UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q



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

For the quarterly period ended March 31, 2009



OR



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



For the transition period from _______to _______



Commission file number 000-23213



YOUNG INNOVATIONS, INC.

(Exact name of registrant as specified in its charter)



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






13705 Shoreline Court 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.

YesxNoo




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 fileroAccelerated filerxNon-accelerated fileroSmaller reporting companyo



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



Number of shares outstanding of the registrants Common Stock at April 17, 2009:

7,850,598 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 31,2009
      (unaudited)
              
              2008AssetsCurrent assets:Cash and cash equivalents
              $        728
              
              $          667Trade accounts receivable, net of allowance for doubtful accounts of  $471
      and $425 in 2009 and 2008, respectively
              12,549
              
              10,421Inventories
              16,419
              
              16,486Other current assets
              4,799
              
              4,759Total current assets
              34,495
              
              32,333Property, plant and equipment, net
              33,367
              
              32,905Goodwill
              80,284
              
              80,334Other intangible assets
              12,162
              
              10,602Other assets
              3,378
              
              3,402Total assets
              $  163,686
              
              $   159,576Liabilities and Stockholders EquityCurrent liabilities:
      Accounts payable and accrued liabilities
              $    10,256
              
              $       8,840Total current liabilities
              10,256
              
              8,840Long-term debt
              29,075
              
              29,349Long-term secured borrowing
              1,226
              
              1,281Deferred income taxes
              13,771
              
              13,829Other noncurrent liabilities
              272
              
              --Total liabilities
              54,600
              
              53,299Stockholders equity:Common stock, voting, $.01 par value, 25,000 shares authorized,
      10,219 shares issued in 2009 and 2008
              102
              
              102Additional paid-in capital
              23,421
              
              25,336Retained earnings
              136,381
              
              133,531Common stock in treasury, at cost; 2,368 and 2,452 shares in 2009 and
      2008, respectively
              (50,690)
              
              (52,673)Accumulated other comprehensive loss
              (128)
              
              (19)Total stockholders' equity
              109,086
              
              106,227Total liabilities and stockholders' equity
               $  163,686
              
           $   159,576




The accompanying notes are an integral part of these statements.



2









YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(unaudited)





Three Months Ended
      March 31,2009
              
              2008Net sales
              
              
              
              
              $   23,764
              
              $   24,395Cost of goods sold
              
              
              
              10,454
              
              11,457Gross profit
              
              
              
              
              13,310
              
              12,938Selling, general and administrative expenses
              8,315
              
              8,368Income from operations
              
              
              
              4,995
              
              4,570Interest expense, net
              
              
              
              154
              
              419Other income, net
              
              
              
              (13)
              
              (325)Income before provision for income taxes
              
              
              4,854
              
              4,476Provision for income taxes
              
              
              1,699
              
              1,645Net income
              
              
              
              
              $    3,155
              
              $    2,831Basic earnings per share
              
              
              
              $0.40
              
              $0.35Diluted earnings per share
              
              
              
              $0.40
              
              $0.34Basic weighted average shares outstanding
              
              
              7,811
              
              8,193Diluted weighted average shares outstanding
              
              
              7,850
              
              8,300The 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 31,2009
              
              2008Cash flows from operating activities:Net income
              
              $3,155
              
              $2,831Adjustments to reconcile net income to net cash flows fromoperating activities --Depreciation and amortization
              
              970
              
              987Share based compensation expense
              
              375
              
              341Loss on private equity investment fund
              
              23
              
              37Changes in assets and liabilities, net of acquisitions --Trade accounts receivable
              
              (2,152)
              
              (364)Inventories
              
              39
              
              (657)Other current assets
              
              (72)
              
              382Other assets
              
              271
              
              426Accounts payable and accrued liabilities
              
              1,356
              
              326Total adjustments
              
              810
              
              1,478Net cash flows from operating activities
              
              3,965
              
              4,309Cash flows from investing activities:Purchase of distribution rights
              
              (1,300)
              
              --Purchases of property, plant and equipment
              
              (1,367)
              
              (159)Purchases of private equity investment
              
              (300)
              
              (750)Net cash flows from investing activities
              
              (2,967)
              
              (909)Cash flows from financing activities:Payments on long-term debt
              
              (17,695)
              
              (18,493)Borrowings on long-term debt
              
              17,421
              
              14,173Payments of long-term secured borrowings
              
              (366)
              
              (473)Borrowings of long-term secured borrowings
              
              331
              
              3,519Excess tax benefit from stock option exercises
              
              21
              
              62Proceeds from stock options exercised
              
              89
              
              436Purchase of treasury stock
              
              (417)
              
              (2,138)Payment of cash dividend
              
              (305)
              
              (329)Net cash flows from financing activities
              
              (921)
              
              (3,243)Effect of exchange rate changes on cash and cash equivalents
              
              (16)
              
              19Net increase in cash and cash equivalents
              
              61
              
              176Cash and cash equivalents, beginning of period
              
              667
              
              528Cash and cash equivalents, end of period
              
              $728
              
              $704The accompanying notes are an integral part of these statements.






4









YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(In thousands, except per share data)



GENERAL:



This report includes information in a condensed format and should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2008.  The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results expected for the full year or any other interim period.



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



The balance sheet information at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.



1.
              ORGANIZATION:


Young Innovations, Inc. and its subsidiaries (the Company) develops, manufactures and markets supplies and equipment used by dentists, dental hygienists, dental assistants and consumers.  The Company's product offering includes disposable and metal prophylaxis (prophy) angles, prophy cups and brushes, dental micro-applicators, panoramic X-ray machines, moisture control products, infection control products, dental handpieces (drills) and related components, endodontic systems, orthodontic toothbrushes, flavored examination gloves, children's toothbrushes, and children's toothpastes.  The Companys manufacturing and distribution facilities are located in Missouri, Illinois, California, Indiana, Texas, Wisconsin and Ireland.



2.
              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:




Principles of Consolidation



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



Use of Estimates



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







5







Revenue Recognition



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



The Company offers discounts to its distributors if certain conditions are met.  Customer allowances, volume discounts and rebates, and other short-term incentive programs are recorded as a reduction in reported revenues at the time of sale.  The Company reduces product revenue for the estimated redemption of annual rebates on certain current product sales. Customer allowances and rebates are estimated based on historical experience and known trends.



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



Income Taxes



The Company uses an estimated annual effective income tax rate to compute the quarterly tax provision pursuant to Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, and Financial Accounting Standards Board (FASB) Interpretation No. 18, Accounting for Income Taxes in Interim Periods. Calculation of the estimated annual effective income tax rate requires significant judgment and is affected by, among others, variances in expected operating income for the year, projections of income earned and taxed in foreign jurisdictions, variances in non-deductible expenses, and changes in tax rates.  When the Companys estimate of the annual effective income tax rate changes the year-to-date effect of the change is recorded in the current period.



The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), at the beginning of fiscal year 2007.  As of December 31, 2008, the Company had $101 of unrecognized tax benefits. The entire amount of unrecognized tax benefits would favorably impact the effective income tax rate if recognized. Penalties and interest related to unrecognized tax benefits are included in income tax expense.  As of December 31, 2008, the Company had accrued $26 of penalties and interest related to uncertain tax positions.



There has not been a significant increase or decrease in the amount of unrecognized tax benefits during the three months ended March 31, 2009 and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.



Based on the Companys evaluation of the indefinite reversal criteria of APB Opinion No. 23 as it relates to investments in foreign subsidiaries, the Company has provided a deferred tax liability for United States income taxes on the undistributed earnings of its foreign subsidiary.



The Company and its subsidiaries are subject to domestic federal and state income taxes as well as foreign income taxes. Tax years 2005 through 2008 remain open to examination by the major taxing jurisdictions to which the Company reports.  The Company does not anticipate that the total amount of unrecognized tax benefit will materially change within the next 12 months.



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, 2009 and 2008, interest income totaled $66 and $116, and interest expense totaled $220 and $535, respectively.



6







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 $69 and $14 for the payment of federal and state income taxes and $231 and $537 for the payment of interest or loan charges for the three months ended March 31, 2009 and 2008, respectively.



Foreign Currency Translation



The translation of financial statements into U.S dollars has been performed in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation.  The local currency for all entities included in the condensed consolidated financial statements has been designated as the functional currency.  Non-U.S. dollar denominated assets and liabilities have been translated into U.S. dollars at the rate of exchange prevailing at the balance sheet date.  Revenues and expenses have been translated at the weighted average of exchange rates in effect during the year.  Translation adjustments are recorded in accumulated other comprehensive loss.  Net currency transaction gains included in other income, net were $2 and $334 for the three months ended March 31, 2009 and 2008, respectively.



3.
              INVESTMENTS:




On February 21, 2006, the Company invested in a private equity investment fund.  At March 31, 2009, the Company had an unfunded capital commitment of up to $1,050.  As of March 31, 2009, the total capital commitment paid by the Company was $1,950.  The investment is accounted for under the equity method of accounting and included in other assets on the Condensed Consolidated Balance Sheet.  Equity income (loss) is recorded using a three-month lag.  The Companys loss attributed to this private equity investment was included in other income, net and totaled $23 and $37 for the three months ended March 31, 2009 and 2008, respectively.



4.
              NOTES RECEIVABLE:




The Company offers various financing options to its equipment customers, including notes payable to the Company.  The equipment purchased is used to secure the notes.  Total revenue from sales of equipment financed by the Company was $20 and $28 during the three months ended March 31, 2009 and 2008, respectively.  These transactions are recorded as a sale upon the transfer of title to the purchaser, which generally occurs at the time of shipment, at an amount equal to the sales price of non-financed sales.  Interest on these notes was accrued as earned and recorded as interest income.



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.  In connection with the agreement, a portion of the recourse holdback pool was released to the Company in January 2009 for a total cash payment of $331.  As the transactions do not qualify as sales of assets under SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, 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, 2009, the residual amount of notes receivable transferred to a third party was $2,425, of which $1,021 is classified as a short-term notes receivable and $1,404 as a long-term notes receivable.  A corresponding long-term and short-term liability have been recorded, net of the recourse holdback pool of $307, on the Companys balance sheet.



7









Notes receivable consist of the following:

March 31,
              
              December 31,2009
              
              2008Notes receivable, short-term
              $  1,148
              
              $  1,258Notes receivable, long-term
              1,579
              
              1,847Total notes receivable
              $  2,727
              
              $  3,105




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



5.
              INVENTORIES:




Inventories consist of the following:

March 31,
              
              December 31,2009
              
              2008Finished products
              $   8,150
              
              $ 7,925Work in process
              2,461
              
              2,603Raw materials and supplies
              5,808
              
              5,958Total inventories
              $16,419
              
              $16,486




6.
              PROPERTY, PLANT AND EQUIPMENT:




Property, plant and equipment consist of the following:

March 31,
              
              December 31,2009
              
              2008Land
              $  3,449
              
              $  3,449Buildings and improvements
              21,555
              
              20,503Machinery and equipment
              25,272
              
              24,492Equipment rented to others
              5,808
              
              6,250Construction in progress
              913
              
              1,205$56,997
              
              $55,899Less:  Accumulated depreciation
              (23,630)
              
              (22,994)Total property, plant and equipment, net
              $ 33,367
              
              $ 32,905




7.
              GOODWILL AND INTANGIBLE ASSETS:




Goodwill activity is as follows:

Balance at December 31, 2008
              $  80,334Foreign currency translation
              (50)Balance at March 31, 2009
              $  80,284




During the first quarter of 2009, the Company acquired for $1,693 the rights to distribute a product line which expands its infection control offerings.  Other intangible assets consist of the following:





8









As of March 31, 2009Gross Carrying Amount
              
              Accumulated Amortization
              
              Net Carrying AmountAmortized intangible assetsLicense agreements
              $     1,200
              
              $          320
              
              $      880Core technology
              591
              
              160
              
              431Patents
              2,256
              
              938
              
              1,318Product formulas
              430
              
              84
              
              346Customer relationships
              813
              
              388
              
              425Non-compete agreements
              371
              
              267
              
              104Supplier relationships
              399
              
              291
              
              108Total
              $     6,060
              
              $       2,448
              
              $      3,612Intangible assets not subject to amortizationLicense agreements
              $     1,693
              
              $              --
              
              $      1,693Trademarks
              6,857
              
              --
              
              6,857Total
              8,550
              
              --
              
              8,550Total intangible assets
              $   14,610
              
              $   2,448
              
              $    12,162




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




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, 2009 and 2008 was $133 and $110, respectively.  Estimated amortization expense for each of the next five years is as follows:

For the year ending 12/31/09
              $
              532


For the year ending 12/31/10
              482


For the year ending 12/31/11
              410


For the year ending 12/31/12
              379


For the year ending 12/31/13
              379




9









8.
              CREDIT ARRANGEMENTS AND NOTES PAYABLE:




The Company has a credit arrangement that provides for an unsecured revolving credit facility with an aggregate commitment of $75,000 which expires in April 2010.  The Company has $45,925 unused line of credit at March 31, 2009.  Borrowings under the arrangement bear interest at rates ranging from LIBOR +.75% to LIBOR +1.50% or Prime, depending on the Companys level of indebtedness.  Commitment fees for this arrangement range from .125% to .15% of the unused balance.  The agreement is unsecured and contains various financial and other covenants.  As of March 31, 2009 and December 31, 2008, the Company was in compliance with these covenants.



Long-term debt was as follows:
              March 31,
              
              December 31,2009
              
              2008Revolving credit facility due 2010 with a weighted-average interestrate of 1.98%
              $    29,075
              
              $    29,349Less - current portion
              --
              
              --$    29,075
              
              $    29,349




9.
              SHARE-BASED COMPENSATION:




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



Any employee of the Company or its affiliates, any consultant whom the Compensation Committee determines is significantly responsible for the Companys success and future growth and profitability, and any member of the Board of Directors, may be eligible to receive awards under the 2006 Plan.  The purpose of the 2006 Plan is to: (a) attract and retain highly competent persons as employees, directors, and consultants of the Company; (b) provide additional incentives to such employees, directors, and consultants by aligning their interests with those of the Companys shareholders; and (c) promote the success of the business of the Company.  The Compensation Committee of the Board of Directors 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, 2009 and 2008, the Company recorded pre-tax compensation expense of $43 and $55 related to the Companys stock option shares.  As of March 31, 2009, there was approximately $263 of unrecognized compensation expense related to stock options, which will be recognized over the weighted-average remaining requisite service period of 1.3 years.  The total aggregate intrinsic value of options exercised during the three months ended March 31, 2009 and 2008 was $60 and $369, respectively.  Payments received upon the exercise of stock options for the three months ended March 31, 2009 and 2008 totaled $89 and $436, respectively.  The related tax benefit realized related to these exercises was $21 and $62 for the three months ended March 31, 2009 and 2008.  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, 2009.  The weighted-average estimated value of stock options granted during the three months ended March 31, 2008 was $5.27 per share, using the following weighted-average assumptions:



10









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




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

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

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

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



The following table summarizes stock option activity for the three months ended March 31, 2009:

Options
              Shares
      (000)
              Weighted-Average ExercisePrice
              Weighted-Average RemainingContractual Term
              AggregateIntrinsic Value
      ($000)Outstanding at January 1, 2009
              807
              $24.59Granted
              --
              --Exercised
              (10)
              $9.29Forfeited or expired
              (6)
              $29.42Outstanding at March 31, 2009
              791
              $24.73
              3.88 yrs
              $811Exercisable at March 31, 2009
              742
              $24.61
              3.91 yrs
              $811




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 2009 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, 2009 and 2008, the Company recorded pre-tax compensation expense of $332 and $286, respectively, related to the Companys non-vested equity shares.  As of March 31, 2009, there was approximately $3,765 of unrecognized compensation cost related to non-vested equity shares which will be amortized over the weighted-average remaining requisite service period of 3.4 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, 2009:

Shares
      (000)
              Weighted-Average
      Grant Date
      Fair ValueNon-vested equity shares, January 1, 2009
              132
              $27.70Granted
              100
              $15.00Vested
              (38)
              $28.05Forfeited
              --
              --Non-vested equity shares, March 31, 2009
              194
              $21.05






11









10.
              RELATED-PARTY TRANSACTIONS:




During the three months ended March 31, 2009 and 2008, respectively, the Company paid consulting fees of $13 to a corporation which is wholly owned by George E. Richmond, the Companys Vice Chairman.



The Company has an employment agreement with George E. Richmond, the Companys Vice Chairman, which paid him $13 during the three months ended March 31, 2009 and 2008, to perform such duties as may be assigned to him by the Companys Board or Chief Executive Officer.



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 31,2009
              2008(unaudited)Net income
              $3,155
              $2,831Weighted average shares outstanding for basic earnings per share7,811
              8,193Dilutive effect of stock options and restricted stock.
              39
              107Weighted average shares outstanding for diluted earnings per share7,850
              8,300Basic earnings per share
              $0.40
              $0.35Diluted earnings per share
              $0.40
              $0.34




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, 2009 and December 31, 2008, respectively, approximately $773 and $788, of the equipment financed with various lenders was subject to such recourse.  Recourse on a given loan is generally for the life of the loan.  Based on the Company's past experience with respect to these arrangements, it is the opinion of management that the fair value of the recourse provided is minimal and not material to the results of operations or financial
      position of the Company.



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



The policy with respect to sales returns generally provides that a customer may not return inventory except at the Companys option, with the exception of X-ray machines, which have a 90-day return policy.  Historically, the level of product returns has not been significant.  The Company generally warrants its products against defects, and its most generous policy provides a two-year parts and labor warranty on X-ray machines.  The accrual for warranty costs was $319 and $309 at March 31, 2009 and December 31, 2008, respectively.  The following is a rollforward of the Companys warranty accrual:



12









Three Months Ended
      March 31,2009
              
              2008(unaudited)Balance, December 31
              $309
              
              $318Accruals for warranties issued during the year
              80
              
              115Warranty settlements made during the year
              (70)
              
              (115)Balance, March 31
              $319
              
              $318




13.
              SUBSEQUENT EVENTS:




On May 5, 2009, the Board declared a quarterly dividend of $0.04 per share, payable June 15, 2009 to shareholders of record on May 22, 2009.



14.
              NEW ACCOUNTING STANDARDS




In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R). Under SFAS No. 141R, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense.  The changes related to income taxes also impact the accounting for acquisitions completed prior to the effective date of SFAS 141R.  In addition, acquired in-process research and development
      is capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS No. 141R changes the accounting treatment for business combinations, generally on a prospective basis beginning January 1, 2009.  The adoption of this statement did not impact the Companys first quarter results, however, the Company expects SFAS 141R will have an impact on its consolidated financial statements for future acquisitions, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions the Company consummates after the effective date.



In April, 2009, the FASB issued FASB Staff Position No. FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies (FSP 141R-1), to amend SFAS 141 (revised 2007) Business Combinations. FSP 141R-1 addresses the initial recognition, measurement and subsequent accounting for assets and liabilities arising from contingencies in a business combination, and requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date if fair value can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the asset acquired or liability assumed arising from a contingency is recognized only if certain criteria are met. This FSP also requires that a systematic and rational basis for subsequently measuring
      and accounting for the assets or liabilities be developed depending on their nature. This FSP shall be effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is during or after 2009.  The Company expects FSP 141-R will have an impact on its consolidated financial statements for future acquisitions, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions the Company consummates after the effective date.



On December 11, 2008, the FASB issued FSP FAS 140-4 and FASB Interpretation ("FIN") 46R-8, Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities ("FSP FAS 140-4 and FIN 46R-8"). This FSP requires additional disclosures by public entities with continuing involvement in transfers of financial assets to special purpose entities and with variable interests in VIEs. FSP FAS 140-4 and FIN 46R-8 was effective for reporting periods ending after December 15, 2008.  The adoption of FSP FAS 140-4 and FASB Interpretation FIN 46R-8 did not impact the Companys financial statements or disclosures.



13







In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The adoption of this statement did not impact the Companys financial statements.



In June 2008, the FASB released FSP EITF 03-6-1 on Emerging Issues Task Force Issue 03-6, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.   The Staff Position requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities as defined in EITF 03-6, Participating Securities and the Two Class Method under FASB Statement No. 128,  and therefore, should be included in computing earnings per share using the two-class method.  The Staff Position was effective for the Company as of January 1, 2009, and did not have a material impact on the Companys earnings per share.



In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosure about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. SFAS 157-b, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with this staff position, the Company had only adopted the provisions of SFAS 157 with respect to its financial assets and liabilities that are measured at fair value within the financial statements as of January 1, 2008. The provisions of SFAS 157 had not been applied to
      non-financial assets and non-financial liabilities. This deferral applied to such items as reporting units measured at fair value in the first step of a goodwill impairment under SFAS 142, and long-lived assets, including intangible assets measured at fair value for an impairment assessment under SFAS 144.  These remaining aspects of SFAS No. 157 were adopted by the Company prospectively beginning January 1, 2009 and did not have a material impact on the Companys financial statements.



In April 2009, the FASB issued FASB Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.  This FSP provides guidance regarding how to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability when compared with normal market activity for the asset or liability.  In such situations, an entity may conclude that transactions or quoted prices may not be determinative of fair value, and may adjust the transactions or quoted prices to arrive at the fair value of the asset or liability.  This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively.  The Company does not believe that the adoption of this
      Staff Position will have a material impact on its financial statements.



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



Critical Accounting Policies



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



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



Inventory The Company values inventory at the lower of cost or market on a first-in, first-out (FIFO) basis.  Inventory values are based upon standard costs, which approximate actual costs.  Management regularly reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on estimated product demand and other information related to the inventory including planned introduction of new products and changes in technology.  If demand for the Companys products is significantly different than managements expectations, the value of inventory could be materially impacted.  Inventory write-downs are included in cost of goods sold.  Costs associated with the procurement and warehousing of inventories are included in cost of goods sold except for the Companys distribution only businesses, which are included in SG&A.



Goodwill and other intangible assets In accordance with the Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Intangible Assets, 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.  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, Accounting for the Impairment or Disposal of
      Long-Lived Assets.



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 within a 2-5 year period.



The Company offers discounts to its distributors if certain conditions are met.  Customer allowances, volume discounts and rebates, and other short-term incentive programs are recorded as a reduction in reported revenues at the time of sale.  The Company reduces product revenue for the estimated redemption of annual rebates on certain current product sales. Customer allowances and rebates are estimated based on historical experience and known trends.



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



15







Stock compensation -Under the provisions of SFAS 123R, share-based compensation cost is estimated at the grant date based on the awards fair-value as calculated by an option pricing model, and is recognized as expense ratably over the requisite service period. The option pricing models require judgmental assumptions including volatility, forfeiture rates, and expected option life. If any of the assumptions used in the model change significantly, share-based compensation expense may differ in the future from that recorded in the current period.



Assets and Liabilities Acquired in Business Combinations The Company periodically acquires businesses.  All business acquisitions completed subsequent January 1, 2009 are accounted for under the provisions of SFAS No. 141R, Business Combinations. Under SFAS No. 141R, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense.  The changes related to income taxes also
      impact the accounting for acquisitions completed prior to the effective date of SFAS 141R.  In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life.  All business acquisitions completed subsequent to 2002 were accounted for under the provisions of SFAS No. 141, Business Combinations, which requires the use of the purchase method.  The purchase method requires the Company to allocate the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.  The allocation of acquisition cost to assets acquired includes the consideration of identifiable intangible assets.  The excess of the cost of an acquired business over the fair value of the assets acquired and liabilities assumed is recognized as goodwill.



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



Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008



Net Sales

Net sales decreased $631 or 2.6% to $23,764 in the first quarter of 2009 from $24,395 in the first quarter of 2008.  While sales of the Companys consumable products were solid despite the economic downturn, the Company continues to have weak performance in its diagnostic product line.  Sales of the Companys consumables products, which include preventive, infection control, endodontic, micro-applicators and home care product lines, remained essentially flat over the prior year quarter.  The Company believes that the weak economic climate contributed to disappointing results in its diagnostic product line, which posted results $530 below that of the first quarter of 2008.  A stronger U.S. dollar negatively impacted sales by approximately $264.



Gross Profit

Gross profit increased $372 or 2.9% to $13,310 in the first quarter of 2009 compared to $12,938 in the first quarter of 2008.  Gross margin increased to 56.0% of net sales in the first quarter of 2009 from 53.0% in the first quarter of 2008.  The additional gross profit was primarily a result of a shift in product mix, the impact of price increases introduced in the second half of 2008 and the benefits of operating efficiencies implemented in 2008, including facility consolidations and adjusted staff levels.



Selling, General, and Administrative Expenses

SG&A expenses decreased $53 or 0.6% to $8,315 in the first quarter of 2009 from $8,368 in the first quarter of 2008.  SG&A decreased due to reduced marketing expenses and benefits of headcount reductions partially offset by increased incentive compensation relative to the performance of the business.  As a percent of net sales, SG&A expenses increased 0.7 percentage points to 35.0% in the first quarter of 2009 compared to 34.3% in the first quarter of 2008 as a result of the factors explained above.



Income from Operations

Income from operations increased $425 or 9.3% to $4,995 in the first quarter of 2009 compared to $4,570 in the first quarter of 2008.  The change was a result of the items explained above.



16







Interest Expense, net

Interest expense, net decreased $265 to $154 in the first quarter of 2009 from $419 in the first quarter of 2008.  The decrease was primarily attributable to reduced interest expense resulting from lower interest rates and lower borrowings on the Company's credit facility.



Other Income, net

Other income, net decreased $312 to $13 in the first quarter of 2009 from $325 in the first quarter of 2008.  The decrease was primarily attributable to a foreign exchange impact on debt repaid from the Company's Irish subsidiary of approximately $300 in 2008.



Provision for Income Taxes

Provision for income taxes increased $54 for the first quarter of 2009 to $1,699 from $1,645 in the first quarter of 2008 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 2009 was 35.00% compared to 36.75% in the first quarter of 2008 due to a reduction in the effective blended state rate resulting from changes in individual state filing requirements based on previous consolidation activity.



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 $3,965 and $4,309 for the first three months of 2009 and 2008, respectively.  Net capital expenditures for property, plant and equipment were $1,367 and $159 for the three months of 2009 and 2008, respectively.  Significant capital expenditures in 2009 included buildings, facility improvements, and production machinery and equipment.  Future capital expenditures are expected to include facility improvements, production machinery and information systems.  During the first quarter of 2009, the Company acquired the rights to distribute a product line which expands its infection control offerings.  The Company paid approximately $1,300 in cash.  The agreement also requires the Company to pay
      $60 annually for the next ten years.



On January 16, 2008, the Company transferred a majority of its X-ray equipment loans to a third party for a cash payment of $3,519.  The Company transferred $4,154 of the notes receivable portfolio for a purchase price of $4,140.  Of the purchase price, $621 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.  In connection with the agreement, a portion of the recourse holdback pool was released to the Company in January 2009 for a total cash payment of $331.  As the transactions do not qualify as sales of assets under SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, 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, 2009, the residual amount of notes receivable transferred to a third party was $2,425, of which $1,021 is classified as a short-term notes receivable and $1,404 as a long-term notes receivable.  A corresponding long-term and short-term liability have been recorded, net of the recourse holdback pool of $307, on the Companys balance sheet.



The Company maintains a credit agreement with a borrowing capacity of $75,000, which expires in April 2010.  Borrowings under the agreement bear interest at rates ranging from LIBOR + .75% to LIBOR + 1.50%, or Prime, depending on the Companys level of indebtedness.  Commitment fees for this agreement range from .125% to .15% of the unused balance. The agreement is unsecured and contains various financial and other covenants.  As of March 31, 2009 and December 31, 2008, the Company was in compliance with all of these covenants.  At March 31, 2009, the Company had $29,075 in outstanding borrowings under this agreement and $45,925 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.



17









Forward-Looking Statements



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



Item 3.
              Quantitative and Qualitative Disclosures About Market Risk.




Market risks relating to the Companys operations result primarily from changes in interest rates and changes in foreign exchange rates.  From time to time, the Company finances acquisitions, capital expenditures and its working capital needs with borrowings under a revolving credit facility.  Due to the variable interest rate feature on the debt, the Company is exposed to interest rate risk.  A theoretical 100 basis point increase in interest rates would have resulted in approximately $73 and $80 of additional interest expense in the three month periods ended March 31, 2009 and 2008, respectively.  Alternatively, a 100 basis point decrease in interest rates would have reduced interest expense by approximately $73 and $80 in the three month periods ended March 31, 2009 and 2008, respectively.



Sales of the Companys products in a given foreign country can be affected by fluctuations in the exchange rate.  For the three months ended March 31, 2009, the Company sold less than 20% of its products outside of the United States.  Of these foreign sales, 41% were denominated in Euros and 4% 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, 2009 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 2009
              1
              $15.01
              1
              160March 2009
              13
              $14.04
              13
              147Total First Quarter 2009
              14
              $14.11
              14
              147




(1)
              The share repurchase program authorizing the purchase of up to 500 shares was announced May 6, 2008. The authorization will expire July 31, 2009 and replaces the previous share repurchase program which was scheduled to expire on July 31, 2008.


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, 2009
              /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










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