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 June 30, 2005

 

Commission file number  000-23213

 

|  
YOUNG INNOVATIONS, INC.

 
(Exact name of registrant as specified in its charter)

 

 
Missouri

43-1718931

 
(State or other jurisdiction of incorporation

(I.R.S. Employer

 
 
or organization)

Identification No.)

 

 

13705 Shoreline Court East, Earth City, Missouri  

63045

 
(Address of principal executive offices)

 
 
(Zip Code)

 
 

(314) 344-0010

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by

Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 

shorter period that the registrant was required to file such reports), and (2) has been subject to such 

filing requirements for the past 90 days.

 

Yes ...X...  

No ........

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  

X  

No ___

 

Number of shares outstanding of the Registrant’s Common Stock at July 29, 2005:

8,914,036 shares of Common Stock, par value $.01 per share

 

 

1

 

 

 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

**YOUNG INNOVATIONS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands, except per share data)**

 

** **

 

 

**June 30,**

**December 31,**

 

 

** **

**2005** 

(unaudited)

**2004** 

 

 

**Assets**

 

Current assets:

 

 

Cash and cash equivalents

$        4,392

$    2,552

Trade accounts receivable, net of allowance for doubtful accounts of $420

and $451 in 2005 and 2004, respectively

 

9,467

 

9,976

Inventories

10,135

10,942

Other current assets

4,930

3,640

Total current assets

28,924

27,110

Property, plant and equipment, net

22,000

22,137

Goodwill..............................................................................................

52,690

52,617

Other intangible assets, net

6,205

6,105

Other assets

1,148

1,860

Total assets

$ 110,967

$ 109,829

 

 

**Liabilities and Stockholders’ Equity**

 

 

Current liabilities:                                                                                          

 

 

Accounts payable and accrued liabilities

7,313

7,639

Net liabilities for discontinued operations...................................................... 

Total current liabilities

--

7,313   

43      

7,682

Deferred income taxes

7,010

7,010

Stockholders’ equity:

 

Common stock, voting, $.01 par value per share, 25,000 shares authorized,

8,914 and 9,038 shares issued and outstanding in 2005 and

2004, respectively

 

 

90

 

 

90

Additional paid-in capital

28,990

29,033

Deferred stock compensation

(430)

(598)

Retained earnings

90,176

83,884

Common stock in treasury, at cost, 1,274 and 1,146 shares in 2005 and 

2004, respectively

 

(22,182)

 

(17,272)

Total stockholders' equity

96,644

95,137

Total liabilities and stockholders' equity

$  110,967

$ 109,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

2

 

 

 

 

 

**YOUNG INNOVATIONS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(In thousands, except per share data)**

**(unaudited)**

 

 

 

 

 

 

 

 

**THREE MONTHS ENDED**

 

**SIX MONTHS ENDED**

 

 

 

 

 

 

**JUNE 30,**

 

**JUNE 30,**

 

 

 

 

 

 

**2005**

** **

**2004**

 

**2005**

** **

**2004**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

$    20,906 

 

$    16,738 

 

$    41,540 

 

$    36,232 

 

Cost of goods sold

 

 

 

9,368 

 

8,089 

 

19,118 

 

16,695 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

11,538 

 

8,649 

 

22,422 

 

19,537 

 

Selling, general and administrative expenses

5,916 

 

5,424 

 

11,293 

 

11,003 

 

 

 

 

 

Income from operations

 

 

 

5,622 

 

3,225 

 

11,129 

 

8,534 

 

Other income, net

 

 

 

143 

 

11 

 

255 

 

16 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

5,765 

 

3,236 

 

11,384 

 

8,550 

 

Provision for income taxes

 

 

2,205 

 

1,238 

 

4,354 

 

3,271 

 

 

 

 

 

 

 

Net income from continuing operations

 

 

3,560

 

1,998 

 

7,030

 

5,279 

Net income from discontinued operations

 

 

0

 

35

 

0

 

51

 

 

 

 

 

 

Net income

 

 

 

 

$      3,560 

 

$      2,033 

 

$      7,030 

 

$      5,330 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

$0.40 

 

$0.22 

 

$0.78 

 

$0.59 

Basic earnings per share from continuing operations

$0.40 

 

$0.22 

 

$0.78 

 

$0.59 

Basic earnings per share from discontinued operations

$0.00 

 

$0.00 

 

$0.00 

 

$0.00 

Diluted earnings per share

 

 

 

$0.38 

 

$0.22 

 

$0.75 

 

$0.57 

Diluted earnings per share from continuing operations

$0.38 

 

$0.22 

 

$0.75 

 

$0.57 

Diluted earnings per share from discontinued operations

$0.00 

 

$0.00 

 

$0.00 

 

$0.00 

Basic weighted average shares outstanding

 

 

8,980 

 

9,039 

 

9,010 

 

9,036 

Diluted weighted average shares outstanding

 

 

9,363 

 

9,399 

 

9,371 

 

9,426 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

 

 

3

 

 

 

**YOUNG INNOVATIONS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(unaudited)**

** **

** **

**SIX MONTHS ENDED**

** **

 

** **

** **

**JUNE 30,**

** **

 

** **

** **

**2005******

** **

**2004******

** **

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$7,030      

 

$       5,330       

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash flows from 

 

 

 

 

 

 

operating activities --

 

 

 

 

 

 

Depreciation and amortization

 

1,514

 

1,476

 

 

Loss on disposal of property, plant and equipment

 

 

 

106     

 

 

Changes in assets and liabilities --

 

 

 

 

 

 

Trade accounts receivable

 

489

 

3,575

 

 

Inventories

 

633

 

(2,063)

 

 

Other current assets 

 

(980)

 

(658)

 

 

Other assets

 

159

 

(730)

 

 

Accounts payable and accrued liabilities

 

(453)

 

(1,252)

 

 

 

 

 

 

 

Total adjustments

 

1,362

 

   454

 

 

 

 

 

 

 

Net cash flows from operating activities

 

8,392

 

5,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

 

 

(1,516)

 

 

Purchases of property, plant and equipment

 

(1,061)

 

(3,644)

 

 

Proceeds from sale of equity investment

 

200

 

 

 

 

 

 

 

 

 

Net cash flows from investing activities

 

(861)

 

(5,160)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from borrowings of long-term debt

 

 

 

9,568

 

 

Payments on long-term debt

 

 

 

(10,291)

 

 

Proceeds from stock options exercised

 

125

 

412

 

 

Payment of cash dividend

 

(741)

 

(738)

 

 

Purchase of treasury stock, net

 

(5,075)

 

--

 

 

 

 

 

 

 

Net cash flows from financing activities

 

(5,691)

 

(1,049)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents 

 

1,840

 

(425)

 

 

Cash and cash equivalents, beginning of period

 

2,552

 

938

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$4,392         

 

$       513              

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

**YOUNG INNOVATIONS, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2005**

**(In thousands, except per share data)**

 

**GENERAL:**

 

This report includes information in a condensed format and should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.  The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results expected for the full year or any other interim period.  

 

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to the rules of the Securities and Exchange Commission.  In our opinion, the statements include all adjustments necessary (which are of a normal recurring nature) for the fair presentation of the results of the interim periods presented.

 

The balance sheet information at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

**1.**

**ORGANIZATION:**

 

Young Innovations, Inc. and subsidiaries (the “Company”) develops, manufactures and markets supplies and equipment used to facilitate the practice of dentistry and to promote oral health.  The Company's product offerings include disposable and metal prophylaxis (“prophy”) angles, prophy cups and brushes, panoramic X-ray machines, dental handpieces (drills) and related components, orthodontic toothbrushes, flavored examination gloves, children’s toothbrushes, children’s toothpastes,  moisture control products, infection control products, and ultrasonic systems and obturation products used in endodontic surgeries (root canal procedures).  The Company's manufacturing and distribution facilities are located in Missouri, California, Indiana, Colorado, Tennessee, Texas and Canada.  Export sales were less than 10% of total net sales for 2004 and 2003.

 

**2.**

**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

 

**Principles of Consolidation**

 

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

 

**Use of Estimates**

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.  Actual results could differ from those estimates.

 

**Revenue Recognition**

 

Revenue from the sale of products is recorded at the time title passes, generally when the products are shipped as our shipping terms are customarily FOB shipping point.  Young employs a variety of promotional activities, including, but not limited to, rebate programs, free goods offers, off-invoice pricing discounts, and free shipping promotions.  The Company’s income statement classification and expense recognition and measurement for these promotional activities is in accordance with the provisions of EITF 01-9:  *Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of*

 

5

 

 

*the Vendor’s Products).*  The Company generally warrants its products against defects and its most generous policy provides a two-year parts and labor warranty on X-ray machines.  The policy with respect to sales returns generally provides that a customer may not return inventory except at the Company’s option with the exception of X-ray machines, which have a 90-day return policy.  

 

The Company owns X-ray equipment rented on a month-to-month basis to customers.  Revenue from the rental of equipment to others is recognized on a month-to-month basis as the revenue is earned.  A liability for the removal costs of the rented X-ray machines is capitalized and amortized over four years.  A liability for the removal costs of the purchased X-ray machines expected to be returned to the Company is included in accounts payable and accrued liabilities at June 30, 2005 and December 31, 2004.  

 

The Company offers various financing options to its customers purchasing X-ray machines, including notes payable to the Company and financing through third parties.  The equipment purchased is used to secure the notes.  These transactions are recorded as a sale upon the transfer of title to the purchaser, which generally occurs at the time of shipment, at an amount equal to the sales price of non-financed sales.  Interest on these notes is accrued as earned and recorded as interest income.  

 

**Supplemental Cash Flow Information**

 

Cash flows from operating activities include $4,382 and $2,086 for the payment of federal and state income taxes and $37 and $54 for the payment of interest for the six months ended June 30, 2005 and 2004, respectively.    

 

**3.**

**STOCK AWARDS:**

 

**Stock Options**

 

The Company adopted the 1997 Stock Option Plan (the Plan) effective in November 1997 and amended the Plan in 1999 and 2001.  A total of 1,725 shares of Common Stock are reserved for issuance under this plan which is administered by the compensation committee of the Board of Directors (Compensation Committee).  Participants in the Plan will be those employees whom the Compensation Committee may select from time to time and those nonemployee directors as the Company’s Board of Directors may select from time to time.  

 

On March 1, 2005, the Company granted 320 options to employees and nonemployee directors.  All options were vested immediately.  As of June 30, 2005, a total of 1,849 options had been granted.  Net of forfeits, 1,590 options have been granted. 

 

In accordance with Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” the Company applies Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for the Plan.  Accordingly, no compensation cost has been recognized for grants made under the Plan, all of which are made at exercise prices that are not less than the fair value of the underlying stock on the date of grant.  Had compensation costs for the Plan been determined based upon the fair value of the options at the grant date consistent with the methodology prescribed under SFAS No. 123, the Company’s net income and earnings per share would approximate the pro forma amounts below:

 

 

** **

**Three Months Ended**

**June 30, 2005******

**Three Months Ended**

**June 30, 2004******

 

** **

**As Reported******

**Pro Forma******

**As Reported******

**Pro Forma******

 

(Unaudited)

(Unaudited)

Net income (loss)

$   3,560

$  3,506

$   2,033

$   1,870

Net income (loss) from continuing operations

3,560

                3,506

1,998

1,835

Net income from discontinued operations

0

                0

35

35

Earnings per share:

 

 

 

 

Basic   

$0.40

$0.39

$0.22

$0.21

 

 

6

 

 

 

 

Basic earnings per share from continuing operations

$0.40

$0.39

$0.22

$0.21

Basic earnings per share from discontinued operations

            $0.00

$0.00

$0.00

$0.00

Diluted   

$0.38

$0.37

$0.22

$0.20

Diluted earnings per share from continuing operations

$0.38

$0.37

$0.22

$0.20

Diluted earnings per share from discontinued operations

$0.00

$0.00

$0.00

$0.00

Amounts of stock-based compensation included in determination of net income:

 

 

 

 

Restricted stock compensation

$    52

$    52

$    52

$    52

 

 

 

 

 

 

 

** **

**Six Months Ended**

**June 30, 2005******

**Six Months Ended**

**June 30, 2004******

 

** **

**As Reported******

**Pro Forma******

**As Reported******

**Pro Forma******

 

(Unaudited)

(Unaudited)

Net income (loss)

$  7,030

$  3,303

$   5,330

$  4,988

Net income (loss) from continuing operations

7,030

        3,303

5,279

4,953

Net income from discontinued operations

0

       0

51

51

Earnings per share:

 

 

 

 

Basic   

$0.78

$0.37

$0.59

$0.55

Basic earnings per share from continuing operations

$0.78

$0.37

$0.59

$0.55

Basic earnings per share from discontinued operations

$0.00

$0.00

$0.00

$0.00

Diluted   

$0.75

$0.35

$0.57

$0.53

Diluted earnings per share from continuing operations

$0.75

$0.35

$0.57

$0.53

Diluted earnings per share from discontinued operations

$0.00

$0.00

$0.00

$0.00

Amounts of stock-based compensation included in determination of net income:

 

 

 

 

Restricted stock compensation

$  104

$   104

$   104

$   104

 

 

 

 

 

 

 

**4.**

**DISCONTINUED OPERATIONS:**

 

In December 2004, the Company completed the sale of the retail division of its Plak Smacker subsidiary.  The retail division, which has previously been reported as a separate segment, sold toothbrushes, children’s toothpaste and dental accessories to mass merchandisers under the Plak Smacker brand name.  The retail operations are accounted for as discontinued operations and accordingly, operating results and net assets are segregated in the accompanying Condensed Consolidated Statements of Income and Condensed Consolidated Balance Sheets.  The Company recorded a pre-tax gain of $1,156 on the transaction, which was included in the consolidated income statement caption “net income (loss) from discontinued operations” during the fourth quarter of 2004.  The net current liabilities of this discontinued operations are primarily accounts receivable and accounts payable.  Results for discontinuedoperations are as follows (in thousands):

 

 

** **

**Three months ended**

**Six months ended**

**June 30,**

**June 30,**

 

**2005******

**2004******

**2005******

**2004******

Net sales 

$       - 

$755 

$        -   

$1,553 

Income before income taxes 

-

57

-

83

Provision for income taxes 

-

22

-

32

Net income 

$       -

$35 

$        -

$51 

 

 

 

7

 

 

 

**5.**

**DIVESTED EQUITY INVESTMENT**

 

On May 17, 1999, the Company acquired a one-third interest in International Assembly, Inc., a Texas corporation (IAI).  The investment has been accounted for under the equity method of accounting and included in other assets on the Consolidated Balance Sheets.  Equity income (loss) is recorded using a three-month lag.  During the second quarter of 2005, the Company sold its interest in IAI for $200, which approximated the book value of the asset.  

 

 

**6.**

**NOTES RECEIVABLE**

 

During the normal course of business, the Company issues notes in connection with equipment purchases by customers.  The equipment is used to secure the note.  

 

Notes receivable consist of the following:

                

 

**June 30,**

**December 31,**

 

**2005******

**2004******

 

 

 

Notes receivable, short-term

$    2,706

$     1,764

Notes receivable, long-term

1,063    

1,496

 

 

 

Total Notes Receivable

$  3,769   

$  3,260

 

 

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

 

**7.**

**INVENTORIES:**

 

Inventories consist of the following: 

****

**June 30,**

**December 31,**

 

 

 

**2005**********

**2004******

Finished products

$ 5,492

$ 6,489

Work in process

2,032

1,957

Raw materials and supplies

2,611

2,496

Total inventories

$ 10,135

$ 10,942

 

 

 

 

 

 

 
**8.**

**PROPERTY, PLANT AND EQUIPMENT:**

 

Property, plant and equipment consist of the following:

 

**June 30,**

**December 31,**

 

**2005******

**2004******

 

 

 

Land

$    1,611

$    1,611

Buildings and improvements

11,271

11,149

Machinery and equipment

19,006

18,786

Equipment rented to others

6,154

5,952

Construction in progress

1,000

997

 

39,042

38,495

 

 

 

Less:  Accumulated depreciation

(17,042)

(16,358)

Total property, plant and equipment, net

$  22,000

$  22,137

 

 

 

 

8

 

 

 

**9.**

**GOODWILL AND INTANGIBLE ASSETS**

 

Goodwill consists of the following:

 

 

 

Goodwill at December 31, 2004

$  57,415

Adjustments to allocation of purchase price.............................

73

Goodwill at June 30, 2005

$  57,488 

Less:  Accumulated amortization

(4,798)

Total goodwill, net

$ 52,690  

 

 

During the first quarter of 2004, YI Ventures LLC (a wholly-owned subsidiary) acquired Healthsonics Corporation for $1,500.  The company manufactures and distributes ultrasonic equipment and solutions.  The final allocation of purchase price resulted in $1,400 of goodwill, which is all deductible for tax purposes, and $248 of other intangible assets.  The final allocation resulted in various adjustments to the goodwill balance in the first quarter of 2005, including a $220 increase in goodwill, which was primarily related to changes in estimates related to severance liabilities and costs incurred to consolidate the operations of the business into a pre-existing facility.  In addition, the Company allocated $248 of the purchase price to trademarks, with an indefinite useful life, thereby reducing goodwill.  The remaining $101 increase in goodwill during the quarter related to adjustments to the purchase priceallocation for the Canadian operations of Obtura Spartan, which were acquired in November of 2004.  

 

There are no contingent payment obligations outstanding on any of the Company’s acquisitions.  There have been no changes in goodwill related to impairment losses or write-offs due to sale of businesses.

 

Other intangible assets consist of the following:

 

 

 
** **

**As of June 30, 2005******

 
** **

**Gross Carrying Amount******

**Accumulated Amortization******

**Net Carrying Amount******

Amortized intangible assets

 

 

 

License agreements

$               1,200

$                    95

$                 1,105

Core technology

591

47

544

Patents

499

279

220

Product formulas

430

44

386

Customer & supplier                                  relationships

380

128

252

Noncompete agreements

252

113

139

Total

$              3,352

$                 706

$                2,646

 

 

 

 

Unamortized intangible assets

 

 

 

Trademarks

3,559

 

3,559

Total intangible assets

$              6,911

$                 706

$               6,205

 

 

 

 

 
** **

**As of December 31, 2004******

 
** **

**Gross Carrying Amount******

**Accumulated Amortization******

**Net Carrying Amount******

Amortized intangible assets

 

 

 

License agreements

$                 1,200

$                     65

$                1,135

Core Technology

591

32

559

Patents

499  

263  

236

Product formulas

430  

37    

393    

 

 

9

 

 

 

 

Customer & supplier                                  relationships

380

86

294

Non-compete agreements

252

75

177

Total

$                 3,352

$                558  

$                2,794    

 

 

 

 

Unamortized intangible assets

 

 

 

Trademarks

3,311

-

3,311

Total intangible assets

$                 6,663

$                558

$                6,105

 

 

The costs of other intangible assets with finite lives are amortized over their expected useful lives using the straight-line method.  The amortization lives are as follows: 18 to 20 years for patents, license agreements and core technology, 40 years for product formulations and 5 years for supplier and customer relationships.  Non-compete agreements are amortized over the length of the signed agreement.  The weighted average life for amortizable intangible assets is 19 years.  Aggregate amortization expense for the three months ended June 30, 2005 and 2004 was $79 and $59, respectively.  Estimated amortization expense for each of the next five years is as follows:

 

For the year ending 12/31/05

250

 
For the year ending 12/31/06

215

 
For the year ending 12/31/07

200

 
For the year ending 12/31/08

200

 
For the year ending 12/31/09

200

 

 

**10.**

**CREDIT ARRANGEMENTS AND NOTES PAYABLE:**

 

The Company has a credit arrangement that provides for an unsecured revolving credit facility with an aggregate commitment of $50,000.  Borrowings under the arrangement bear interest at rates ranging from LIBOR +1% to LIBOR +2.25% or Prime to Prime +.5% depending on the Company’s level of indebtedness.  Commitment fees for this arrangement range from .15% to .20% of the unused balance.  The agreement is unsecured and contains various financial and other covenants.  As of June 30, 2005 and December 31, 2004, the Company was in compliance with all of these covenants.  The current arrangement expires in September 2007.  As of June 30, 2005, and December 31, 2004, there were no borrowings on the Company’s credit arrangement.

 

In certain circumstances, the Company provides recourse for loans for equipment purchases by customers.  Certain banks require the Company to provide recourse to finance equipment for new dentists and other customers with credit histories which are not consistent with the banks' lending criteria.   In the event that a bank requires recourse on a given loan, the Company would assume the bank’s security interest in the equipment securing the loan.  As of June 30, 2005, and December 31, 2004, approximately $159 and $205, respectively, of the equipment financed with various lenders was subject to such recourse.  Recourse on a given loan is generally eliminated by the bank after one year, provided the bank has received timely payments on that loan.  Based on the Company's past experience with respect to these arrangements, it is the opinion of management that the fair value of the recourse providedis minimal and not material to the results of operations or financial position of the Company.

 

 

**11.**

**EARNINGS PER SHARE:**

 

Basic earnings per share (Basic EPS) are 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) include 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**

 

**Six Months Ended**

 

 

10

 

 

 

 

** **

**June 30,**

 

**June 30,**

** **

**2005******

**2004******

 

**2005******

**2004******

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

Net income................................................... 

$3,560 

$2,033 

 

$7,030 

$5,330 

Net income from continuing operations...............

3,560

1,998

 

7,030

5,279

Net income from discontinued operations............

-

35

 

-

51

Weighted average shares outstanding for basic earnings per share.......................................................... 

 

 

 

 

 

8,980

9,039

 

9,010

9,036

Dilutive effect of stock options and restricted stock. ..

383

360

 

361

390

Weighted average shares outstanding for diluted earnings per share.......................................................... 

 

 

 

 

 

9,363

9,399

 

9,371

9,426

Basic earnings per share.................................... 

$0.40 

$0.22 

 

$0.78 

$0.59 

Basic earnings per share from continuing operations.....                                   

$0.40 

$0.22 

 

$0.78 

$0.59 

Basic earnings per share from discontinued operations...

 $0.00 

$0.00 

 

$0.00 

$0.00 

Diluted earnings per share .................................

$0.38 

$0.22 

 

$0.75 

$0.57 

Diluted earnings per share from continuing operations...... 

$0.38 

$0.22 

 

$0.75 

$0.57 

Diluted earnings per share from discontinued operations......

$0.00 

$0.00 

 

$0.00 

$0.00 

 

 

 

**12.**

**COMMITMENTS AND CONTINGENCIES:**

 

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

 

The Company generally warrants its products against defects and its most generous policy provides a two-year parts and labor warranty on X-ray machines.  The accrual for warranty costs was $277 and $280 at June 30, 2005 and December 31, 2004, respectively.  There were no significant warranty costs during the six-month period ended June 30, 2005.

 

 

**13.**

**RELATED-PARTY TRANSACTIONS**

 

In May 2005, the Company purchased 100 shares of its common stock from a trust controlled by George E. Richmond, its Chairman and principal stockholder, for an aggregate purchase price of $3,725.

 

 

**14.**

**SUBSEQUENT EVENTS**

 

On July 18, 2005, the Board of Directors declared a quarterly dividend of $0.04 per share, payable September 12, 2005 to shareholders of record on August 12, 2005.

 

11

 

 

 

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

 

In December 2001, the SEC requested that all registrants include in their MD&A their most critical accounting policies, the judgments and uncertainties affecting the application of those policies, and the likelihood that materially different amounts would be reported under different conditions using different assumptions.  The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  The Company believes that the following accounting policies fit this definition:

 

Allowance for doubtful accounts – Accounts receivable balances are subject to credit risk.  Management has reserved for expected credit losses, sales returns and allowances, and discounts based upon past experience as well as knowledge of current customer information.  We believe that our reserves are adequate.  It is possible, however, that the accuracy of our estimation process could be impacted by unforeseen circumstances.  We continuously review our reserve balance and refine the estimates to reflect any changes in circumstances.

 

Inventory – The Company values inventory at the lower of cost or market on a first-in, first-out basis.  Inventory values are based upon standard costs which approximate historical costs.  Management regularly reviews inventory quantities on hand and records a provision for excess or obsolete inventory based primarily on estimated product demand and other knowledge related to the inventory.  If demand for the Company’s products is significantly different than management’s expectations, the reserve could be materially impacted.  Changes to the reserves are included in cost of goods sold.  

 

Goodwill and other intangible assets – The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142 effective January 1, 2002.  Goodwill and other long-lived assets with indefinite useful lives are reviewed by management for impairment annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable.  If indicators of impairment are present, the determination of the amount of impairment would be based on management’s judgment as to the future operating cash flows to be generated from the assets.  SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144.

 

Contingencies - The Company and its subsidiaries from time to time are subject to various contingencies, including legal proceedings arising in the normal course of business. Management, with the assistance of external legal counsel, performs an analysis of current litigation and will record liabilities if a loss is probable and can be reasonably estimated. The Company believes the reserve is adequate, however it cannot guarantee that costs will not be incurred in excess of current estimates.  

 

Assets and Liabilities Acquired in Business Combinations – The Company periodically acquires businesses.  All business acquisitions completed subsequent to 2002 are accounted for under the provisions of SFAS No. 141, “Business Combinations,” which requires the use of the purchase method.  All business acquisitions completed in years prior to 2002 were accounted for under the purchase method as set forth in APB No. 16, “Business Combinations.”  The purchase method requires the Company to allocate the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.  The allocation of acquisition cost to assets acquired includes the consideration of identifiable intangible assets.  The excess of the cost of an acquired business over the fair value of the assets acquired and liabilities assumed is recognized asgoodwill.  The Company’s measurement of certain preacquisition contingencies may impact the Company’s cost allocation to assets acquired and liabilities assumed for a period of up to one year following the date of an acquisition.  The Company utilizes a variety of information sources to determine the value of acquired assets and liabilities.  Third-party appraisers are utilized to assist the Company in determining the fair value and useful lives of identifiable intangibles, including the determination of intangible assets that have an indefinite life.  The valuation of the acquired assets and liabilities and the useful lives assigned by the Company will impact the determination of future operating performance of the Company.  

 

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

 

**Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004**

 

***Net Sales***

 

12

 

 

 

Net sales increased $4,168 or 24.9% to $20,906 in the second quarter of 2005 from $16,738 in the second quarter of 2004.  The increased sales resulted from relatively low sales in the second quarter of 2004 due to the restructuring of certain sales incentive programs to dealers in May 2004,  favorable dealer response to  targeted marketing initiatives in the second quarter of 2005, and solid end-user demand for the Company’s products, 

 

The sales incentive programs that were restructured by the Company principally consisted of off-invoice pricing discounts (i.e., a discount reflected directly on the billing and requiring no performance obligation on the part of the customer) that are recorded in the net sales account at the time of sale.  During the second quarter of 2004, the Company eliminated certain of these promotional pricing incentives, which reduced customer orders and sales in that quarter.  The reason for this second quarter change was to transition to product line based pricing promotions from the brand based promotions that had been run in the previous periods.  These changes were made to facilitate certain new product introductions and facilities consolidation efforts, while providing for improved service levels to the Company’s distributors.

 

***Gross Profit***

Gross profit increased $2,889 or 33.4%, to $11,538 in the second quarter of 2005 from $8,649 in the second quarter of 2004.  The additional gross profit was primarily the result of the increased net sales.  Gross margin increased to 55.2% of net sales in the second quarter of 2005 from 51.7% in the second quarter of 2004.  The significant increase in sales volume over the prior year quarter (for reasons described above), had a positive impact on the comparable margin in this quarter.  Gross margin also increased as a result of changes in product mix and improved production efficiencies.  

 

***Selling, General, and Administrative Expenses***

SG&A expenses increased $492 or 9.1% to $5,916 in the second quarter of 2005 from $5,424 in the second quarter of 2004.  The increase in SG&A costs is primarily attributable to increased personnel to support the growth of the business and increased regulatory compliance costs relating to the consolidation activities of the business.  As a percent of net sales, SG&A expenses decreased 4.1 percentage points to 28.3% in 2005 compared to 32.4% in 2004.  

 

***Income from Operations***

Income from operations increased $2,397 or 74.3%, to $5,622 in the second quarter of 2005 from $3,225 in the second quarter of 2004.  The increase was a result of the items explained above.  

 

***Other Income(Expense), net*** 

Other income(expense), net increased $132 to $143 in the second quarter of 2005 from $11 in the second quarter of 2004.  This increase was primarily attributable to less interest expense in the current year as no borrowings were outstanding on the Company’s credit facility during the second quarter of 2005.   

 

***Provision for Income Taxes***

Provision for income taxes increased $967 for the second quarter of 2005 to $2,205 from $1,238 in the second quarter of 2004 as a result of increased pre-tax income.  The Company recorded an effective tax rate of 38.25% in 2005 and 2004.  Beginning in 2005, the Company believes it will be eligible for benefits associated with Internal Revenue Code Section 199 (related to the American Jobs Creation Act of 2004) and will continue to evaluate the effect of this potential benefit on our effective tax rate.

 

**Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004**

 

***Net Sales***

Net sales increased $5,308 or 14.7% to $41,540 in the first six months of 2005 from $36,232 for the first six months of 2004.  The increased sales resulted from relatively low sales in the second quarter of 2004 due to the restructuring of certain sales incentive programs to dealers in May 2004,  favorable dealer response to  targeted marketing initiatives in the second quarter of 2005, and solid end-user demand for the Company’s products. 

 

The sales incentive programs that were restructured by the Company principally consisted of off-invoice pricing discounts (i.e., a discount reflected directly on the billing and requiring no performance obligation on the part of the customer) that are recorded in the net sales account at the time of sale.  During the second quarter of 2004, the Company eliminated certain of these promotional pricing incentives, which reduced customer orders and sales in that quarter.  The reason for this second quarter change was to transition to product line based pricing promotions from the brand based promotions that had been run 

 

13

 

 

in the previous periods.  These changes were made to facilitate certain new product introductions and facilities consolidation efforts, while providing for improved service levels to the Company’s distributors.

 

***Gross Profit***

Gross profit increased $2,885 or 14.8%, to $22,422 for the first six months of 2005 from $19,537 for the first six months of 2004. The additional gross profit was primarily a result of the increased net sales.  Gross margin remained relatively flat at 54.0% in the first six months of 2005 compared to 53.9% of net sales for the first six months of 2004.  The increase in sales volume as well as changes in product mix had a positive impact on the gross profit margin.  This was offset, in part, by temporary production inefficiencies related to facility consolidation activity. 

 

***Selling, General, and Administrative Expenses***

SG&A expenses increased $290 or 2.6% to $11,293 for the first six months of 2005 from $11,003 for the first six months of 2004.  The increase in SG&A costs is primarily attributable to increased costs related to the growth in infrastructure of the business (such as regulatory and facilities costs), partially offset by headcount reductions related to facility consolidations.  As a percent of net sales, SG&A expenses decreased to 27.2% in 2005 from 30.4% in 2004.  

 

***Income from Operations***

Income from operations increased $2,595 or 30.4%, to $11,129 for the first six months of 2005 from $8,534 for the first six months of 2004.  The increase was a result of the items explained above.  

 

***Other Income(Expense), net*** 

Other income(expense), net increased $239 to $255 for the first six months of 2005 from $16 for the first six months of 2004.  

 

***Provision for Income Taxes***

Provision for income taxes increased $1,083 for the first six months of 2005 to $4,354 from $3,271 for the first six months of 2004 as a result of increased pre-tax income.  The Company recorded an effective tax rate of 38.25% in 2005 and 2004.  Beginning in 2005, the Company believes it will be eligible for benefits associated with Internal Revenue Code Section 199 (related to the American Jobs Creation Act of 2004) and will continue to evaluate the effect of this potential benefit on our effective tax 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 $8,392 and $5,784 for the first six months of 2005 and 2004, respectively.  Capital expenditures for property, plant and equipment were $1,061 and $3,644 for the first six months of 2005 and 2004, respectively.  During the first quarter of 2004, the Company acquired a warehouse and office facility in Corona, California for approximately $2,800.  The building was occupied in April 2004.  Consistent with the Company’s historical capital expenditures, future capital expenditures are expected to include facility improvements, panoramic X-ray machines for the Company’s rental program, production machinery and information systems.  During the second quarter of 2005, the Companypurchased 100 shares of its common stock from a trust controlled by George E. Richmond, its Chairman and principal stockholder, for an aggregate purchase price of $3,725.

 

The Company maintains a credit agreement with a borrowing capacity of $50,000 which currently expires in September 2007. The Company expects this agreement to be extended under similar terms.  Borrowings under the agreement bear interest at rates ranging from LIBOR + 1% to LIBOR + 2.25% or Prime to Prime + .5% depending on the Company’s level of indebtedness.  Commitment fees for this agreement range from .15% to .20% of the unused balance.  The agreement is unsecured and contains various financial and other covenants.  As of June 30, 2005 and December 31, 2004, the Company was in compliance with all of these covenants.  As of June 30, 2005, there were no outstanding borrowings under this agreement.  Management believes through its operating cash flows as well as borrowing capabilities, the Company has adequate liquidity and capital resources to meet its needs on a short and long-term basis.

 

 

14

 

 

 

**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 andexpected results thereof may differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those disclosed in the Company's Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission. 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign exchange rates.  From time to time, the Company finances acquisitions, capital expenditures and its working capital needs with borrowings under a revolving credit facility.  Due to the variable interest rate feature on the debt, the Company is exposed to interest rate risk.  A theoretical 100 basis point increase in interest rates would have resulted in approximately $12 and $31 of additional interest expense in the six month periods ended June 30, 2005 and 2004, respectively.  Alternatively, a 100 basis point decrease in interest rates would have reduced interest expense by approximately $12 and $31 in the six month periods ended June 30, 2005 and 2004, respectively.  

 

Sales of the Company’s products in a given foreign country can be affected by fluctuations in the exchange rate.  However, the Company sells less than 10% of its products outside of the United States.  Of these foreign sales, approximately 99% are denominated in US dollars with the remaining amount denominated in Canadian dollars.  As a result, the Company does not feel that foreign currency movements have a material impact on its financial statements.

 

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

 

 

Item 4.

Controls and Procedures

 

Our Chief Executive Officer, President, and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer, President, and Chief Financial Officer to allow timely decisions regarding required disclosure and that the information is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  There have been no changes in our internal controls over financial reporting that occurred during the quarterly period ending June 30, 2005 that have materially affected, or that are reasonably likely tomaterially affect our internal control over financial reporting.  

 

 

 

 

 

 

 

 

 

15

 

 

 

PART II

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

None.

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

ISSUER PURCHASES OF EQUITY SECURITIES (in 000’s) (1)

 

 

 

 

 

 

 

 

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Program

Maximum Number of Shares that May Yet Be Purchased Under the Program

April  2005

0

$        -

0

415

May 2005

6

$35.55

6

409

June 2005

4

$35.55

4

405

Total Second Quarter 2005

10

$35.55

10

 

 

 

16

 

 

 

 

(1)

The share repurchase program authorizing the purchase of up to 500 shares was announced May 6, 2004 and will expire in July 2005.  In May 2005, the Board of Directors extended the authorization through July 2006.

(2)

On May 24, 2005, in connection with the previously announced share repurchase program, the Company repurchased 100 shares of its common stock for $37.25 per share, or an aggregate purchase price of $3,725 from a trust controlled by George E. Richmond, the Company’s Chairman and principal stockholder.

 

Item 4.  

Submission of Matters to a Vote of Security Holders

 

(a)

A regular Annual Meeting of Shareholders was held on May 12, 2005.

 

(b)

The following directors were elected at the Annual Meeting:

 

George E. Richmond, Alfred E. Brennan, Marc R. Sarni, Dr. Patrick J. Ferrillo, and Brian F. Bremer.

 

(c)

The voting at the Annual Meeting of Shareholders for the election of directors was as follows:

 

 

**Nominees**

**For**

**Withheld**

 
George E. Richmond

8,647,797

225,060

Alfred E. Brennan

8,587,000

285,857

Marc R. Sarni

8,736,485

136,372

Dr. Patrick J. Ferrillo

8,814,132

58,725

Brian F. Bremer

8,725,440

147,417

 

 

 

 

 

Item 6.

Exhibits

 

Exhibits.

 

10.1  Stock Repurchase Agreement

 

31.1  Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2  Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.3  Certification pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002

 

32.1  Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

17

 

 

 

 

 

 

SIGNATURE

 

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

 

YOUNG INNOVATIONS, INC.

 

August 8, 2005

*/s/*

*Arthur L. Herbst, Jr.*

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

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

Date  

Arthur L. Herbst, Jr.

 
 
President

 
 

 

*/s/*

*Christine R. Boehning*

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

Christine R. Boehning

 
Vice President and Chief Financial Officer

 
 

 

 

 

 

18

 

 

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