UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
 
 FORM
10-Q
 
 [X]                      QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
quarterly period ended March 31, 2010
 
 OR
 
 [  ]           TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
transition period from _______to _______
 
 
 Commission
file number 000-23213
 
 YOUNG
INNOVATIONS, INC.
 (Exact
name of registrant as specified in its charter)
  Missouri
              
              43-1718931(State
      or other jurisdiction
              
              (I.R.S.
      Employer Identification No.)of
      incorporation or organization)
 
 
 13705
      Shoreline Court East
                Earth
      City, Missouri
              63045(Address
      of principal executive offices)
              (Zip
      Code)
 
 
 (314)
344-0010
 (Registrant’s
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes
[X]  No [ ]
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [_] No
[_]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 (Check
one):  Large accelerated filer  [ ]  Accelerated
filer  [X]  Non-accelerated filer  [
]  Smaller reporting company  [ ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes [ ] No [X]
 
 Number of
shares outstanding of the registrant’s Common Stock at April 30,
2010:
 7,984,592 shares of Common Stock,
$0.01 par value per share
  1
   
 PART
I
 FINANCIAL
INFORMATION
 
 Item 1.
Financial Statements.
 YOUNG
INNOVATIONS, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
thousands, except per share data)
  March
      31,
                
                
                December
      31,2010
                
                
                2009(unauditedAssetsCurrent
      assets:Cash
      and cash equivalents
                $
                392
                
                $
                67Trade
      accounts receivable, net of allowance for doubtful accounts
      of  $228
                  and
      $232 in 2010 and 2009, respectively
                
                11,975
                
                
                11,397Inventories
                
                13,939
                
                
                14,816Other
      current assets
                
                4,950
                
                
                4,849Total
      current assets
                
                31,256
                
                
                31,129Property,
      plant and equipment, net
                
                33,783
                
                
                33,668Goodwill
                
                80,298
                
                
                80,374Other
      intangible assets
                
                11,947
                
                
                12,097Other
      assets
                
                2,436
                
                
                2,732Total
      assets
                $
                159,720
                
                $
                160,000Liabilities
      and Stockholders’ EquityCurrent
      liabilities:
                  Accounts
      payable and accrued liabilities
                $
                10,382
                
                $
                8,377Total
      current liabilitiesLong-term
      debt
                
                10,382
                
                
                8,377Long-term
      secured borrowing
                
                8,505
                
                
                13,979Deferred
      income taxes
                
                456
                
                
                550Other
      noncurrent liabilities
                
                15,886
                
                
                15,947Total liabilities
                
                266
                
                
                282Stockholders’
      equity:
                
                35,495
                
                
                39,135Common
      stock, voting, $.01 par value, 25,000 shares authorized,
                  10,219
      shares issued in 2010 and 2009
                
                102
                
                
                102Additional
      paid-in capital
                
                23,103
                
                
                23,985Retained
      earnings
                
                149,034
                
                
                145,756Common
      stock in treasury, at cost; 2,235 and 2,294 shares in 2010
and
                  2009,
      respectively
                
                (47,891
                
                
                (49,090Accumulated
      other comprehensive (loss)  income
                
                (123
                
                
                112Total
      stockholders' equity
                
                124,225
                
                
                120,865Total
      liabilities and stockholders' equity
                $
                159,720
                
                $
                160,000
 The
accompanying notes are an integral part of these statements.
  2
  
 YOUNG
INNOVATIONS, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
 (In
thousands, except per share data)
 (unaudited)
 
 
 Three
      Months Ended
                March
      31,2010
              
              
              2009Net
      sales
              
              $
              24,782
              
              
              $
              23,764Cost
      of goods sold
              
              
              10,980
              
              
              
              10,454Gross
      profit
              
              
              13,802
              
              
              
              13,310Selling,
      general and administrative expenses
              
              
              8,395
              
              
              
              8,315Income
      from operations
              
              
              5,407
              
              
              
              4,995Interest
      expense, net
              
              
              101
              
              
              
              154Other
      income, net
              
              
              (84
              )
              
              
              (13
              )Income
      before provision for income taxes
              
              
              5.390
              
              
              
              4,854Provision
      for income taxes
              
              
              1,832
              
              
              
              1,699Net
      income
              
              $
              3,558
              
              
              $
              3,155Basic
      earnings per share
              
              $
              0.45
              
              
              $
              0.40Diluted
      earnings per share
              
              $
              0.44
              
              
              $
              0.40Basic
      weighted average shares outstanding
              
              
              7,984
              
              
              
              7,811Diluted
      weighted average shares outstanding
              
              
              8,060
              
              
              
              7,850The
      accompanying notes are an integral part of these
    statements.
 
 
 
 
  3
  YOUNG
INNOVATIONS, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
thousands)
 (unaudited)
 Three
      Months EndedMarch
      31,2010
              
              
              2009Cash
      flows from operating activities:Net
      income
              
              $
              3,558
              
              
              $
              3,155Adjustments
      to reconcile net income to net cash flows fromoperating
      activities --Depreciation
      and amortization
              
              
              1,012
              
              
              
              970Share
      based compensation expense
              
              
              441
              
              
              
              375Excess
      Tax Benefit from share exercises
              
              
              (122
              )Loss
      on private equity investment fund
              
              
              
              
              
              
              23Changes
      in assets and liabilities, net of acquisitions --Trade
      accounts receivable
              
              
              (712
              )
              
              
              (2,152
              )Inventories
              
              
              835
              
              
              
              39Other
      current assets
              
              
              81
              
              
              
              (72
              )Other
      assets
              
              
              204
              
              
              
              271Accounts
      payable and accrued liabilities
              
              
              1,718
              
              
              
              1,356Total
      adjustments
              
              
              3,457
              
              
              
              810Net
      cash flows from operating activities
              
              
              7,015
              
              
              
              3,965Cash
      flows from investing activities:Purchase
      of distribution rights
              
              
              
              
              
              
              (1,300
              )Purchases
      of property, plant and equipment
              
              
              (1,077
              )
              
              
              (1,367
              )Purchases
      of private equity investment
              
              
              
              
              
              
              (300
              )Net
      cash flows from investing activities
              
              
              (1,077
              )
              
              
              (2,967
              )Cash
      flows from financing activities:Payments
      on long-term debt
              
              
              (19,318
              )
              
              
              (17,695
              )Borrowings
      on long-term debt
              
              
              13,844
              
              
              
              17,421Payments
      of long-term secured borrowings
              
              
              (94
              )
              
              
              (366
              )Borrowings
      of long-term secured borrowings
              
              
              
              
              
              
              331Excess
      tax benefit/ (deficit) from stock option exercises
              
              
              122
              
              
              
              21Proceeds
      from stock options exercised
              
              
              212
              
              
              
              89Purchase
      of treasury stock
              
              
              (7
              )
              
              
              (417
              )Payment
      of cash dividend
              
              
              (310
              )
              
              
              (305
              )Net
      cash flows from financing activities
              
              
              (5,551
              )
              
              
              (921
              )Effect
      of exchange rate changes on cash and cash equivalents
              
              
              (62
              )
              
              
              (16
              )Net
      increase in cash and cash equivalents
              
              
              325
              
              
              
              61Cash
      and cash equivalents, beginning of period
              
              
              67
              
              
              
              667Cash
      and cash equivalents, end of period
              
              $
              392
              
              
              $
              728The
      accompanying notes are an integral part of these
    statements.
  4
  
 YOUNG
INNOVATIONS, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March
31, 2010
 (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,
2009.  The results of operations for the three months ended March 31,
2010 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, 2009 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
 
 1.           ORGANIZATION:
  Young
Innovations, Inc. and its subsidiaries (“the Company”) develops, manufactures
and markets supplies and equipment used by dentists, dental hygienists, dental
assistants and consumers.  The Company's product offerings include
disposable and metal prophylaxis (“prophy”) angles, prophy cups and brushes,
dental micro-applicators, panoramic X-ray machines, moisture control products,
infection control products, dental handpieces (drills) and related components,
endodontic systems, orthodontic toothbrushes, flavored examination gloves,
children's toothbrushes, and children's toothpastes.  The Company’s
manufacturing and distribution facilities are located in Missouri, Illinois,
California, Indiana, 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, and uncertain income
tax positions.
 
 
  5
  
 Revenue
Recognition
 
 Revenue
from the sale of products is recorded at the time title passes, generally when
the products are shipped, as the Company’s shipping terms are customarily FOB
shipping point.  Revenue from the rental of equipment to others is
recognized on a month-to-month basis as the revenue is earned.  The Company
generally requires payment within 30 days from the date of invoice and offers
cash discounts for early payment.  For certain acquired businesses that
offer different terms, the Company migrates these customers to the terms
referred above over time.
 
 The
Company offers discounts to its distributors if certain conditions are
met.  Customer allowances, volume discounts and rebates, and other
short-term incentive programs are recorded as a reduction in reported revenues
at the time of sale.  The Company reduces product revenue for the estimated
redemption of annual rebates on certain current product sales. Customer
allowances and rebates are estimated based on historical experience and known
trends.
 
 The
policy with respect to sales returns generally provides that a customer may not
return inventory except at the Company’s option, 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.
 
 The
Company adopted the disclosure requirements of ASC Topic 605, “Revenue
Recognition” (that is, gross versus net presentation) for tax receipts on the
face of its income statements. The scope of this guidance includes any tax
assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer and may include,
but is not limited to, sales, use, value added, and some excise taxes (gross
receipts taxes are excluded). The Company presents such taxes on a net
basis.
 
 Fair
Value of Financial Instruments
 
 Financial
instruments consist principally of cash, accounts receivable, notes receivable,
accounts payable and debt.  The estimated fair value of these
instruments approximates their carrying value.  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 accounts for uncertain tax positions in accordance with the provisions
of ASC 740, “Income Taxes.”  As of December 31, 2009, the Company had
$95 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, 2009, the Company had accrued $27 of
penalties and interest related to uncertain tax positions.
 
 The
Company decreased the amount of unrecognized tax benefits during the three
months ended March 31, 2010 by approximately $46 due to a change in measurement
of an uncertain tax position recognized in a prior period.  The
Company is not aware of any other tax positions for which it is reasonably
possible that the total amounts of unrecognized tax benefits will significantly
increase or decrease within the next twelve months.
  6
  
 The
Company 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.
 
 The
Company and its subsidiaries are subject to domestic federal and state income
taxes as well as foreign income taxes. With certain exceptions, the Company is
no longer subject to U.S. federal, state, and local or non-U.S. income tax
examinations by tax authorities for years prior to 2005.
 
 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 March 31,
2010 and 2009, interest income totaled $35 and $66, and interest expense totaled
$136 and $220, respectively.
 
 Other
Income, net
 
 Other
income, net includes foreign currency transaction gain/loss and other
miscellaneous income, all of which are not directly related to the Company’s
primary business.
 
 Supplemental
Cash Flow Information
 
 Cash
flows from operating activities include $267 and $69 for the payment of federal
and state income taxes and $74 and $231 for the payment of interest or loan
charges for the three months ended March 31, 2010 and 2009,
respectively.
 
 Foreign
Currency Translation
 
 The
translation of financial statements into U.S dollars has been performed in
accordance with ASC 830 “Foreign Currency Matters.”  The local
currency for all entities included in the condensed consolidated financial
statements has been designated as the functional currency.  Non-U.S.
dollar denominated assets and liabilities have been translated into U.S. dollars
at the rate of exchange prevailing at the balance sheet
date.  Revenues and expenses have been translated at the weighted
average of exchange rates in effect during the quarter.  Translation
adjustments are recorded in accumulated other comprehensive income
(loss).  Net currency transaction gains included in other income, net
were $61 and $2  for the three months ended March 31, 2010 and 2009,
respectively.
 
 3.           INVESTMENTS:
 
 On
February 21,
2006, the Company invested in a private equity investment fund.  At
March 31, 2010, the Company has an unfunded capital commitment of up to
$300.  As of March 31, 2010, the total capital commitment paid by the
Company was $1,950.  Through December 31, 2009, the Company accounted
for this investment under the equity method as the Company had an ability to
exercise significant influence over the fund through board
membership.  Effective January 2010, the Company’s investment no
longer qualifies for equity method accounting as the Company’s delegate to the
board resigned.  As of January 1, 2010, the Company is accounting for
its investment using cost method.  The Company will no longer record
equity earnings or losses as a result of this change.  The Company
recorded a loss attributed to this private equity investment at March 31, 2009
of $23 included in other expense (income).
 
 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.  The Company did not earn financing revenue from
sales of equipment for the three months ended March 31, 2010.  The
Company recognized $20 during the three months ended 2009.  These
transactions are recorded as a sale upon the transfer of title to the purchaser,
which generally occurs at the time of shipment, at an amount equal to the sales
price of non-financed sales.  Interest on these notes was accrued as
earned and recorded as interest income.
  7
  
 On
January 16, 2008, the Company transferred a majority of its X-ray equipment
loans to a third party for a cash payment of $3,519.  The Company
transferred $4,154 of the notes receivable portfolio for a purchase price of
$4,140.  Of the purchase price, $621 is subject to a recourse holdback
pool that has been established with respect to the limited recourse the third
party has on the loans.  On May 5, 2008, the Company transferred
additional X-ray equipment loans to a third party for a cash payment of
$235.  There is an additional $42 subject to a recourse holdback
pool.  As the transactions do not qualify as sales of assets under ASC
Topic 860 “Transfers and Servicing” the transactions have been treated as
financing and the loans remain on the Company’s balance sheet.  As the
third party receives payments on the transferred notes, the Company reduces the
corresponding notes receivable and secured borrowing balances.  As of
March 31, 2010, the residual amount of notes receivable transferred to a third
party was $1,260, of which $662 is classified as a short-term notes receivable
and $598 as a long-term notes receivable.  A corresponding long-term
and short-term liability has been recorded, net of the recourse holdback pool of
$149, on the Company’s balance sheet.
  8
  
 Notes
receivable consist of the following:
 March
      31,
              
              
              December
      31,2010
              
              
              2009Notes
      receivable, short-term
              
              $
              812
              
              
              $
              892Notes
      receivable, long-term
              
              
              686
              
              
              
              890Total
      notes receivable
              
              $
              1,498
              
              
              $
              1,782
 
 Notes
receivable are included in other current assets and other assets in the
accompanying condensed consolidated balance sheets.
 
 5.           INVENTORIES:
 
 Inventories
consist of the following:
 March
      31,
              
              
              December
      31,2010
              
              
              2009Finished
      products                                                                   .
              
              $
              6,011
              
              
              $
              6,905Work
      in process,
      long-term
              
              
              2,692
              
              
              
              2,584Raw
      materials and supplies
              
              
              5,236
              
              
              
              5,327Total
      inventories
              
              $
              13,939
              
              
              $
              14,816
 
 6.           PROPERTY,
PLANT AND EQUIPMENT:
 
 Property,
plant and equipment consist of the following:
 March
      31,
              
              
              December
      31,2010
              
              
              2009Land
              
              $
              3,449
              
              
              $
              3,449Buildings
      and
      improvements
              
              
              21,803
              
              
              
              21,550Machinery
      and
      equipment
              
              
              28,127
              
              
              
              27,560Equipment
      rented to
      others
              
              
              5,301
              
              
              
              5,464Construction
      in
      progress
              
              
              1,607
              
              
              
              1,527$
              60,287
              
              
              $
              59,550Accumulated
      depreciation
              
              
              (26,504
              )
              
              
              (25,882
              )Total property, plant and
      equipment,
      net
              
              $
              33,783
              
              
              $
              33,668
 
 7.           GOODWILL
AND INTANGIBLE ASSETS:
 
 Goodwill
activity is as follows:
 Balance
      at December 31, 2009
              
              $
              80,374Foreign
      currency translation
              
              
              (76
              )Balance
      at March 31, 2010.
              
              $
              80,298
 
 
 
  9
  
 As of March 31, 2010Gross Carrying Amount
              
              
              Accumulated Amortization
              
              
              Net Carrying AmountAmortized
      intangible assetsLicense
      agreements
              
              $
              1,251
              
              
              $
              410
              
              
              $
              841Core
      technology
              
              
              739
              
              
              
              194
              
              
              
              545Patents
              
              
              2,265
              
              
              
              1,145
              
              
              
              1,120Product
      formulas
              
              
              430
              
              
              
              94
              
              
              
              336Customer
      relationships
              
              
              813
              
              
              
              509
              
              
              
              304Non-compete
      agreements
              
              
              519
              
              
              
              322
              
              
              
              197Supplier
      relationships
              
              
              399
              
              
              
              345
              
              
              
              54Total
              
              $
              6,416
              
              
              $
              3,019
              
              
              $
              3,397Intangible
      assets not subject to amortizationLicense
      agreements
              
              $
              1,693
              
              
              $
              --
              
              
              $
              1,693Trademarks
              
              
              6,857
              
              
              
              --
              
              
              
              6,857Total
              
              
              8,550
              
              
              
              --
              
              
              
              8,550Total
      intangible assets
              
              $
              14,966
              
              
              $
              3,019
              
              
              $
              11,947
 
 
 As of December 31, 2009Gross Carrying Amount
              
              
              Accumulated Amortization
              
              
              Net Carrying AmountAmortized
      intangible assetsLicense
      agreements
              
              $
              1,251
              
              
              $
              382
              
              
              $
              869Core
      technology
              
              
              739
              
              
              
              184
              
              
              
              555Patents
              
              
              2,265
              
              
              
              1,094
              
              
              
              1,171Product
      formulas
              
              
              430
              
              
              
              92
              
              
              
              338Customer
      relationships
              
              
              813
              
              
              
              479
              
              
              
              334Non-compete
      agreements
              
              
              519
              
              
              
              306
              
              
              
              213Supplier
      relationships
              
              
              399
              
              
              
              332
              
              
              
              67Total
              
              $
              6,416
              
              
              $
              2,869
              
              
              $
              3,547Intangible
      assets not subject to amortizationLicense
      agreements
              
              
              1,693
              
              
              
              
              
              
              
              1,693Trademarks
              
              $
              6,857
              
              
              
              --
              
              
              $
              6,857Total
              
              
              8,550
              
              
              
              
              
              
              
              8,550Total
      intangible assets
              
              $
              14,966
              
              
              $
              2,869
              
              
              $
              12,097
 
 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, license agreements and core
technology; 40 years for product formulations; and 5 to 8 years for supplier and
customer relationships.  Non-compete agreements are amortized over the
length of the signed agreement.  The weighted average life for
amortizable intangible assets is 16 years.  Aggregate amortization
expense for the three months ended March 31, 2010 and 2009 was $150 and $133,
respectively.  Estimated amortization expense for each of the next
five years is as follows:
 
  10
  
 For the year ending
12/31/10                                                                $545
 For the
year ending
12/31/11                                                                  440
 For the year ending
12/31/12                                                                  408
 For the
year ending
12/31/13                                                                  408
 For the
year ending
12/31/14                                                                  325
 
 8.           CREDIT
ARRANGEMENTS AND NOTES PAYABLE:
 
 On May
21, 2009, the Company renewed its credit facility.  The new credit
facility reduced the aggregate commitment from $75,000 to $60,000 and expires in
July 2012.  The Company has $51,495 available under the line of credit
at March 31, 2010.  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 March 31, 2010
and December 31, 2009 the Company was in compliance with these
covenants.
 
 Long-term
      debt was as follows:
              
              March
      31,
              
              
              December
      31,2010
              
              
              2009Revolving
      credit facility due 2012 with a weighted-average interestrate
      of 3.05% and 2.97% at March 31, 2010 and December 31, 2009,
      respectively
              
              $
              8,505
              
              
              $
              13,979Less
      - current portion
              
              
              --
              
              
              
              --$
              8,505
              
              
              $
              13,979
 
 9.      SHARE-BASED
COMPENSATION:
 
 The
Company adopted the 1997 Stock Option Plan (the “1997 Plan”) effective in
November 1997 and amended the Plan in 1999 and 2001.  A total of 1,725
shares of Common Stock were reserved for issuance under this plan which is
administered by the compensation committee of the Board of Directors
(“Compensation Committee”).  The Company adopted the 2006 Long-Term
Incentive Plan (“the 2006 Plan”) effective in May 2006.  The 2006 Plan
is intended to be a successor to the 1997 Plan.  A total of 700 shares
were authorized for grant under the 2006 Plan.  Awards under the 2006
Plan may be stock options, stock appreciation rights, restricted stock,
restricted stock units, and other equity awards.
 
 Any
employee of the Company or its affiliates, any consultant whom the Compensation
Committee determines is significantly responsible for the Company’s success and
future growth and profitability, and any member of the Board of Directors, may
be eligible to receive awards under the 2006 Plan.  The purpose of the
2006 Plan is to: (a) attract and retain highly competent persons as employees,
directors, and consultants of the Company; (b) provide additional incentives to
such employees, directors, and consultants by aligning their interests with
those of the Company’s shareholders; and (c) promote the success of the business
of the Company.  The Compensation Committee establishes vesting
schedules for each option issued under the Plan.  Under the 1997 Plan,
outstanding options generally vested over a period of up to four years while
non-vested equity shares vested over five years.  Under the 2006 Plan,
outstanding options generally vest over a period of up to three years while
non-vested equity shares vest over one, two, three, four and five year
periods.  All outstanding options expire ten years from the date of
grant under the 1997 Plan and five years from the date of grant under the 2006
Plan.
 
 Stock
Options
 During
the three months ended March 31, 2010 and 2009, the Company recorded pre-tax compensation
expense of $37 and $43 related to the Company’s stock option
shares.  As of March 31, 2010, there was approximately $58 of
unrecognized compensation expense related to stock options, which will be
recognized over the weighted-average remaining requisite service period of 1.4
years.  The total aggregate intrinsic value of options exercised
during the
  11
  three
months ended March 31, 2010 and 2009 was $200 and $60,
respectively.  Payments received upon the exercise of stock options
for the three months ended March 31, 2010 and 2009 totaled $212 and $89,
respectively.  The related tax benefit realized related to these
exercises was $122 and $21 for the three months ended March 31, 2010 and
2009.  The Company issues shares from treasury upon share option
exercises.
 
 The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. There were no stock options granted during
the three months ended March 31, 2010 or 2009.
  
  The
following table summarizes stock option activity for the three months ended
March 31, 2010:
 Options
              
              Shares
                (000)
              
              
              Weighted-Average
      Exercise Price
              
              Weighted-Average
      Remaining Contractual
      Term
              
              Aggregate
                Intrinsic Value
                ($000)Outstanding
      at January 1, 2010
              
              
              712
              
              
              $
              26.27Granted
              
              
              --
              
              
              
              --Exercised
              
              
              (15
              )
              
              $
              14.23Forfeited
      or expired
              
              
              --
              
              
              
              --Outstanding
      at March 31, 2010
              
              
              696
              
              
              $
              26.54
              
              3.21
      yrs
              
              $
              3,545Exercisable
      at March 31, 2010
              
              
              685
              
              
              $
              26.58
              
              3.22
      yrs
              
              $
              3,496
 
 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 first quarter of 2010 and the exercise price, multiplied
by the number of in-the-money options).
  Non-Vested Equity
Shares
  Under the
2006 Plan, non-vested equity share units and restricted stock may be awarded or
sold to participants under terms and conditions established by the Compensation
Committee.  The Company calculates compensation cost for restricted
stock grants to employees and non-employee directors by using the fair market
value of its Common Stock at the date of grant and the number of shares issued.
This compensation cost is amortized over the applicable vesting
period.  During the three months ended March 31, 2010 and 2009, the
Company recorded pre-tax compensation expense of $404 and $332, respectively,
related to the Company’s non-vested equity shares.  As of March 31,
2010, there was approximately $2,537 of unrecognized compensation cost related
to non-vested equity shares which will be amortized over the weighted-average
remaining requisite service period of 2.43 years.  The Company issues
share grants from treasury.
  The
following table details the status and changes in non-vested equity shares for
the three months ended March 31, 2010:
  Shares
                (000)
              
              
              Weighted-Average
                Grant
      Date
                Fair ValueNon-vested
      equity shares, January 1, 2010
              
              
              189
              
              
              $
              20.98Granted
              
              
              65
              
              
              $
              24.80Vested
              
              
              (58
              )
              
              $
              23.46Forfeited
              
              
              --
              
              
              
              --Non-vested
      equity shares, March 31, 2010
              
              
              196
              
              
              $
              21.52
 
 
 
 10.           RELATED-PARTY
TRANSACTIONS:
 
 The
Company has an employment agreement with George E. Richmond, the Company’s Vice
Chairman and principal stockholder, which paid him $23 for the three months
ended March 31, 2010.  On February 25, 2010, the
  12
  Company
increased his annual salary from $50 to $100 which was effective January 1,
2010.  The Company paid $13 during the three months ended March 31,
2009.
 
 During
the three months ended March 31, 2009 the Company paid consulting fees of $13 to
a corporation which is wholly owned by George E. Richmond, the Company’s Vice
Chairman and principal stockholder.   On February 25, 2010, the
Company terminated its consulting agreement with this corporation effective
December 31, 2009.
 
 
 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
                March 31,2010
              
              
              2009Net
      income
              
              $
              3,558
              
              
              $
              3,155Weighted
      average shares outstanding for basic earnings per share7,984
              
              
              
              7,811Dilutive
      effect of stock options and restricted stock
              
              
              76
              
              
              
              39Weighted
      average shares outstanding for diluted earnings per share8,060
              
              
              
              7,850Basic
      earnings per share
              
              $
              0.45
              
              
              $
              0.40Diluted
      earnings per share
              
              $
              0.44
              
              
              $
              0.40
 
 12.           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 March 31, 2010 and December 31, 2009, respectively,
approximately $533 and $579, 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 $277 and $319 at March 31, 2010 and 2009,
respectively.  The following is a rollforward of the Company’s
warranty accrual:
  13
  
 Three Months Ended
                March 31,2010
              
              
              2009Balance,
      December 31
              
              $
              292
              
              
              $
              309Accruals
      for warranties issued during the quarter
              
              
              180
              
              
              
              80Warranty
      settlements made during the quarter
              
              
              (195
              )
              
              
              (70
              )Balance,
      March 31
              
              $
              277
              
              
              $
              319
 
 13.           SUBSEQUENT
EVENTS:
 
 On May 4,
2010, the Board declared a quarterly dividend of $0.04 per share, payable June
15, 2010 to shareholders of record on May 22, 2010.
 
 
 
  14
  Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
 
 Critical
Accounting Policies
 
 The SEC
has requested that all registrants include in their MD&A a description of
their most critical accounting policies, the judgments and uncertainties
affecting the application of those policies, and the likelihood that materially
different amounts would be reported under different conditions using different
assumptions.  The SEC indicated that a “critical accounting policy” is
one which is both important to the portrayal of the company’s financial
condition and results and requires management’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain.  The Company believes
that the following accounting policies fit this definition:
 
 Allowance for doubtful
accounts –Accounts receivable balances are subject to credit
risk.  Management has reserved for expected credit losses, sales
returns and allowances, and discounts based upon past experience, as well as
knowledge of current customer information.  The Company believes that
its reserves are adequate.  It is possible, however, that the accuracy
of our estimation process could be impacted by unforeseen
circumstances.  The Company continuously reviews its reserve balance
and refines the estimates to reflect any changes in circumstances.
 
 Inventory – The Company
values inventory at the lower of cost or market on a first-in, first-out (FIFO)
basis.  Inventory values are based upon standard costs, which
approximate actual costs.  Management regularly reviews inventory
quantities on hand and records a write-down for excess or obsolete inventory
based primarily on estimated product demand and other information related to the
inventory, including planned introduction of new products and changes in
technology.  If demand for the Company’s products is significantly
different than management’s expectations, the value of inventory could be
materially impacted.  Inventory write-downs are included in cost of
goods sold.
 
 Goodwill and other intangible
assets – In accordance with Accounting Standards Codification
(“ASC”)  Topic 350, “Intangibles- Goodwill and Other,” goodwill and
other intangible assets with indefinite useful lives are reviewed by management
for impairment at least annually, or whenever events or changes in circumstances
indicate the carrying amount may not be recoverable.  If indicators of
impairment are present, the determination of the amount of impairment would be
based on management’s judgment as to the future operating cash flows to be
generated from the assets.  ASC Topic 350 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with ASC Topic 360, “Property, Plant, and
Equipment.”
 
 Revenue Recognition - Revenue
from the sale of products is recorded at the time title passes, generally when
the products are shipped, as the Company’s shipping terms are customarily FOB
shipping point.  The Company generally requires payment within 30 days from
the date of invoice and offers cash discounts for early payment.  For
certain acquired businesses that offer different terms, the Company migrates
these customers to the terms referred above over time.
 
 The
Company offers discounts to its distributors if certain conditions are
met.  Customer allowances, volume discounts and rebates, and other
short-term incentive programs are recorded as a reduction in reported revenues
at the time of sale.  The Company reduces product revenue for the estimated
redemption of annual rebates on certain current product sales. Customer
allowances and rebates are estimated based on historical experience and known
trends.
 
 The
policy with respect to sales returns generally provides that a customer may not
return inventory except at the Company’s option, 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 - In
accordance with ASC Topic 718, “Stock Compensation,” compensation cost is
recognized within the financial statements at the grant date based on the
award’s fair-value.  Stock option fair value is
  15
  calculated
by an option pricing model, and is recognized as expense ratably over the
requisite service period. The option pricing models require judgmental
assumptions including: volatility, forfeiture rates, and expected option life.
If any of the assumptions used in the model change significantly, share-based
compensation expense may differ in the future from that recorded in the current
period.  The Company uses the Black-Scholes option pricing
model.  Compensation expense is also recognized for restricted stock
using the fair market value of our Common Stock at the date of
grant.
 
 Assets Acquired and Liabilities
Assumed in Business Combinations – The Company periodically acquires
businesses.  All business acquisitions completed subsequent to January
1, 2009 are accounted for under the provisions of ASC Topic 805, “Business
Combinations,” which requires an entity to recognize the assets acquired,
liabilities assumed, contractual contingencies, and contingent consideration at
their fair value on the acquisition date.  It further requires that
acquisition-related costs be recognized separately from the acquisition and
expensed as incurred, restructuring costs generally be expensed in the periods
subsequent to the acquisition date, and changes in accounting for deferred tax
asset valuation allowances and acquired income tax uncertainties after the
measurement period be recorded as income tax expense.  The changes
related to income taxes also impact the accounting for acquisitions completed
prior to the effective date of ASC 805.  In addition, acquired
in-process research and development is capitalized as an intangible asset and
amortized over its estimated useful life.  Acquisitions completed
prior to this adoption were made using the purchase method.  Future
acquisitions will be impacted using the provisions of the new accounting
standard.
 
 RESULTS
OF OPERATIONS (In thousands, except per share data)
 
 Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
 
 Net
Sales
 Net sales
increased $1,018 or 4.3% to $24,782 in the first quarter of 2010 from $23,764 in
the first quarter of 2009.  Overall demand for products remained
stable in the first quarter.  Increased sales of consumable products,
which include preventive, infection control, endodontic, micro-applicators and
home care product lines, were somewhat offset by weaker results in the
diagnostic product line.  Given the ongoing high unemployment rates in
the U.S., the Company believes that the increased strength of consumable product
sales may be more a function of timing of orders than a reflection of general
market growth.  A weaker U.S. dollar positively impacted sales by
approximately $118.
 
 Gross
Profit
 Gross
profit increased $492 or 3.7% to $13,802 in the first quarter of 2010 compared
to $13,310 in the first quarter of 2009.  Gross margin decreased to
55.7% of net sales in the first quarter of 2010 from 56.0% in the first quarter
of 2009.  The slight decline in margin percentage was primarily
attributable to the mix of products sold as compared to the prior
period.
 
 Selling, General, and
Administrative Expenses
 SG&A
expenses increased $80 or 1.0% to $8,395 in the first quarter of 2010 as overall
spending remained relatively consistent with the first quarter of
2009.  As a percent of net sales, SG&A expenses decreased 1.1
percentage points to 33.9% in the first quarter of 2010 compared to 35.0% in the
first quarter of 2009 as sales increased at a faster rate than
expenses.
 
 Income from
Operations
 Income
from operations increased $412 or 8.2% to $5,407 in the first quarter of 2010
compared to $4,995 in the first quarter of 2009.  The change was a
result of the factors described above.
 
 Interest Expense,
net
 Interest
expense, net decreased $53 to $101 in the first quarter of 2010 from $154 in the
first quarter of 2009.  The decrease was primarily attributable to
lower borrowings on the Company's credit facility.
  16
  
 Other Income,
net
 Other
income, net increased $71 to $84 in the first quarter of 2010 from $13 in the
first quarter of 2009.  The increase was primarily attributable to a
foreign exchange impact on inventory purchases by the Company’s Irish
subsidiary.
 
 Provision for Income
Taxes
 Provision
for income taxes increased $133 for the first quarter of 2010 to $1,832 from
$1,699 in the first quarter of 2009 as a result of higher pre-tax income offset
partially by a decrease in the effective tax rate.  The effective tax
rate in the first quarter of 2010 was 34.0% compared to 35.0% in the first
quarter of 2009.  The decrease in rate was primarily due to an
increase in the allowance rates for the manufacturing deduction and a change in
measurement of a prior period uncertain tax position.
 
 Liquidity
and Capital Resources
 
 Historically,
the Company has financed its operations primarily through cash flow from
operating activities and, to a lesser extent, through borrowings under its
credit facility.  Net cash flow from operating activities was $7,015
and $3,965 for the first three months of 2010 and 2009,
respectively.  Net capital expenditures for property, plant and
equipment were $1,077 and $1,367 for the three months of 2010 and 2009,
respectively.  Operating cash flow in 2010 improved due to increased
net income, the reduction in inventories due to timing of product sales and
accounts payable due to the timing of vendor payments.  These
improvements were somewhat offset by an increase in accounts receivable
principally caused by the timing of collections received in 2010 compared to
2009.  The timing of payments did not adversely impact the aging of
receivables.
 
 The
Company maintains a credit agreement with a borrowing capacity of $60,000, which
expires in July 2012.  Borrowings under the agreement bear interest at
rates ranging from LIBOR + 2.0% to LIBOR + 2.5%, or Prime, depending on the
Company’s level of indebtedness.  Commitment fees for this agreement
range from .25% to .5% of the unused balance. The agreement is unsecured and
contains various financial and other covenants.  As of March 31, 2010,
the Company was in compliance with all of these covenants.  During the
three months ended March 31, 2010, the Company borrowed under the credit
facility to finance investments in facilities and for working capital
needs.  At March 31, 2010, the Company had $8,505 in outstanding
borrowings under this agreement and $51,495 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,
  17
  the
Company is exposed to interest rate risk.  A theoretical 100 basis
point increase in interest rates would have resulted in approximately $112 and
$73 of additional interest expense in the three month periods ended March 31,
2010 and 2009, respectively.  Alternatively, a 100 basis point
decrease in interest rates would have reduced interest expense by approximately
$112 and $73 in the three month periods ended March 31, 2010 and 2009,
respectively.
 
 Sales of
the Company’s products in a given foreign country can be affected by
fluctuations in the exchange rate.  For the three months ended March
31, 2010, the Company sold less than 20% of its products outside of the United
States.  Of these foreign sales, 39% were denominated in Euros and 7%
in Canadian dollars.  The Company does not feel that foreign currency
movements have a material impact on its financial statements.
 
 The
Company does not use derivatives to manage its interest rate or foreign exchange
rate risks.
 
 Item
4.                      Controls
and Procedures.
 
 Evaluation
of Disclosure Controls and Procedures
 The
Company’s Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation as of the end of the period covered by this report,
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934, as amended, is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure and that the
information is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms.
 
 Changes
in Internal Control Over Financial Reporting
 There
have been no changes in our internal controls over financial reporting that
occurred during the quarterly period ended March 31, 2010 that have materially
affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.
  18
  PART
II
 OTHER
INFORMATION
 
 
 Item
      2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds.
 
 
 ISSUER
      PURCHASES OF EQUITY SECURITIES (in thousands, except per share data)
      (1)
 
 Period
              
              Total
      Number of Shares Purchased
              
              
              Average
      Price Paid per Share
              
              
              Total
      Number of Shares Purchased as Part of Publicly Announced
      Program
              
              
              Maximum
      Number of Shares that May Yet Be Purchased Under the
    ProgramFebruary
      2010
              
              
              .3
              
              
              $
              22.48
              
              
              
              .3
              
              
              
              500Total
      First Quarter 2010
              
              
              .3
              
              
              $
              22.48
              
              
              
              .3
              
              
              
              500
 
 (1)
              The
      share repurchase program authorizing the purchase of up to 500 shares was
      announced July 20, 2009.The
      authorization will expire July 31, 2010 and replaces the previous share
      repurchase program which expired in July
2009.
 
 
 Item
      6.
              Exhibits.
 
 Exhibits.
 
 31.1  Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
 Section
302 of the Sarbanes-Oxley Act of 2002.
 
 31.2  Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
 Section
302 of the Sarbanes-Oxley Act of 2002.
 
 32.1  Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
 Section
906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
  19
  
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 YOUNG INNOVATIONS,
INC.
 
 May 7,
2010                                                                 /s/     Alfred
E. Brennan, Jr.
 ----------------------                                                                ------------------------------------------------------------
 Date                                                                 Alfred E. Brennan,
Jr.
 Chief Executive
Officer
 
 /s/     Arthur
L. Herbst, Jr.
 ------------------------------------------------------------
 Arthur L. Herbst,
Jr.
 President and Chief
Financial Officer
 
 
  20