash flows from operating activities include $97 and $2,788 for the payment of federal and state income taxes and $55 and $78 for the payment of interest or loan charges for the nine months ended September 30, 2005 and 2004, respectively.  3.
        STOCK AWARDS:  Stock Options  The Company adopted the 1997 Stock Option Plan (the Plan) effective in November 1997 and amended the Plan in 1999 and 2001. A total of 1,725 shares of Common Stock are reserved for issuance under this plan which is administered by the compensation committee of the Board of Directors (Compensation Committee). Participants in the Plan will be those employees whom the Compensation Committee may select from time to time and those nonemployee directors as the Companys Board of Directors may select from time to time.  On March 1, 2005, the Company granted 320 options to employees and nonemployee directors. All options were vested immediately. As of September 30, 2005, a total of 1,849 options had been granted. Net of forfeits, 1,590 options have been granted.  In accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for Stock-Based Compensation  Transition and Disclosure, the Company applies Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for the Plan. Accordingly, no compensation cost has been recognized for grants made under the Plan, all of which are made at exercise prices that are not less than the fair value of the underlying stock on the date of grant. Had compensation costs for the Plan been determined based upon the fair value of the options at the grant date consistent with the methodology prescribed under SFAS No. 123, the Companys net income and earnings per share would approximate the pro forma amounts below:   Three Months Ended
September 30, 2005
        Three Months Ended
September 30, 2004As Reported
        Pro Forma
        As Reported
        Pro Forma(Unaudited)
        (Unaudited)Net income
        4,168
        4,109
        3,794
        3,631Income from continuing operations
        4,168
        4,109
        3,745
        3,582Income from discontinued operations
        --
        --
        49
        49Earnings per share:Basic
        0.47
        0.46
        0.42
        0.40   6        Basic earnings per share from continuing operations
        0.47
        0.46
        0.41
        0.39Basic earnings per share from discontinued operations
        --
        --
        0.01
        0.01Diluted
        0.45
        0.44
        0.40
        0.39Diluted earnings per share from continuing operations
        0.45
        0.44
        0.39
        0.38Diluted earnings per share from discontinued operations
        --
        --
        0.01
        0.01Amounts of stock-based compensation included in determination of net income:Restricted stock compensation
        $56
        $56
        $52
        $52   Nine Months Ended
September 30, 2005
        Nine Months Ended
September 30, 2004As Reported
        Pro Forma
        As Reported
        Pro Forma(Unaudited)
        (Unaudited)Net income
        11,198
        7,412
        9,124
        8,619Income from continuing operations
        11,198
        7,412
        9,024
        8,519Income from discontinued operations
        --
        --
        100
        100Earnings per share:Basic
        1.25
        0.83
        1.01
        0.95Basic earnings per share from continuing operations
        1.25
        0.83
        1.00
        0.94Basic earnings per share from discontinued operations
        --
        --
        0.01
        0.01Diluted
        1.20
        0.79
        0.97
        0.91Diluted earnings per share from continuing operations
        1.20
        0.79
        0.96
        0.90Diluted earnings per share from discontinued operations
        --
        --
        0.01
        0.01Amounts of stock-based compensation included in determination of net income:Restricted stock compensation
        $160
        $160
        $156
        $156   4.
        DISCONTINUED OPERATIONS:  In December 2004, the Company completed the sale of the retail division of its Plak Smacker subsidiary. The retail division, which was previously reported as a separate segment, sold toothbrushes, childrens toothpaste and dental accessories to mass merchandisers under the Plak Smacker brand name. The retail operations are accounted for as discontinued operations and accordingly, operating results and net assets are segregated in the accompanying Condensed Consolidated Statements of Income and Condensed Consolidated Balance Sheets. The Company recorded a pre-tax gain of $1,156 on the sale transaction, which was included in the consolidated income statement caption net income (loss) from discontinued operations during the fourth quarter of 2004. The net current liabilities of the discontinued operations are primarily accounts receivable and accounts payable. Results for discontinued operations
are as follows (in thousands):  Three months ended
        Nine months endedSeptember 30,
        September 30,2005
        2004
        2005
        2004(Unaudited)
        (Unaudited)Net sales
        $    -
        $812
        $     -
        $2,367Income before income taxes
        -
        79
        -
        162Provision for income taxes
        -
        30
        -
        62   7        Net income
        $    -
        $49
        $     -
        $100   5.
        DIVESTED EQUITY INVESTMENT  On May 17, 1999, the Company acquired a one-third interest in International Assembly, Inc., a Texas corporation (IAI). The investment was accounted for under the equity method of accounting and included in other assets on the Consolidated Balance Sheets. Equity income (loss) was recorded using a three-month lag. During the second quarter of 2005, the Company sold its interest in IAI for $200, which approximated the book value of the asset.   6.
        NOTES RECEIVABLE  During the normal course of business, the Company issues notes in connection with equipment purchases by customers. The equipment is used to secure the note.  Notes receivable consist of the following:  September  30,
        December 31,2005
        2004(Unaudited)Notes receivable, short-term
        $2,089
        $  1,764Notes receivable, long-term
        1,869
        1,496Total Notes Receivable
        $3,958
        $  3,260  Notes receivable are included in other current assets and other assets in the accompanying condensed consolidated balance sheets.  7.
        INVENTORIES:  Inventories consist of the following: September 30,
        December 31,2005
        2004(Unaudited)Finished products
        $      7,097
        $ 6,489Work in process, long-term
        1,784
        1,957Raw materials and supplies
        1,826
        2,496Total inventories
        $10,707
        $  10,942 8.
        PROPERTY, PLANT AND EQUIPMENT:  Property, plant and equipment consist of the following: September 30,
        December 31,2005
        2004(Unaudited)Land
        $   1,611
        $    1,611Buildings and improvements
        11,330
        11,149Machinery and equipment
        19,228
        18,786Equipment rented to others
        6,328
        5,952Construction in progress
        1,120
        99739,617
        38,495   8        Less:  Accumulated depreciation
        (17,546)
        (16,358)Total property, plant and equipment, net
        $  22,071
        $  22,137    9.
        GOODWILL AND INTANGIBLE ASSETS  Goodwill consists of the following:  Goodwill at December 31, 2004
        $ 57,415Adjustments to allocation of purchase price
        73Goodwill at September 30, 2005
        $57,488Less:  Accumulated amortization
        (4,798)Total goodwill, net
        $ 52,690  During the first quarter of 2004, YI Ventures LLC (a wholly-owned subsidiary) acquired Healthsonics Corporation for $1,500. The company manufactures and distributes ultrasonic equipment and solutions. The final allocation of purchase price resulted in $1,400 of goodwill, which is all deductible for tax purposes, and $248 of other intangible assets. The final allocation resulted in various adjustments to the goodwill balance in the first quarter of 2005, including a $220 increase in goodwill, which was primarily related to changes in estimates related to severance liabilities and costs incurred to consolidate the operations of the business into a pre-existing facility. In addition, the Company allocated $248 of the purchase price to trademarks, with an indefinite useful life, thereby reducing goodwill. The remaining $101 increase in goodwill during the year related to adjustments to the purchase price
allocation for the Canadian operations of Obtura Spartan, which were acquired in November of 2004.  There are no contingent payment obligations outstanding on any of the Companys acquisitions. There have been no changes in goodwill related to impairment losses or write-offs due to sale of businesses.  During the third quarter of 2005, the Company acquired the assets of a product line related to its Earth City operations, which primarily consisted of $897 in patents. Other intangible assets consist of the following:   As of September 30, 2005Gross Carrying Amount
        Accumulated Amortization
        Net Carrying AmountAmortized intangible assetsLicense agreements
        $1,200
        $291
        $909Core technology
        591
        113
        478Patents
        1,366
        318
        1,048Product formulas
        430
        47
        383Customer & supplier
relationships
        698
        144
        554Noncompete agreements
        356
        125
        231Total
        $4,641
        $1,038
        $3,603Unamortized intangible assetsTrademarks
        $3,559
        
        $3,559Total intangible assets
        $8,200
        $1,038
        $7,162   9        As of December 31, 2004Gross Carrying Amount
        Accumulated Amortization
        Net Carrying AmountAmortized intangible assetsLicense agreements
        $                 1,200
        $                     65
        $                1,135Core Technology
        591
        32
        559Patents
        499
        263
        236Product formulas
        430
        37
        393Customer & supplier
relationships
        380
        86
        294Non-compete agreements
        252
        75
        177Total
        $                 3,352
        $                558
        $                2,794Unamortized intangible assetsTrademarks
        3,311
        -
        3,311Total intangible assets
        $6,663
        $558
        $6,105   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: 7 to 20 years for patents, license agreements and core technology, 40 years for product formulations and 5 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 19 years. Aggregate amortization expense for the three months ended  September 30, 2005 and 2004 was $83 and $64, respectively. Estimated amortization expense for each of the next five years is as follows:  For the year ending 12/31/05
        $360For the year ending 12/31/06
        439For the year ending 12/31/07
        352For the year ending 12/31/08
        352For the year ending 12/31/09
        352   10.
        CREDIT ARRANGEMENTS AND NOTES PAYABLE:  The Company has a credit arrangement that provides for an unsecured revolving credit facility with an aggregate commitment of $50,000. Borrowings under the arrangement bear interest at rates ranging from LIBOR +1% to LIBOR +2.25% or Prime to Prime +.5% depending on the Companys level of indebtedness. Commitment fees for this arrangement range from .15% to .20% of the unused balance. The agreement is unsecured and contains various financial and other covenants. As of September 30, 2005 and December 31, 2004, the Company was in compliance with all of these covenants. The current arrangement expires in September 2007. As of September 30, 2005 and December 31, 2004, there were no borrowings on the Companys credit arrangement.  In certain circumstances, the Company provides recourse for loans for equipment purchases by customers. Certain banks require the Company to provide recourse to finance equipment for new dentists and other customers with credit histories which are not consistent with the banks lending criteria.  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, 2005 and December 31, 2004, approximately $134 and $205, respectively, of the equipment financed with various lenders was subject to such recourse. Recourse on a given loan is generally eliminated by the bank after one year, provided the bank has received timely payments on that 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.   10       11.
        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:   Three Months Ended
        
        Nine Months EndedSeptember 30,
        
        September 30,2005
        2004
        
        2005
        2004(unaudited)
        
        (unaudited)Net income
        $4,168
        $3,794
        
        $11,198
        $9,124Income from continuing operations
        4,168
        49
        
        11,198
        9,024Income from discontinued operations
        --
        3,745
        
        --
        100Weighted average shares outstanding for basic earnings per share8,902
        9,039
        
        8,974
        9,037Dilutive effect of stock options and restricted stock. ..
        353
        350
        
        358
        375Weighted average shares outstanding for diluted earnings per share
        9,255
        9,389
        
        9,332
        9,412Basic earnings per share
        $0.47
        $0.42
        
        $1.25
        $1.01Basic earnings per share from continuing operations
        $0.47
        $0.41
        
        $1.25
        $1.00Basic earnings per share from discontinued operations...
        $0.00
        $0.01
        
        $0.00
        $0.01Diluted earnings per share
        $0.45
        $0.40
        
        $1.20
        $0.97Diluted earnings per share from continuing operations
        $0.45
        $0.39
        
        $1.20
        $0.96Diluted earnings per share from discontinued operations
        $0.00
        $0.01
        
        $0.00
        $0.01    12.
        INCOME TAXES  During the three months ended September 30, 2005, the Company recorded a reduction in taxes payable related to the benefit of a capital loss incurred in 2005 for which realization was determined to be more likely than not. The Company also adjusted its effective tax rate to reflect its current estimate of domestic manufacturing tax benefits associated with IRC Section 199.   13.
        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 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 $276 and $280 at September 30, 2005 and December 31, 2004, respectively.    11       14.
        RELATED-PARTY TRANSACTIONS  In May 2005, the Company purchased 100 shares of its common stock from a trust controlled by George E. Richmond, its Chairman and principal stockholder, for an aggregate purchase price of $3,725.   15.
        SUBSEQUENT EVENTS  On October 17, 2005, the Board of Directors declared a quarterly dividend of $0.04 per share, payable December 15, 2005 to shareholders of record on November 15, 2005.   16.
        NEWLY ISSUED ACCOUNTING STANDARDS  In December 2004, the Financial Accounting Standards Board (FASB) issued a revised Statement of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (SFAS 123R). Among its provisions, SFAS 123R will require us to measure the value of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize the cost over the requisite service period. The Company will adopt SFAS 123R in the first quarter of 2006. We are currently evaluating the impact of this proposed standard on our consolidated financial statements.  12       Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  In December 2001, the SEC requested that all registrants include in their MD&A their most critical accounting policies, the judgments and uncertainties affecting the application of those policies, and the likelihood that materially different amounts would be reported under different conditions using different assumptions. The SEC indicated that a critical accounting policy is one which is both important to the portrayal of the companys financial condition and results and requires managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. 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. We believe that our reserves are adequate. It is possible, however, that the accuracy of our estimation process could be impacted by unforeseen circumstances. We continuously review our reserve balance and refine the estimates to reflect any changes in circumstances.  Inventory  The Company values inventory at the lower of cost or market on a first-in, first-out basis. Inventory values are based upon standard costs which approximate historical costs. Management regularly reviews inventory quantities on hand and records a provision for excess or obsolete inventory based primarily on estimated product demand and other knowledge related to the inventory. If demand for the Companys products is significantly different than managements expectations, the reserve could be materially impacted. Changes to the reserves are included in cost of goods sold.  Goodwill and other intangible assets  The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142 effective January 1, 2002. Goodwill and other long-lived assets with indefinite useful lives are reviewed by management for impairment 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. SFAS No. 142 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 SFAS No. 144.  Contingencies - The Company and its subsidiaries from time to time are subject to various contingencies, including legal proceedings arising in the normal course of business. Management, with the assistance of external legal counsel, performs an analysis of current litigation and will record liabilities if a loss is probable and can be reasonably estimated. The Company believes the reserve is adequate, however it cannot guarantee that costs will not be incurred in excess of current estimates.  Assets and Liabilities Acquired in Business Combinations  The Company periodically acquires businesses. All business acquisitions completed subsequent to 2002 are accounted for under the provisions of SFAS No. 141, Business Combinations, which requires the use of the purchase method. All business acquisitions completed in years prior to 2002 were accounted for under the purchase method as set forth in APB No. 16, Business Combinations.  The purchase method requires the Company to allocate the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The allocation of acquisition cost to assets acquired includes the consideration of identifiable intangible assets. The excess of the cost of an acquired business over the fair value of the assets acquired and liabilities assumed is recognized as
goodwill. The Companys measurement of certain preacquisition contingencies may impact the Companys cost allocation to assets acquired and liabilities assumed for a period of up to one year following the date of an acquisition. The Company utilizes a variety of information sources to determine the value of acquired assets and liabilities. Third-party appraisers are utilized to assist the Company in determining the fair value and useful lives of identifiable intangibles, including the determination of intangible assets that have an indefinite life. The valuation of the acquired assets and liabilities and the useful lives assigned by the Company will impact the determination of future operating performance of the Company.   13        RESULTS OF OPERATIONS (In thousands, except per share data)  Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004  Net Sales Net sales increased $725 or 3.5% to $21,616 in the third quarter of 2005 from $20,891 in the third quarter of 2004. The increased sales resulted from favorable dealer response to targeted marketing initiatives and solid end-user demand for the Companys products. Sales growth in the third quarter was negatively impacted by approximately $300 as a result of managements decision to voluntarily recall from dealers certain drug products (principally fluorides).  Gross Profit Gross profit increased $99 or 0.8% to $11,805 in the third quarter of 2005 from $11,706 in the third quarter of 2004. The additional gross profit was primarily the result of the increased net sales. Gross margin decreased to 54.6% of net sales in the third quarter of 2005 from 56.0% in the second quarter of 2004. Gross margin decreased primarily as a result of changes in product mix and costs and inefficiencies associated with the voluntary recall of certain fluoride products.  Selling, General, and Administrative Expenses SG&A expenses remained relatively flat, with a decrease of $64 or 1.1% to $5,657 in the third quarter of 2005 from $5,721 in the third quarter of 2004. Increases in SG&A costs were related primarily to professional fees associated with regulatory compliance matters, and were partially offset by decreases related to facility consolidations and cost containment measures. As a percent of net sales, SG&A expenses decreased 1.2 percentage points to 26.2% in 2005 compared to 27.4% in 2004.  Income from Operations Income from operations increased $163 or 2.7%, to $6,148 in the third quarter of 2005 from $5,985 in the third quarter of 2004. The increase was a result of the items explained above.  Other Income(Expense), net Other income (expense), net remained relatively flat, with an increase of $16 to $96 in the third quarter of 2005 from $80 in the third quarter of 2004.  Provision for Income Taxes Provision for income taxes decreased $244 for the third quarter of 2005 to $2,076 from $2,320 in the third quarter of 2004 as a result of the reduction in the effective tax rate to 33.25% compared to 38.25% in the third quarter of 2004. The lower effective tax rate is primarily attributable to the recognition of a tax benefit associated with a non-recurring capital loss and the estimated impact of the IRC Section 199 manufacturing deduction.  Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004  Net Sales Net sales increased $6,033 or 10.6% to $63,156 in the first nine months of 2005 from $57,123 for the first nine months of 2004. The increased sales resulted from relatively low sales in the second quarter of 2004 due to the restructuring of certain sales incentive programs to dealers in May 2004,  favorable dealer response to targeted marketing initiatives in the second quarter of 2005, and solid end-user demand for the Companys products,  The sales incentive programs that were restructured by the Company principally consisted of off-invoice pricing discounts (i.e., a discount reflected directly on the billing and requiring no performance obligation on the part of the customer) that are recorded in the net sales account at the time of sale. During the second quarter of 2004, the Company eliminated certain of these promotional pricing incentives, which reduced customer orders and sales in that quarter. The reason for this second quarter change was to transition to product line based pricing promotions from the brand based promotions that had been run in the previous periods. These changes were made to facilitate certain new product introductions and facilities consolidation efforts, while providing for improved service levels to the Companys distributors.   14       Gross Profit Gross profit increased $2,984 or 9.6% to $34,227 for the first nine months of 2005 from $31,243 for the first nine months of 2004. The additional gross profit was primarily a result of the increased net sales. Gross margin remained relatively flat at 54.2% of net sales in the first nine months of 2005 compared to 54.7% of net sales in the first nine months of 2004. The increase in sales volume as well as changes in product mix had a positive impact on the gross profit margin. This was offset by temporary production inefficiencies related to facility consolidation activity and the impact of the voluntary recall of certain fluoride products.  Selling, General, and Administrative Expenses SG&A expenses increased $226 or 1.4% to $16,950 in the first nine months of 2005 from $16,724 in the first nine months of 2004. The increase in SG&A costs is primarily attributable to increased costs related to the growth in infrastructure of the business (such as regulatory and facilities costs), partially offset by headcount reductions related to facility consolidations.    As a percent of net sales, SG&A expenses decreased 2.5 percentage points to 26.8% in 2005 compared to 29.3% in 2004.  Income from Operations Income from operations increased $2,758 or 19.0%, to $17,277 in the first nine months of 2005 from $14,519 in the first nine months of 2004. The increase was a result of the items explained above.  Other Income(Expense), net Other income (expense), net increased $255 to $351 in the first nine months of 2005 from $96 in the first nine months of 2004. This increase was primarily attributable to less interest expense in the current year as no borrowings were outstanding on the Companys credit facility during the first nine months of 2005.  Provision for Income Taxes Provision for income taxes increased $839 in the first nine months of 2005 to $6,430 from $5,591 in the first nine months of 2004 as a result of increased pre-tax income. The Company recorded an effective tax rate of approximately 36.5% for the nine months of 2005 and 38.25% in 2004. In the third quarter of 2005, the Company changed the effective tax rate from 38.25% to 33.25%. The lower effective tax rate is primarily attributable to recognition of a tax benefit associated with a non-recurring capital loss and the estimated impact of the IRC Section 199 manufacturing deduction.  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 $14,936 and $10,061 for the first nine months of 2005 and 2004, respectively. Capital expenditures for property, plant and equipment were $1,699 and $3,932 for the first nine months of 2005 and 2004, respectively. During the first quarter of 2004, the Company acquired a warehouse and office facility in Corona, California for approximately $2,800. The building was occupied in April 2004. Consistent with the Companys historical capital expenditures, future capital expenditures are expected to include facility improvements, panoramic X-ray machines for the Companys rental program, production machinery and information systems. During the second quarter of 2005, the Company purchased
100 shares of its common stock from a trust controlled by George E. Richmond, its Chairman and principal stockholder, for an aggregate purchase price of $3,725.  The Company maintains a credit agreement with a borrowing capacity of $50,000 which currently expires in September 2007. The Company expects this agreement to be extended under similar terms. Borrowings under the agreement bear interest at rates ranging from LIBOR + 1% to LIBOR + 2.25% or Prime to Prime + .5% depending on the Companys level of indebtedness. Commitment fees for this agreement range from .15% to .20% of the unused balance. The agreement is unsecured and contains various financial and other covenants. As of  September 30, 2005 and December 31, 2004, the Company was in compliance with all of these covenants. As of September 30, 2005, there were no outstanding borrowings under this agreement. Management believes through its operating cash flows as well as borrowing capabilities, the Company has adequate liquidity and capital resources to meet its needs on a short and long-term basis.   15       Forward-Looking Statements  Investors are cautioned that this report as well as other reports and oral statements by Company officials may contain certain forward-looking statements as defined in the Private Securities Litigation and Reform Act of 1995. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions and which include words such as expects, anticipates, intends, plans, believes, estimates or similar expressions. These statements are not guaranties of future performance and the Company makes no commitment to update or disclose any revisions to forward-looking statements, or any facts, events or circumstances after the date hereof that may bear upon forward-looking statements. Because such statements involve risks and uncertainties, actual actions and strategies and the timing and
expected results thereof may differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those disclosed in the Companys Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission.  In addition to the risk factors identified in our Form 10-K, the following risks and uncertainties, which are inherent in any forward-looking statement, include, but are not limited to the following:  The Companys sales and earnings could be adversely affected and subject to increased volatility as a result of:  
        The success and timing of the reintroduction of recalled products 
        Regulatory compliance and related costs 
        Changes in the Companys effective tax rate due to regulatory changes and the increasing size and complexity of the Company  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 $12 and $31 of additional interest expense in the nine month periods ended September 30, 2005 and 2004, respectively. Alternatively, a 100 basis point decrease in interest rates would have reduced interest expense by approximately $12 and $31 in the nine month periods ended September 30, 2005 and 2004, respectively.  Sales of the Companys products in a given foreign country can be affected by fluctuations in the exchange rate. However, the Company sells less than 10% of its products outside of the United States. Of these foreign sales, approximately 99% are denominated in US dollars with the remaining amount denominated in Canadian dollars. As a result, the Company does not feel that foreign currency movements have a material impact on its financial statements.  The Company does not use derivatives to manage its interest rate or foreign exchange rate risks.   Item 4.
        Controls and Procedures  Our Chief Executive Officer, President, 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 is accumulated and communicated to our management, including our Chief Executive Officer, President, 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 Securities and Exchange Commissions rules and forms. There have been no changes in our internal controls over financial reporting that occurred during the quarterly period ending September 30, 2005 that have materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.   16        PART II OTHER INFORMATION   Item 2.
        Unregistered Sales of Equity Securities and Use of Proceeds   ISSUER PURCHASES OF EQUITY SECURITIES (in 000s) (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 ProgramJuly  2005
        0
        $        -
        0
        405August 2005
        24
        $34.19
        24
        381September 2005
        3
        $36.07
        3
        378Total Third Quarter 2005
        27
        $34.40
        27  (1)
        The share repurchase program authorizing the purchase of up to 500 shares was announced May 6, 2004 and was originally scheduled to expire in July 2005. In May 2005, the Board of Directors extended the authorization through July 2006.     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.  31.3
        Certification pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 302 of 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.   17          SIGNATURE  Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.  YOUNG INNOVATIONS, INC.  November 8, 2005
        /s/
        Alfred E. Brennan, Jr.----------------------
        ------------------------------------------------------------Date
        Alfred E. Brennan, Jr.Chief Executive Officer  /s/
        Arthur L. Herbst, Jr.------------------------------------------------------------Arthur L. Herbst, Jr.President   /s/
        Christine R. Boehning------------------------------------------------------------Christine R. BoehningVice President and Chief Financial Officer      18