UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q



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

For the quarterly period ended September 30, 2009



OR



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



For the transition period from _______to _______



Commission file number 000-23213



YOUNG INNOVATIONS, INC.

(Exact name of registrant as specified in its charter)



Missouri
              43-1718931(State or other jurisdiction
              (I.R.S. Employer Identification No.)of incorporation or organization)




13705 Shoreline Court EastEarth 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.

YesxNoo




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). YesoNoo



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 fileroAccelerated filerxNon-accelerated fileroSmaller reporting companyo



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YesoNox



Number of shares outstanding of the registrants Common Stock at October 20, 2009:

7,914,625 shares of Common Stock, $0.01 par value per share




PART I



1





FINANCIAL INFORMATION



Item 1. Financial Statements.

YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)





September 30,
              December 31,2009
      (unaudited)
              2008AssetsCurrent assets:Cash and cash equivalents
              $           495
              $           667Trade accounts receivable, net of allowance for doubtful accounts of $372
      and $425 in 2009 and 2008, respectively
              11,115
              10,421Inventories
              15,662
              16,486Other current assets
              4,704
              4,759Total current assets
              31,976
              32,333Property, plant and equipment, net
              33,542
              32,905Goodwill, net
              80,393
              80,334Other intangible assets
              11,948
              10,602Other assets
              3,014
              3,402Total assets
              $    160,873
              $    159,576Liabilities and Stockholders EquityCurrent liabilities:
      Accounts payable and accrued liabilities
              $      11,064
              $        8,840Total current liabilities
              11,064
              8,840Long-term debt
              17,628
              29,349Long-term secured borrowing
              798
              1,281Deferred income taxes
              14,033
              13,829Other noncurrent liabilities
              293
              Total liabilities
              43,816
              53,299Stockholders equity:Common Stock, voting, $.01 par value, 25,000 shares authorized,
      10,219 and 10,219 shares issued in 2009 and 2008, respectively
              102
              102Additional paid-in capital
              23,533
              25,336Retained earnings
              142,546
              133,531Common Stock in treasury, at cost; 2,304 and 2,452 shares in 2009 and
      2008, respectively
              (49,304)
              (52,673)Accumulated other comprehensive income (loss)
              180
              (19)Total stockholders' equity
              117,057
              106,227Total liabilities and stockholders' equity
              $    160,873
              $     159,576






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 30,2009
              
              2008
              
              2009
              
              2008Net sales
              
              
              
              
              $    24,805
              
              $    24,922
              
              $  73,206
              
              $  75,220Cost of goods sold
              
              
              
              10,857
              
              11,759
              
              32,264
              
              35,328Gross profit
              
              
              
              
              13,948
              
              13,163
              
              40,942
              
              39,892Selling, general and administrative expenses
              8,298
              
              7,955
              
              24,899
              
              24,962Income from operations
              
              
              
              5,650
              
              5,208
              
              16,043
              
              14,930Interest expense, net
              
              
              
              172
              
              324
              
              506
              
              1,069Other expense (income), net
              
              
              
              53
              
              (18)
              
              95
              
              (383)Income before provision for income taxes
              
              
              5,425
              
              4,902
              
              15,442
              
              14,244Provision for income taxes
              
              
              1,951
              
              1,754
              
              5,482
              
              5,164Net income
              
              
              
              
              $      3,474
              
              $      3,148
              
              $   9,960
              
              $   9,080Basic earnings per share
              
              
              
              $        0.44
              
              $        0.40
              
              $     1.27
              
              $     1.13Diluted earnings per share
              
              
              
              $        0.43
              
              $        0.39
              
              $     1.25
              
              $     1.11Basic weighted average shares outstanding
              
              
              7,912
              
              7,915
              
              7,866
              
              8,062Diluted weighted average shares outstanding
              
              
              8,040
              
              8,013
              
              7,939
              
              8,153The 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 30,2009
              
              2008Cash flows from operating activities:Net income
              
              $           9,960
              
              $           9,080Adjustments to reconcile net income to net cash flows from
      operating activities --Depreciation and amortization
              
              2,990
              
              3,030Share based compensation expense
              
              1,247
              
              1,073Deferred income taxes
              
              93
              
              --Excess tax benefit from share based compensation
              
              (54)
              
              --Loss on private equity investment
              
              76
              
              75Changes in assets and liabilities, net of acquisitions --Trade accounts receivable
              
              (586)
              
              885Inventories
              
              872
              
              (1,840)Other current assets
              
              (81)
              
              954Other assets
              
              847
              
              971Accounts payable and accrued liabilities
              
              2,297
              
              1,783Total adjustments
              
              7,701
              
              6,931Net cash flows from operating activities
              
              17,661
              
              16,011Cash flows from investing activities:Purchase of distribution rights
              
              (1,350)
              
              --Payments for acquisitions of businesses and intangible assets, net of cash acquired
              
              (10)
              
              (2,735)Purchases of property, plant and equipment
              
              (3,135)
              
              (2,176)Purchases of private equity investments
              
              (300)
              
              (750)Net cash flows from investing activities
              
              (4,795)
              
              (5,661)Cash flows from financing activities:Payment of deferred finance costs
              
              (158)
              
              --Payments of long-term debt
              
              (47,713)
              
              (46,598)Borrowings of long-term debt
              
              35,992
              
              42,975Payments of long-term secured borrowing
              
              (969)
              
              (1,248)Borrowings of long-term secured borrowing
              
              346
              
              3,754Excess tax benefit from share based compensation
              
              54
              
              65Proceeds from stock options exercised
              
              778
              
              443Purchase of treasury stock
              
              (459)
              
              (8,325)Payment of cash dividend
              
              (945)
              
              (968)Net cash flows from financing activities
              
              (13,074)
              
              (9,902)Effect of exchange rate changes on cash
              
              36
              
              (19)Net (decrease) increase in cash and cash equivalents
              
              (172)
              
              429Cash and cash equivalents, beginning of period
              
              667
              
              528Cash and cash equivalents, end of period
              
              $              495
              
              $              957The accompanying notes are an integral part of these statements.






4







YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(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, 2008.  The results of operations for the three and nine months ended September 30, 2009 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, 2008 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, Texas, Wisconsin and Ireland.



2.
              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:




Principles of Consolidation



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



Use of Estimates



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





5







Revenue Recognition



Revenue from the sale of products is recorded at the time title passes, generally when the products are shipped, as the Companys shipping terms are customarily FOB shipping point.  Revenue from the rental of equipment to others is recognized on a month-to-month basis as the revenue is earned.  The Company generally requires payment within 30 days from the date of invoice and offers cash discounts for early payment.  For certain acquired businesses that offer different terms, the Company migrates these customers to the payment terms referred to above within a 2-5 year period.



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, with the exception of X-ray machines, which have a 90-day return policy.  Historically, the level of product returns has not been significant.  The Company generally warrants its products against defects, and its most generous policy provides a two-year parts and labor warranty on X-ray machines.  The Company owns X-ray equipment rented on a month-to-month basis to customers.  A liability for the removal costs of the rented X-ray machines is capitalized and amortized over four years.



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.  The carrying value of debt approximates fair value as the interest rate adjusts to market interest rates.  Due to the short term nature of the notes receivable, book value approximates fair value.



Income Taxes



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



The Company adopted the provisions of ASC 740, Income Taxes, related to the accounting for uncertain tax positions at the beginning of fiscal year 2007.  As of December 31, 2008, the Company had $101 of unrecognized tax benefits. The entire amount of unrecognized tax benefits would favorably impact the effective income tax rate if recognized. Penalties and interest related to unrecognized tax benefits are included in income tax expense.  As of December 31, 2008, the Company had accrued $26 of penalties and interest related to uncertain tax positions.



There has not been a significant increase or decrease in the amount of unrecognized tax benefits during the nine months ended September 30, 2009 and the Company is not aware of any 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 anticipates repatriation of earnings from its foreign subsidiary and has provided a deferred tax liability for United States income taxes on the undistributed earnings of its foreign subsidiary, in accordance with ASC 740 Income Taxes as it relates to investments in foreign subsidiaries.



6





The Company and its subsidiaries are subject to domestic federal and state income taxes as well as foreign income taxes. Tax years 2005 through 2008 remain open to examination by the major taxing jurisdictions to which the Company reports.



Interest Expense, net



Interest expense, net includes interest paid related to borrowings on the Companys credit facility and secured borrowing, as well as offsetting interest income earned on various investments.  For the three months ended September 30, 2009 and 2008, interest income totaled $47 and $80, respectively, and $168 and $289 for the nine months ended September 30, 2009 and 2008, respectively.  For the three months ended September 30, 2009 and 2008, interest expense totaled $219 and $404, respectively, and $674 and $1,358 for the nine months ended September 30, 2009 and 2008, respectively.



Other Expense (Income), net



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



Supplemental Cash Flow Information



Cash flows from operating activities include $3,986 and $3,192 for the payment of federal and state income taxes and $639 and $1,510 for the payment of interest or loan charges for the nine months ended September 30, 2009 and 2008, 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 year.  Translation adjustments are recorded in accumulated other comprehensive income (loss).  Net currency transaction losses (gains) included in other expense (income), net were $36 and ($19) for the three months ended September 30, 2009 and 2008, respectively, and $69 and ($349) for the nine months ended September 30, 2009 and 2008, respectively.



3.
              INVESTMENTS:




On February 21, 2006, the Company invested in a private equity investment fund.  At September 30, 2009, the Company had an unfunded capital commitment of up to $1,050.  As of September 30, 2009, the total capital commitment paid by the Company was $1,950.  On October 1, 2009, the Companys unfunded capital commitment in a private equity investment was reduced from $1,050 to $300 due to a change in the funds investment strategy.

The investment is accounted for under the equity method of accounting and included in other assets on the Condensed Consolidated Balance Sheet.  Equity (income) loss is recorded using a three-month lag.  The Companys loss attributed to this private equity investment was included in other expense (income), net and totaled $19 and $22 for the three months ended September 30, 2009 and 2008, respectively, and $76 and $75 for the nine months ended September 30, 2009 and 2008, respectively.



4.
              NOTES RECEIVABLE:




The Company offers various financing options to its equipment customers, including notes payable to the Company.  The equipment purchased is used to secure the notes.  Total revenue from sales of equipment financed by the Company was $0 and $3 for the three months ended September 30, 2009 and 2008, respectively, and $20 and $45 for the nine months ended September 30, 2009 and 2008, respectively.  These transactions are recorded as a sale upon the transfer of title to the purchaser, which generally occurs at the time of shipment, at an amount equal to the sales price of non-financed sales.  Interest on these notes was accrued as earned and recorded as interest income.



7





On January 16, 2008, the Company transferred a majority of its X-ray equipment loans to a third party for a cash payment of $3,519.  The Company transferred $4,154 of the notes receivable portfolio for a purchase price of $4,140.  Of the purchase price, $621 was subject to a recourse holdback pool that has been established with respect to the limited recourse the third party buyer has on the loans.  On May 5, 2008, the Company transferred additional X-ray equipment loans to a third party for a cash payment of $235.  There was an additional $42 subject to a recourse holdback pool.  In connection with the agreement, a portion of the recourse holdback pool was released to the Company during the nine months ended September 30, 2009 for a total cash payment of $346. As the transactions do not qualify as sales of assets under ASC 860, Transfers and Services, the transactions have been treated as
      financing and the loans will remain on the Companys balance sheet.  As of September 30, 2009, the amount of notes receivable transferred to a third party was $1,777, of which $840 is classified as a short-term notes receivable and $937 as a long-term notes receivable.  A corresponding long-term and short-term liability have been recorded, net of the recourse holdback pool of $265, on the Companys balance sheet.



Notes receivable consist of the following:



September 30,
              December 31,2009
              2008Notes receivable, short-term
              $    985
              $  1,258Notes receivable, long-term
              1,100
              1,847Total notes receivable
              $  2,085
              $  3,105




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



5.
              INVENTORIES:




Inventories consist of the following:

September 30,
              December 31,2009
              2008Finished products.
              $    7,773
              $     7,925Work in process, long-term
              2,631
              2,603Raw materials and supplies
              5,258
              5,958Total inventories
              $  15,662
              $   16,486




6.
              PROPERTY, PLANT AND EQUIPMENT:




Property, plant and equipment consist of the following:



September 30,
              December 31,2009
              2008Land
              $  3,449
              $  3,449Buildings and improvements
              22,048
              20,503Machinery and equipment
              26,901
              24,492Equipment rented to others
              5,607
              6,250Construction in progress
              677
              1,205$58,682
              $55,899Less:  Accumulated depreciation
              (25,140)
              (22,994)Total property, plant and equipment, net
              $ 33,542
              $ 32,905






8







7.
              GOODWILL AND INTANGIBLE ASSETS:




Goodwill activity is as follows:



Balance at December 31, 2008
              $  80,334Foreign currency translation
              59Balance at September 30, 2009
              $  80,393




During the first quarter of 2009, the Company acquired for $1,693 the rights to distribute a product line which expands its infection control offerings.  This license agreement has an indefinite life as the distribution agreement does not have a termination date.  Other intangible assets consist of the following:



As of September 30, 2009Gross Carrying Amount
              Accumulated Amortization
              Net Carrying AmountAmortized intangible assetsLicense agreements
              $     1,251
              $          359
              $      892Core technology
              591
              175
              416Patents
              2,260
              1,041
              1,219Product formulas
              430
              90
              340Customer relationships
              813
              449
              364Non-compete agreements
              377
              291
              86Supplier relationships
              399
              318
              81Total
              $     6,121
              $       2,723
              $      3,398Intangible assets not subject to amortizationLicense agreements
              $     1,693
              $              --
              $      1,693Trademarks
              6,857
              --
              6,863Total
              8,550
              --
              8,556Total intangible assets
              $   14,671
              $       2,723
              $    11,948




As of December 31, 2008Gross Carrying Amount
              Accumulated Amortization
              Net Carrying AmountAmortized intangible assetsLicense agreements
              $      1,200
              $          305
              $      895Core technology
              591
              153
              438Patents
              2,256
              885
              1,371Product formulas
              430
              82
              348Customer relationships
              813
              358
              455Non-compete agreements
              371
              254
              117Supplier relationships
              399
              278
              121Total
              $     6,060
              $       2,315
              $      3,745Intangible assets not subject to amortizationTrademarks
              $     6,857
              --
              $      6,857Total intangible assets
              $   12,917
              $        2,315
              $    10,602






9







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 20 years for patents and core technology; 1 to 20 years for license agreements; 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, 2009 and 2008 was $142 and $132, respectively, and $408 and $398 for the nine months ended September 30, 2009 and 2008, respectively.  Estimated amortization expense for each of the next five years is as follows:



For the year ending 12/31/09
              $
              548


For the year ending 12/31/10
              515


For the year ending 12/31/11
              411


For the year ending 12/31/12
              379


For the year ending 12/31/13
              379




8.
              CREDIT ARRANGEMENTS AND NOTES PAYABLE:




On May 21, 2009, the Company renewed its credit facility.  The new credit facility reduces the aggregate commitment from $75,000 to $60,000 and expires in July 2012.  The Company has $42,372 available under the line of credit at September 30, 2009.  Borrowings under the arrangement bear interest at rates ranging from LIBOR + 2.00% to LIBOR +2.50% or Prime + .50% to Prime + 1.00%, depending on the Companys level of indebtedness.  Commitment fees for this arrangement range from .25% to .50% of the unused balance.  Borrowings under the previous arrangement had interest rates ranging from LIBOR +.75% to LIBOR +1.50% or Prime and commitment fees from .125% to .15% of the unused balance.  The agreement is unsecured and contains various financial and other covenants.  As of September 30, 2009 and December 31, 2008, the Company was in compliance with these covenants.



Long-term debt was as follows:September 30,
      2009
              December 31,
      2008Revolving credit facility due 2012 with a weighted-average interest
      rate of 2.72%
              $    17,628
              $    29,349Less - current portion
              --
              --$    17,628
              $    29,349




9.
              SHARE-BASED COMPENSATION:




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



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



10





shares vest over one, two, three, four and five year periods.  All outstanding options expire ten years from the date of grant under the 1997 Plan and five years from the date of grant under the 2006 Plan.





Stock Options

The Company recorded pre-tax compensation expense of $60 and $62 for the three months ended September 30, 2009 and 2008, respectively, and $162 and $178 for the nine months ended September 30, 2009 and 2008, respectively related to the Companys stock option shares.  As of September 30, 2009, there was approximately $144 of unrecognized compensation expense related to stock options, which will be recognized over the weighted-average remaining requisite service period of 0.9 years.  The total aggregate intrinsic value of options exercised during the three months ended September 30, 2009 and 2008 was $154 and $9, respectively, and $654 and $378 for the nine months ended September 30, 2009 and 2008, respectively.  Payments received upon the exercise of stock options for the three months ended September 30, 2009 and 2008 totaled $198 and $7, respectively, and $778 and $443 for the nine months ended September
      30, 2009 and 2008, respectively.  The related tax (shortfall) benefit realized related to these exercises was ($122) and $3 for the three months ended September 30, 2009 and 2008, respectively, and $54 and $65 for the nine months ended September 30, 2009 and 2008, respectively.  The Company issues shares from treasury upon share option exercises.



The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.  There were no stock options granted during the nine months ended September 30, 2009.  The weighted-average estimated value of stock options granted during the nine months ended September 30, 2008 was $5.27 per share, using the following weighted-average assumptions:



2008Dividend yield (1)
              0.68%Expected volatility (2)
              28%Risk-free interest rate (3)
              2.35%Expected life (4)
              3.5




(1)  Represents cash dividends paid as a percentage of the share price on the date of grant.

(2)  Based on historical volatility of the Companys Common Stock over the expected life of the options.

(3)  Represents the U.S. Treasury STRIP rates over maturity periods matching the expected term of the options at the time of grant.

(4)  The period of time that options granted are expected to be outstanding based upon historical evidence.



The following table summarizes stock option activity for the six months ended September 30, 2009:

Options
              Shares
      (000)
              Weighted-Average ExercisePrice
              Weighted-Average Remaining ContractualTerm
              AggregateIntrinsic Value
      ($000)Outstanding at January 1, 2009
              807
              $    24.59Granted
              --
              --Exercised
              (77)
              $   10.08Forfeited or expired
              (8)
              $    28.22Outstanding at September 30, 2009
              722
              $    26.10
              3.65 yrs
              $        3,349Exercisable at September 30, 2009
              674
              $    26.06
              3.71 yrs
              $        3,291




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 2009 and the exercise price, multiplied by the number of in-the-money options).



11





Non-Vested Equity Shares

Under the 2006 Plan, non-vested equity share units and restricted stock may be awarded or sold to participants under terms and conditions established by the Compensation Committee.  The Company calculates compensation cost for restricted stock grants to employees and non-employee directors by using the fair market value of its Common Stock at the date of grant and the number of shares issued. This compensation cost is amortized over the applicable vesting period.  The Company recorded pre-tax compensation expense of $374 and $300 for the three months ended September 30, 2009 and 2008, respectively, and $1,085 and $894 for the nine months ended September 30, 2009 and 2008, respectively related to the Companys non-vested equity shares.  As of September 30, 2009, there was approximately $3,076 of unrecognized compensation cost related to non-vested equity shares which will be amortized over the
      weighted-average remaining requisite service period of 3.0 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, 2009:

Shares(000)
              Weighted-Average Grant DateFair ValueNon-vested equity shares, January 1, 2009
              132
              $27.70Granted
              104
              $15.03Vested
              (45)
              $27.27Forfeited
              (3)
              $15.00Non-vested equity shares, September 30, 2009
              188
              $20.98




10.
              Comprehensive Income:




Comprehensive income for the three and nine months ended September 30, 2009 and 2008 was computed as follows:



Three Months Ended
      September 30,
              Nine Months Ended
      September  30,2009
              2008
              2009
              2008Net income
              $3,474
              $3,148
              $9,960
              $9,080Foreign currency translation adjustments, net of tax
              120
              (348)
              199
              (182)Comprehensive income
              $3,594
              $2,800
              $10,159
              $8,898




11.
              RELATED-PARTY TRANSACTIONS:




The Company paid consulting fees of $12.5 for the three months ended September 30, 2009 and 2008, and $37.5 for the nine months ended September 30, 2009 and 2008, to George E. Richmond, the Companys Vice Chairman.



The Company has an employment agreement with George E. Richmond, the Companys Vice Chairman, which paid him $12.5 during the three months ended September 30, 2009 and 2008, and $37.5 during the nine months ended September 30, 2009 and 2008, to perform such duties as may be assigned to him by the Companys Board or Chief Executive Officer.



12.
              EARNINGS PER SHARE:




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



12







Three Months Ended
      September 30,
              Nine Months Ended
      September 30,2009
              2008
              2009
              2008(unaudited)
              (unaudited)Net income
              $3,474
              $3,148
              $9,960
              $9,080Weighted average shares outstanding for basic earnings per share
              7,912
              7,915
              7,866
              8,062Dilutive effect of stock options and restricted stock
              128
              98
              73
              91Weighted average shares outstanding for diluted earnings per share
              8,040
              8,013
              7,939
              8,153Basic earnings per share
              $0.44
              $0.40
              $1.27
              $1.13Diluted earnings per share
              $0.43
              $0.39
              $1.25
              $1.11




13.
              COMMITMENTS AND CONTINGENCIES:




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 that are not consistent with the banks' lending criteria.   In the event that a bank requires recourse on a given loan, the Company would assume the banks security interest in the equipment securing the loan.  As of September 30, 2009 and December 31, 2008, respectively, approximately $620 and $788, of the equipment financed with various lenders was subject to such recourse.  Recourse on a given loan is generally for the life of the loan.  Based on the Company's past experience with respect to these arrangements, it is the opinion of management that the fair value of the recourse provided is minimal and not material to the results of operations or financial
      position of the Company.



The Company and its subsidiaries from time to time are parties to various legal proceedings arising in the normal course of business.  Management believes that none of these proceedings, if determined adversely, would have a material adverse effect on the Companys financial position, results of operations or liquidity.



The policy with respect to sales returns generally provides that a customer may not return inventory except at the Companys option, with the exception of X-ray machines, which have a 90-day return policy.  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 $292 and $309 at September 30, 2009 and December 31, 2008, respectively.  The following is a rollforward of the Companys warranty accrual:



Nine Months Ended
      September 30,2009
              2008(unaudited)Balance, December 31
              $309
              $318Accruals for warranties issued during the year
              159
              345Warranty settlements made during the year
              (176)
              (291)Balance, September 30, 2009
              $292
              $372




14.
              SUBSEQUENT EVENTS:




On October 19, 2009, the Board declared a quarterly dividend of $0.04 per share, payable December 15, 2009 to shareholders of record on November 13, 2009.



13







Subsequent events have been evaluated through November 6, 2009, which is the date the Companys financial statements for the third quarter of 2009 were issued.



15.
              NEW ACCOUNTING STANDARDS




Adopted Accounting Pronouncements

In the third quarter of 2009, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The ASC is the single official source of authoritative, nongovernmental General Accepted Accounting Principles GAAP, other than guidance issued by the SEC.  On July 1, 2009, the FASBs Accounting Standards Codification changed the way that U.S. GAAP is documented, updated, referenced, and accessed.  Beginning on that date, ASC officially became the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF), and related literature. Only one level of authoritative GAAP now exists.  All other literature is now considered non-authoritative.  The ASC was effective for interim or annual reporting periods ending after
      September 15, 2009.  The company adopted the codification during the quarter ended September 30, 2009. The ASC did not have any impact on the Companys financial statements.



In May 2009, the FASB issued new guidance for accounting for subsequent events.  The new guidance, which is now part of ASC 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.  An entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.  An entity must also disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. However, an entity does not have to recognize subsequent events
      that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued.  The provisions of the new guidance were effective for interim or annual financial periods ending after June 15, 2009 and shall be applied prospectively.  The Company has added this disclosure to its footnote 14.



In April 2009, the FASB issued new guidance related to the disclosure of the fair value of financial instruments.  The new guidance, which is now part of ASC 825, Financial Instruments, requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  The provisions of the new guidance were effective for interim periods ending after June 15, 2009.  The adoption of this statement did not impact the companys financial statements.  The Company has added this disclosure to its footnote 2.



In April 2009, the FASB further updated the fair value measurement standard to provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. Under the revised guidance, which is now part of ASC 820, Fair Value Measurements and Disclosures, an entity may conclude that transactions or quoted prices may not be determinative of fair value, and may adjust the transactions or quoted prices to arrive at the fair value of the asset or liability. This update was effective for interim and annual reporting periods ending after June 15, 2009, and did not have a material impact on the Companys financial statements



In December 2007, the FASB issued revised guidance for the accounting for business combinations.  The revised guidance, which is now part of ASC 805, Business Combinations, states that an entity is required 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 impact 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.  The adoption of this statement did not impact the Companys first nine months results, however, the Company expects ASC 805 will



14





have an impact on its consolidated financial statements for future acquisitions, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions the Company consummates after the effective date.



In June 2008, the FASB issued new guidance on determining whether instruments granted in share-based payment transactions are participating securities.  The new guidance, which is now part of ASC 260, Earnings per Share, requires that unvested share-based payments awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and should be included in computing earnings per share using the two-class method. The new guidance was effective for the Company as of January 1, 2009, and did not have a material impact on the Companys earnings per share.



In April 2008, the FASB issued revised guidance on determining the useful life of intangible assets.  The revised guidance, which is now a part of ASC 350, Intangibles -Goodwill and Other, to address the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The new guidance was effective for fiscal years beginning after December 15, 2008. The adoption of this statement did not impact the Companys financial statements.



In September 2006, the FASB issued a new accounting standard for fair value measurements.  The new standard, which is now part of ASC 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements.  In February 2008, the FASB issued additional guidance, which is now part of ASC 820, which defers the effective date by one year for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with ASC 820, the Company had only adopted the provisions of ASC 820 with respect to its financial assets and liabilities that are measured at fair value within the financial statements as of January 1, 2008. The provisions of ASC 820 had not been applied to non-financial assets and non-financial liabilities.
      This deferral applied to such items as reporting units measured at fair value in the first step of a goodwill impairment under ASC 350, Intangibles- Goodwill and Other, and long-lived assets, including intangible assets measured at fair value for an impairment assessment under ASC 360, Property, Plant and Equipment.  These remaining aspects of ASC 820 were adopted by the Company prospectively beginning January 1, 2009 and did not have a material impact on the Companys financial statements.



Not Yet Adopted



In October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements  A Consensus of the FASB Emerging Issues Task Force. This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially
      modified after January 1, 2011.The Company has not determined the impact that this update may have on its financial statements.



In August 2009, the FASB issued new guidance for the accounting for the fair value measurement of liabilities.  The new guidance, which is now part of ASC 820, provides clarification that in certain circumstances in which a quoted price in an active market for the identical liability is not available, a company is required to measure fair value using one or more of the following valuation techniques: the quoted price of the identical liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, and/or another valuation technique that is consistent with the principles of fair value measurements.  The new guidance clarifies that a company is not required to include an adjustment for restrictions that prevent the transfer of the liability and if an adjustment is applied to the quoted price used in a valuation technique, the result is a
      Level 2 or 3 fair value measurement.  The new guidance is effective for interim and annual periods beginning after August 27, 2009.  The Company does not expect that the provisions of the new guidance will have a material effect on its financial statements.



15





In June 2009, the FASB issued new guidance on the accounting for the transfers of financial assets.  The new guidance, which was issued as Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 has not yet been adopted into Codification.  The amended standard will address practices that have developed since the original issuance that are not consistent with the original intent and key requirements of the standard as well as concerns of financial statement users that many of the financial assets and related obligations that have been derecognized should continue to be reported in the financial statements of transferors.  The standard must be applied as of the beginning of each entitys first annual reporting period that begins after November 15, 2009, and is not expected to have a significant impact on
      the Companys financial statements.



In June 2009, the FASB issued revised guidance on the accounting for variable interest entities.  The revised guidance, which was issued as Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R), has not yet been adopted into Codification. The amended guidance eliminates the qualifying special-purpose entity concept in ASC 860 Transfers and Servicing and addresses the timeliness and usefulness of accounting disclosures involving an enterprises involvement in a variable interest entity.  The standard will be effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, and is not expected to have a significant impact on the Companys financial statements.



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.  Costs associated with the procurement and warehousing of inventories are included in cost of goods sold except for the Companys distribution only businesses, which are included in SG&A.



Goodwill and other intangible assets In accordance with the ASC 350 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.



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



16





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 payment terms referred to above within a 2-5 year period.



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, with the exception of X-ray machines, which have a 90-day return policy. Historically, the level of product returns has not been significant. The Company generally warrants its products against defects, and its most generous policy provides a two-year parts and labor warranty on X-ray machines. The Company owns X-ray equipment rented on a month-to-month basis to customers. 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 estimated at the grant date based on the awards fair-value as 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.



Assets and Liabilities Acquired in Business Combinations The Company periodically acquires businesses.  All business acquisitions completed subsequent to January 1, 2009 will be accounted for under the provisions of ASC 805. Under ASC 805, an entity is required 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 impact 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.  All business acquisitions completed subsequent to 2002 were accounted for under the purchase method.  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.





17







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



Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008



Net Sales

Net sales decreased $117 or 0.5% to $24,805 in the third quarter of 2009 from $24,922 in the third quarter of 2008.  Total sales for the third quarter remained stable, as increased demand for the Companys consumable products offset continued weakness in its diagnostic product line. Consumable product sales, which include preventive, infection control, endodontic, micro-applicator and home care product lines, posted gains for the quarter. The Companys diagnostic product line continues to be affected by the weak economy and tight credit markets. Sales of diagnostic products were $490 less than the prior year quarter.



Gross Profit

Gross profit increased $785 or 6.0% to $13,948 in the third quarter of 2009 compared to $13,163 in the third quarter of 2008.  Gross margin increased to 56.2% of net sales in the third quarter of 2009 from 52.8% in the third quarter of 2008.  Gross margin increased due to improved production efficiencies, favorable product mix, and continued benefits of facility consolidations.



Selling, General, and Administrative Expenses

SG&A expenses increased $343 or 4.3% to $8,298 in the third quarter of 2009 from $7,955 in the third quarter of 2008.  SG&A increased primarily due to higher incentive compensation expense consistent with the performance of the business, somewhat offset by headcount reductions and reduced marketing expenses.  As a percent of net sales, SG&A expenses increased to 33.5% in the third quarter of 2009 compared to 31.9% in the third quarter of 2008 due to the items explained above.



Income from Operations

Income from operations increased $442 or 8.5% to $5,650 in the third quarter of 2009 compared to $5,208 in the third quarter of 2008.  The change was a result of the items explained above.



Interest  Expense, net

Interest expense, net decreased $152 to $172 in the third quarter of 2009 from $324 in the third quarter of 2008.   The decrease was primarily attributable to reduced interest expense resulting from lower interest rates and lower borrowings on the Company's credit facility.



Other Expense (Income), net

Other expense (income), net increased $71 to $53 in the third quarter of 2009 from $(18) in the third quarter of 2008.  This increase was due to lower levels of miscellaneous income.



Provision for Income Taxes

Provision for income taxes increased $197 in the third quarter of 2009 to $1,951 from $1,754 in the third quarter of 2008 as a result of higher pre-tax income. The effective tax rate in the third quarter of 2009 was 36.0% compared to 35.8% in the third quarter of 2008.



Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008



Net Sales

Net sales decreased $2,014 or 2.7% to $73,206 in the first nine months of 2009 from $75,220 in the first nine months of 2008.  Sales of the Companys consumable products were solid despite the challenging economic environment, while demand for the Companys diagnostic products remained weak. Consumable product sales, which include preventive, infection control, endodontic, micro-applicators and home care product lines, remained essentially flat over the first nine months of 2008.  Sales of diagnostic products were $2,115 below that of the first nine months of 2008.  In addition, a stronger U.S. dollar negatively impacted sales by approximately $620.



18







Gross Profit

Gross profit increased $1,050 or 2.6% to $40,942 in the first nine months of 2009 compared to $39,892 in the first nine months of 2008.  Gross margin increased to 55.9% of net sales in the first nine months of 2009 compared to 53.0% in the first nine months of 2008.  The increase in gross margin was primarily a result of benefits of operating efficiencies implemented in 2008, including facility consolidations and adjusted staff levels and favorable product mix.



Selling, General, and Administrative Expenses

SG&A expenses were essentially flat at $24,899 in the first nine months of 2009 from $24,962 in the first nine months of 2008.  The benefits from headcount reductions and reduced marketing expenses were offset by higher equity compensation as well as increased incentive compensation consistent with the performance of the business.  As a percent of net sales, SG&A expenses increased to 34.0% in the first nine months of 2009 compared to 33.2% in the first nine months of 2008 due to the lower sales in 2009 compared to 2008.



Income from Operations

Income from operations increased $1,113 or 7.5% to $16,043 in the first nine months of 2009 compared to $14,930 in the first nine months of 2008.  The change was a result of the items explained above.



Interest Expense, net

Interest expense, net decreased $563 to $506 in the first nine months of 2009 from $1,069 in the first nine months of 2008.  The decrease was primarily attributable to reduced interest expense resulting from lower interest rates and lower borrowings on the Company's credit facility



Other Expense (Income), net

Other expense (income), net increased $478 to $95 in the first nine months of 2009 from $(383) in the first nine months of 2008.  This increase was primarily attributable to a foreign exchange impact on debt repaid from the Companys Irish subsidiary of approximately $300 in 2008.



Provision for Income Taxes

Provision for income taxes increased $318 in the first nine months of 2009 to $5,482 from $5,164 in the first nine months of 2008 as a result of higher pre-tax income offset by a decrease in the effective tax rate.  The effective tax rate in the first nine months of 2009 was 35.5% compared to 36.3% in the first nine months of 2008 due to a reduction in the effective blended state rate resulting from changes in certain state filing requirements based on previous consolidation activity offset by changes in state tax laws enacted in the second quarter of 2009 which increased the Companys state rate.



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 $17,661 and $16,011 for the first nine months of 2009 and 2008, respectively.  Net capital expenditures for property, plant and equipment were $3,135 and $2,176 for the nine months of 2009 and 2008, respectively.  Significant capital expenditures in 2009 included buildings, facility improvements, and production machinery and equipment.  Future capital expenditures are expected to include facility improvements, production machinery and information systems.  During the first quarter of 2009, the Company acquired the rights to distribute a product line which expands its infection control offerings.  The Company paid approximately $1,300 in cash.  The agreement also requires the Company to pay
      $60 annually for the next ten years.



On January 16, 2008, the Company transferred a majority of its X-ray equipment loans to a third party for a cash payment of $3,519.  The Company transferred $4,154 of the notes receivable portfolio for a purchase price of $4,140.  Of the purchase price, $621 was subject to a recourse holdback pool that has been established with respect to the limited recourse the third party has on the loans.  On May 5, 2008, the Company transferred additional X-ray equipment loans to a third party for a cash payment of $235.  There was an additional $42 subject to a recourse holdback pool.  In connection with the agreement, a portion of the recourse holdback pool was released to the Company during the nine months ended September 30, 2009 for a total cash payment of $346.  As the transactions



19





do not qualify as sales of assets under ASC 860, Transfers and Services, the transactions have been treated as financing and the loans remain on the Companys balance sheet.  As the third party receives payments on the transferred notes, the Company reduces the corresponding notes receivable and secured borrowing balances.  As of September 30, 2009, the residual amount of notes receivable transferred to a third party was $1,777, of which $840 is classified as a short-term notes receivable and $937 as a long-term notes receivable.  A corresponding long-term and short-term liability have been recorded, net of the recourse holdback pool of $265, on the Companys balance sheet.



On May 21, 2009, the Company renewed its credit facility.  The new credit facility reduces the aggregate commitment from $75,000 to $60,000 and expires in July 2012.  The Company has $42,372 available under the line of credit at September 30, 2009.  Borrowings under the arrangement bear interest at rates ranging from LIBOR + 2.00% to LIBOR +2.50% or Prime + .50% to Prime + 1.00%, depending on the Companys level of indebtedness.  Commitment fees for this arrangement range from .25% to .50% of the unused balance.  Borrowings under the previous arrangement had interest rates ranging from LIBOR +.75% to LIBOR +1.50% or Prime and commitment fees from .125% to .15% of the unused balance.  The agreement is unsecured and contains various financial and other covenants.  As of September 30, 2009 and December 31, 2008, the Company was in compliance with all of these covenants.  At September 30, 2009, the Company
      had $17,628 in outstanding borrowings under this agreement and $42,372 available for borrowing. Management believes through its operating cash flows as well as borrowing capabilities, the Company has adequate liquidity and capital resources to meet its needs on a short and long-term basis.



Forward-Looking Statements



Investors are cautioned that this report as well as other reports and oral statements by Company officials may contain certain forward-looking statements as defined in the Private Securities Litigation and Reform Act of 1995. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions and which include words such as expects, anticipates, intends, plans, believes, estimates or similar expressions. These statements are not guaranties of future performance and the Company makes no commitment to update or disclose any revisions to forward-looking statements, or any facts, events or circumstances after the date hereof that may bear upon forward-looking statements. Because such statements involve risks and uncertainties, actual actions and strategies and the timing and
      expected results thereof may differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those disclosed in the Company's Annual Report on Form 10-K and other reports filed with the SEC.



Item 3.
              Quantitative and Qualitative Disclosures About Market Risk.




Market risks relating to the Companys operations result primarily from changes in interest rates and changes in foreign exchange rates.  From time to time, the Company finances acquisitions, capital expenditures and its working capital needs with borrowings under a revolving credit facility.  Due to the variable interest rate feature on the debt, the Company is exposed to interest rate risk.  A theoretical 100 basis point increase in interest rates would have resulted in approximately $50 and $82 of additional interest expense in the three months ended September 30, 2009 and 2008, respectively, and $188 and $246 in the nine months ended September 30, 2009 and 2008, respectively.  Alternatively, a 100 basis point decrease in interest rates would have reduced interest expense by approximately $50 and $82 in the three months ended September 30, 2009 and 2008, respectively, and $188 and $246 in the nine
      months ended September 30, 2009 and 2008, 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, 2009, the Company sold less than 20% of its products outside of the United States.  Of these foreign sales, 39% were denominated in Euros and 3% in Canadian dollars.  The Company does not feel that foreign currency movements have a material impact on its financial statements.



The Company does not use derivatives to manage its interest rate or foreign exchange rate risks.



20







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, 2009 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.



















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PART II

OTHER INFORMATION









Item 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.








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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



YOUNG INNOVATIONS, INC.




November 6, 2009
              /s/
              Alfred E. Brennan, Jr.


----------------------
              ------------------------------------------------------------


Alfred E. Brennan, Jr.


Chief Executive Officer




/s/
              Arthur L. Herbst, Jr.


------------------------------------------------------------


Arthur L. Herbst, Jr.


President and Chief Financial Officer






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