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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 April 30, 2003:
8,986,652 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)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 1,470 $ 554
Trade accounts receivable, net of allowance for doubtful accounts
of $328 and $385 in 2003 and 2002, respectively .............. 7,929 10,010
Inventories ..................................................... 7,207 7,861
Other current assets ............................................ 2,415 2,405
-------- --------
Total current assets ......................................... 19,021 20,830
-------- --------
Property, plant and equipment, net ................................ 18,787 18,962
-------- --------
Goodwill
42,414 42,414
Other intangible assets, net ...................................... 2,286 2,302
-------- --------
Other assets ...................................................... 480 480
-------- --------
Total assets ................................................. $ 82,988 $ 84,988
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............................ $ 77 $ 75
Accounts payable and accrued liabilities ........................ 6,749 8,110
-------- --------
Total current liabilities .................................... 6,826 8,185
-------- --------
Deferred income taxes ............................................. 4,904 4,904
-------- --------
Long-term debt, less current maturities ........................... 48 4,229
-------- --------
Stockholders' equity:
Common stock, voting, $.01 par value per share, 25,000 shares
authorized, 8,967 and 8,905 shares issued and outstanding in
2003 and 2002, respectively ................................. 89 89
Additional paid-in capital ...................................... 27,774 28,050
Deferred stock compensation ..................................... (1,187) (1,271)
Retained earnings ............................................... 61,665 58,772
Common stock in treasury, at cost, 1,276 and 1,338 shares in 2003
and 2002, respectively ....................................... (17,131) (17,970)
-------- --------
Total stockholders' equity ................................... 71,210 67,670
-------- --------
Total liabilities and stockholders' equity ................... $ 82,988 $ 84,988
======== ========
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,
2003 2002
------------- ------------
Net sales $17,743 $16,513
Cost of goods sold 8,411 7,537
------------- ------------
Gross profit 9,332 8,976
Selling, general and administrative expenses 4,661 4,780
------------- ------------
Income from operations 4,671 4,196
------------- ------------
Other income, (expense), net 14 (213)
------------- ------------
Income before provision for income taxes 4,685 3,983
Provision for income taxes 1,792 1,553
------------- ------------
Net income $2,893 $2,430
============= ============
Basic earnings per share $0.32 $0.28
============= ============
Diluted earnings per share $0.31 $0.27
============= ============
Basic weighted average shares outstanding 8,930 8,805
============= ============
Diluted weighted average shares outstanding 9,325 9,147
============= ============
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)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------- -------------
Cash flows from operating activities:
Net income $2,893 $2,430
------------- -------------
Adjustments to reconcile net income to net cash flows from
operating activities --
Depreciation and amortization 667 612
Loss on disposal of property, plant and equipment - 137
Changes in assets and liabilities --
Trade accounts receivable 2,081 1,439
Inventories 654 (790)
Other current assets (10) (12)
Other assets - 171
Accounts payable and accrued liabilities (1,361) 70
------------- -------------
Total adjustments 2,031 1,627
------------- -------------
Net cash flows from operating activities 4,924 4,057
------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (392) (1,026)
------------- -------------
Net cash flows from investing activities (392) (1,026)
------------- -------------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 339 15,730
Payments on long- term debt (4,518) (18,904)
Proceeds from stock options exercised 563 61
------------- -------------
Net cash flows from financing activities (3,616) (3,113)
------------- -------------
Net increase / (decrease) in cash and cash equivalents 916 (82)
Cash and cash equivalents, beginning of period 554 82
------------- -------------
Cash and cash equivalents, end of period $ 1,470 $ -----
============= =============
The accompanying notes are an integral part of these statements.
4
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(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 2002 Annual Report on Form 10-K. The results of
operations for the three months ended March 31, 2003 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 at December 31, 2002 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 by dentists, dental hygienists, dental
assistants and consumers. The Company's product offering includes disposable and
metal prophy angles, prophy cups and brushes, panoramic x-ray machines, moisture
control products, infection control products, dental handpieces (drills) and
related components, orthodontic toothbrushes, flavored examination gloves,
children's toothbrushes, and children's toothpastes. The Company's manufacturing
and distribution facilities are located in Missouri, California, Indiana,
Colorado, Tennessee and Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of Young
Innovations, Inc. formed in July 1995 and its direct and indirect wholly owned
subsidiaries. All significant inter-company accounts and transactions are
eliminated in consolidation.
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 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. 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 March 31,
2003 and December 31, 2002.
5
SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from operating activities include $34 and $750 for the payment of
federal and state income taxes and $15 and $163 for the payment of interest for
the three months ended March 31, 2003 and 2002, 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. As of March 31, 2003, 1,422
options had been granted.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Company applies Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employee," 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 the 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
March 31,
------------------------------
2003 2002
(Unaudited)
Net income, as reported..................... $2,893 $2,430
Less: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (215) (298)
Pro forma net income........................ $2,678 $2,132
Earnings per share:.........................
Basic - as reported.................... $0.32 $0.28
Basic - pro forma......................... $0.30 $0.24
Diluted - as reported..................... $0.31 $0.27
Diluted - pro forma....................... $0.29 $0.23
Amounts included in determination of net income:
Restricted stock compensation 52 51
4. SEGMENT INFORMATION:
Segment information has been prepared in accordance with Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company has two operating segments
according to SFAS No. 131: professional and retail. The professional segment
sells products used by dentists, dental hygienists and dental assistants. The
retail segment sells products to consumers through mass merchandisers. There are
no significant determinable assets or interest costs for the retail segment.
The table below is a summary of certain financial information relating to the
two segments:
6
THREE MONTHS ENDED
MARCH 31, 2003
-----------------------------------------------
PROFESSIONAL RETAIL TOTAL
Net sales.................... $ 16,771 $ 972 $ 17,743
Income from operations....... $ 4,738 $ (67) $ 4,671
THREE MONTHS ENDED
MARCH 31, 2002
-----------------------------------------------
PROFESSIONAL RETAIL TOTAL
Net sales.................... $ 15,301 $ 1,212 $ 16,513
Income from operations....... $ 4,169 $ 27 $ 4,196
5. INVENTORIES:
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Finished products...................... $ 4,699 $ 4,931
Work in process........................ 1,033 1,321
Raw materials and supplies............. 1,475 1,609
------- -------
Total inventories................. $ 7,207 $ 7,861
======= =======
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Land....................................... $ 1,086 $ 1,086
Buildings and improvements................. 7,241 7,474
Machinery and equipment.................... 17,560 17,250
Equipment rented to others................. 5,932 5,852
Construction in progress................... 330 129
--- --------
32,149 31,791
Less- Accumulated depreciation............. (13,362) (12,829)
-------- -------
Total property, plant and
equipment, net................ $ 18,787 $ 18,962
======== ========
7
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill consists of the following:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Goodwill.................................. $ 47,212 $ 47,212
Less- Accumulated amortization............ (4,798) (4,798)
------- ------
Total goodwill, net............ $ 42,414 $ 42,414
========= ========
The Company did not acquire goodwill or incur impairment losses on goodwill
during the three months ended March 31, 2003 and 2002.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". In accordance
with SFAS 142, the Company no longer amortizes goodwill and intangibles which
have indefinite lives. Other intangible assets with finite lives continue to be
amortized over their useful lives.
SFAS 142 also requires that the Company assess goodwill and intangibles with
indefinite lives for impairment at least annually, based on the fair value of
the related reporting unit or intangible asset. The impairment test for goodwill
is a two-step process. The first step is to identify when a goodwill impairment
has occurred by comparing the fair value of a reporting unit with its carrying
amount, including goodwill. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is not considered impaired. If
the carrying amount of the reporting unit exceeds its fair value, the second
step of the goodwill test is performed to measure the amount of the impairment
loss, if any. In this second step, the implied fair value of the reporting
unit's goodwill is compared with the carrying amount of the goodwill. If the
carrying amount of the reporting unit's goodwill exceeds the implied fair value
of that goodwill, an impairment loss is recognized in an amount equal to that
excess, not to exceed the carrying amount of the goodwill.
In accordance with the transition rules of SFAS 142, the Company performed the
transitional impairment tests during the first half of 2002, as of January 1,
2002. Reporting units were established based on the Company's current reporting
structure. All existing goodwill and intangible assets were assigned to the
reporting units. All of the goodwill was allocated to the reporting units within
the professional segment. The Company engaged an independent valuation and
appraisal firm to assist with determining fair values based upon discounted
future estimated cash flows and other valuation techniques. Fair values of the
reporting units exceeded their respective book values. Thus no impairment was
identified as of January 1, 2002, and therefore, Step 2 testing was deemed
unnecessary. During the fourth quarter of 2002, the Company carried forward the
detailed determination of the fair value of the reporting units, as permitted
based on certain criteria of SFAS 142. The Company determined that there was no
impairment of reporting units. On an ongoing basis, the Company will perform its
annual impairment assessment in the fourth quarter of each year.
Other intangible assets consist of the following, which are all included in the
Professional Segment:
8
AS OF MARCH 31, 2003
--------------------
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
Patents $ 491 $ 211 $ 280
Product formulas 430 18 412
Supplier relationships 130 46 84
Total $1,051 $ 275 $ 776
Unamortized intangible assets
Trademarks $1,510 $1,510
------ ------
Total $1,510 $1,510
Total intangible assets $2,561 $ 275 $2,286
AS OF DECEMBER 31, 2002
-----------------------
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
Patents $ 491 $ 204 $ 287
Product formulas 430 16 414
Supplier relationships 130 39 91
Total $1,051 $ 259 $ 792
Unamortized intangible assets
Trademarks $1,510 $1,510
------ ------
Total $1,510 $1,510
Total intangible assets $2,561 $ 259 $2,302
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, 40 years for product formulations and 5
years for supplier relationships. The weighted average life for amortizable
intangible assets is 26 years. Aggregate amortization expense for the three
months ended March 31, 2003 and 2002 was $15 and $6, respectively. Estimated
amortization expense for each of the next five years is as follows:
For the year ending 12/31/03 $ 62
For the year ending 12/31/04 62
For the year ending 12/31/05 62
For the year ending 12/31/06 49
For the year ending 12/31/07 36
8. CREDIT ARRANGEMENTS AND NOTES PAYABLE:
The Company has a credit arrangement that provides for a three-year, unsecured
revolving credit facility with an aggregate commitment of $40,000. Borrowings
under the arrangement bear interest at rates ranging from LIBOR +1% to LIBOR
+2.25% or Prime to Prime +.5%. Commitment fees for this arrangement range from
..15% to .25% of the unused balance. The agreement is unsecured and contains
various financial and other covenants as well as limitations on indebtedness. As
of March 31, 2003 and December 31, 2002, the Company was in compliance with all
of these covenants.
9
Long-term debt was as follows:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Revolving credit facility due 2004 with a weighted-
average interest rate of 2.73% at December 31, 2002 $ - $ 4,161
Capital lease obligations 125 143
------- ---
125 4,304
Less- current portion 77 75
------ ------
$ 48 $ 4,229
======= =======
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 March 31, 2003, and
December 31, 2002 approximately $605 and $649, 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 of the opinion of management that the
fair value of the recourse provided was minimal.
9. 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
------------------
MARCH 31, MARCH 31,
2003 2002
(unaudited)
Net income.................................. $ 2,893 $ 2,430
Weighted average shares outstanding for
basic earnings per share.................... 8,930 8,805
Dilutive effect of stock options and
restricted stock............................ 395 342
Weighted average shares outstanding for
diluted earnings per share.................. 9,325 9,147
Basic earnings per share.................... $ .32 $.28
Diluted earnings per share.................. $ .31 $.27
10. 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.
11. NEW ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No.148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS
10
No. 148 provides for voluntary adoption of the fair value method
for entities with fiscal years ending after December 15, 2002. The Company
currently has not made this election, but has included the required disclosures
in Note 3 to these condensed consolidated financial statements.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No.45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements in this Interpretation are effective for financial
statements of interim or annual periods ending after December 31, 2002. Adoption
of FIN 45 did not have a material impact on the consolidated financial
statements of the Company.
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.
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 throughout their estimable useful lives. 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. 121.
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 can not guarantee that costs will not be incurred in excess
of current estimates.
RESULTS OF OPERATIONS (In thousands, except per share data)
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
NET SALES
- ---------
Net sales increased $1,230 or 7.4% to $17,743 in the first quarter of 2003 from
$16,513 in the first quarter of 2002. The increase was a result of increased
sales in the Professional Segment, offset by a decline of $240 of sales in the
Retail Segment. The Professional Segment specifically benefited from strong
demand for X-ray equipment relative to the first quarter of 2002. The decline in
Retail sales was primarily a result of poor sell-through from several large
fourth quarter promotions to one of the Company's significant retail customers.
GROSS PROFIT
- ------------
Gross profit increased $356 or 4.0%, to $9,332 in the first quarter of 2003 from
$8,976 in the first quarter of 2002. The additional gross profit was a result of
the increased net sales. Gross margin decreased slightly to 52.6% of net sales
in the first quarter of 2003 from 54.4% in the first quarter of 2002. Gross
margin decreased as a result of close-out pricing of certain discontinued retail
products, less than anticipated efficiencies related to the start-up of certain
capital equipment and sales mix.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
- ---------------------------------------------
SG&A expenses decreased $119 or 2.5% to $4,661 in the first quarter of 2003 from
$4,780 in the first quarter of 2002. The decrease was due, in part, to a
one-time expense related to demolition of a building in 2002, as well as
12
stringent operating expense controls. As a percent of net sales, SG&A expenses
decreased to 26.3% in 2003 from 28.9% in 2002 for the foregoing reasons.
INCOME FROM OPERATIONS
- ----------------------
Income from operations increased $475 or 11.3%, to $4,671 in the first quarter
of 2003 from $4,196 in the first quarter of 2002. The increase was a result of
the items explained above.
OTHER INCOME(EXPENSE), NET
- --------------------------
Other income(expense), net increased $227 to $14 in the first quarter of 2003
from $(213) in the first quarter of 2002. The increased income was primarily
attributable to lower expense associated with the Company's one-third interest
in International Assembly Inc., as well as a reduction in interest expense
resulting from lower borrowings on the Company's credit facility.
PROVISION FOR INCOME TAXES
- --------------------------
Provision for income taxes increased $239 for the first quarter of 2003 to
$1,792 from $1,553 in the first quarter of 2002 primarily as a result of
increased pre-tax income. The effective tax rate in 2003 of 38.25% compared to
39.0% for 2002, is more in line with the Company's estimates of 2003 statutory
rates. The impact of the effective tax rate change on the first quarter of 2003
was $35.
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 $4,924 and
$4,057 for the first three months of 2003 and 2002, respectively. Capital
expenditures for property, plant and equipment were $392 and $1,026 for the
first three months of 2003 and 2002, respectively. 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.
The Company has a credit arrangement that provides for a three-year, unsecured
revolving credit facility with an aggregate commitment of $40,000. This
arrangement expires in 2004. Borrowings under the agreement bear interest at
rates ranging from LIBOR + 1% to LIBOR + 2.25% or Prime to Prime + .5%.
Commitment fees for this agreement range from .15% to .25% of the unused
balance. The agreement is unsecured, contains various financial and other
covenants as well as limitations on indebtedness. As of March 31, 2003 and
December 31, 2002, the Company was in compliance with all of these covenants. As
of March 31, 2003, the Company had no outstanding borrowings under this
agreement and $40,000 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.
NEW ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No.148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 provides for voluntary adoption of the fair value method
for entities with fiscal years ending after December 15, 2002. The Company
currently has not made this election, but has included the required disclosures
in Note 3 to these condensed consolidated financial statements.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No.45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements in
13
this Interpretation are effective for financial
statements of interim or annual periods ending after December 31, 2002. Adoption
of FIN 45 did not have a material impact on the consolidated financial
statements of the Company.
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 and expected results thereof may differ materially from those
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, those disclosed in the Company's
Annual Report on Form 10-K and other reports filed with the Securities and
Exchange Commission.
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 $9 and $41 of additional interest expense in the three month
periods ended March 31, 2003 and 2002, respectively. Alternatively, a 100 basis
point decrease in interest rates would have reduced interest expense by
approximately $9 and $41 in the three month periods ended March 31, 2003 and
2002, 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
97% are denominated in US dollars with the remaining 3% 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 and Chief Financial Officer have concluded, based on
their evaluation within 90 days of the filing date of 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 recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. There have been no significant changes in our internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the previous mentioned evaluation.
15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Amendment to George E. Richmond Employment Agreement
dated April 1, 2002, as amended.
10.2 Amendment to GER Consulting, Inc. Consulting Agreement
dated April 1, 2002, as amended.
10.3 Amendment to Stock Repurchase Agreement dated November
9, 2001, by and between the Registrant and George E.
Richmond.
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
None.
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.
May 7, 2003 /s/ Arthur L. Herbst, Jr.
- --------------- -----------------------------------
Date Arthur L. Herbst, Jr.
Executive Vice President, Chief
Operating Officer, & Chief
Financial Officer
16
CERTIFICATIONS
--------------
I, Alfred E. Brennan, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Young
Innovations, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 7, 2003
/s/ Alfred E. Brennan, Jr.
----------------------------
Alfred E. Brennan, Jr.
Chief Executive Officer
17
CERTIFICATIONS, CONT.
---------------------
I, Arthur L. Herbst, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Young
Innovations, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 7, 2003
/s/ Arthur L. Herbst, Jr.
--------------------------------
Arthur L. Herbst, Jr.
Executive Vice President, Chief
Operating Officer, & Chief
Financial Officer
18