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 September 30, 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 October 31,
2003: 9,099,046 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)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 7,327 $ 554
Trade accounts receivable, net of allowance for doubtful accounts
of $413 and $385 in 2003 and 2002, respectively ................. 11,310 10,010
Inventories ........................................................ 7,843 7,861
Other current assets ............................................... 2,200 2,405
-------- --------
Total current assets ............................................ 28,680 20,830
-------- --------
Property, plant and equipment, net ................................... 19,050 18,962
Goodwill
42,883 42,414
Other intangible assets, net ......................................... 2,249 2,302
Other assets ......................................................... 489 480
-------- --------
Total assets .................................................... $ 93,351 $ 84,988
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............................... $ 80 $ 75
Accounts payable and accrued liabilities ........................... 9,882 8,110
-------- --------
Total current liabilities ....................................... 9,962 8,185
Deferred income taxes ................................................ 4,904 4,904
Long-term debt, less current maturities .............................. 7 4,229
Stockholders' equity:
Common stock, voting, $.01 par value per share, 25,000 shares
authorized, 9,047 and 8,905 shares issued and outstanding in
2003 and 2002, respectively ..................................... 90 89
Additional paid-in capital ......................................... 27,530 28,050
Deferred stock compensation ........................................ (1,019) (1,271)
Retained earnings .................................................. 67,958 58,772
Common stock in treasury, at cost, 1,196 and 1,338 shares in 2003
and 2002, respectively ........................................... (16,081) (17,970)
-------- --------
Total stockholders' equity ..................................... 78,478 67,670
-------- --------
Total liabilities and stockholders' equity ...................... $ 93,351 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------- ------------- ------------ ------------
Net sales $19,014 $18,086 $55,397 $52,534
Cost of goods sold 8,520 8,610 25,184 24,443
------------- ------------- ------------ ------------
Gross profit 10,494 9,476 30,213 28,091
Selling, general and administrative expenses 5,167 4,772 14,961 14,463
Income from operations 5,327 4,704 15,252 13,628
Other income (expense), net 27 (41) 68 (297)
------------- ------------- ------------ ------------
Income before provision for income taxes 5,354 4,663 15,320 13,331
Provision for income taxes 2,048 1,819 5,860 5,199
------------- ------------- ------------ ------------
Net income $3,306 $2,844 $9,460 $8,132
============= ============= ============ ============
Basic earnings per share $0.37 $0.32 $1.05 $0.92
============= ============= ============ ============
Diluted earnings per share $0.35 $0.30 $1.01 $0.87
============= ============= ============ ============
Basic weighted average shares outstanding 9,045 8,908 8,995 8,859
============= ============= ============ ============
Diluted weighted average shares outstanding 9,489 9,432 9,409 9,384
============= ============= ============ ============
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)
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
------------- -------------
Cash flows from operating activities:
Net income $9,460 $8,132
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization 1,993 1,879
Loss on disposal of property, plant and equipment - 148
Changes in assets and liabilities:
Trade accounts receivable (1,221) 1,680
Inventories 100 (442)
Other current assets 223 (912)
Other assets (9) 671
Accounts payable and accrued liabilities 1,710 501
------------- -------------
Total adjustments 2,796 3,525
------------- -------------
Net cash flows from operating activities 12,256 11,657
------------- -------------
Cash flows from investing activities:
(Payments) recovery for acquisitions, net of cash acquired (606) 431
Purchases of property, plant and equipment (1,756) (2,199)
============= =============
Net cash flows from investing activities (2,362) (1,768)
------------- -------------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt - 39,286
Payments on long-term debt (4,217) (50,096)
Proceeds from stock options exercised 1,436 851
Purchase of treasury stock, net (66) -
Payment of cash dividend (274) -
------------- -------------
Net cash flows from financing activities (3,121) (9,959)
------------- -------------
Net change in cash and cash equivalents 6,773 (70)
Cash and cash equivalents, beginning of period 554 82
------------- -------------
Cash and cash equivalents, end of period $7,327 $ 12
============= =============
The accompanying notes are an integral part of these statements.
4
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 nine months ended September 30, 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 offerings include 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 September
30, 2003 and December 31, 2002.
5
SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from operating activities include $3,532 and $3,893 for the payment
of federal and state income taxes and $67 and $312 for the payment of interest
for the nine months ended September 30, 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 non-employee directors as the Company's
Board of Directors may select from time to time. As of September 30, 2003,
options to purchase 1,422 shares 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
Employees," and related interpretations in accounting for the Plan. Accordingly,
no compensation cost has been recognized for grants made under the Plan, all of
which are made at exercise prices that are not less than the fair value of the
underlying stock on the date of grant. Had compensation costs for the Plan been
determined based upon the fair value of the options at the grant date consistent
with the methodology prescribed under SFAS No. 123, the Company's net income and
earnings per share would approximate the following pro forma amounts:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited) (Unaudited)
Net income, as reported .......................... $ 3,306 $ 2,844 $ 9,460 $ 8,132
Less: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects .............................. (215) (298) (645) (894)
--------- --------- --------- ---------
Pro forma net income ............................. $ 3,091 $ 2,546 $ 8,815 $ 7,238
========= ========= ========= =========
Earnings per share:
Basic - as reported ............................ $ 0.37 $ 0.32 $ 1.05 $ 0.92
Basic - pro forma .............................. $ 0.34 $ 0.29 $ 0.98 $ 0.82
Diluted - as reported .......................... $ 0.35 $ 0.30 $ 1.01 $ 0.87
Diluted - pro forma ............................ $ 0.33 $ 0.27 $ 0.94 $ 0.77
Amounts included in determination of net income:
Restricted stock compensation .................. $ 52 $ 51 $ 156 $ 154
6
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:
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:
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
----------------------------------------------- ----------------------------------------------
Professional Retail Consolidated Professional Retail Consolidated
Net sales.................. $ 18,148 $ 866 $ 19,014 $ 52,821 $ 2,576 $ 55,397
Income (loss) from
operations............. $ 5,313 $ 14 $ 5,327 $ 15,417 $ (165) $ 15,252
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
---------------------------------------------- ----------------------------------------------
Professional Retail Consolidated Professional Retail Consolidated
Net sales.................. $ 16,932 $ 1,154 $ 18,086 $ 49,022 $ 3,512 $ 52,534
Income from operations..... $ 4,593 $ 111 $ 4,704 $ 13,433 $ 195 $ 13,628
5. INVENTORIES:
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Finished products.......................... $ 5,111 $ 4,931
Work in process............................ 1,182 1,321
Raw materials and supplies................. 1,550 1,609
------------- -----------
Total inventories..................... $ 7,843 $ 7,861
============ ===========
7
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
Land................................................................. $ 1,086 $ 1,086
Buildings and improvements........................................... 7,473 7,474
Machinery and equipment.............................................. 17,708 17,250
Equipment rented to others........................................... 6,182 5,852
Construction in progress............................................. 811 129
--------- ---------
33,260 31,791
Less: Accumulated depreciation....................................... (14,210) (12,829)
-------- ---------
Total property, plant and equipment, net.................. $ 19,050 $ 18,962
======== =========
7. GOODWILL AND INTANGIBLE ASSETS:
Goodwill consists of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
Goodwill............................................................. $ 47,681 $ 47,212
Less: Accumulated amortization....................................... (4,798) (4,798)
---------- ----------
Total goodwill, net....................................... $ 42,883 $ 42,414
========== ==========
During the third quarter of 2003, YI Ventures LLC (a wholly-owned subsidiary)
acquired a company which provides dental services. The acquisition resulted in
$468 of additional goodwill. The Company did not incur impairment losses on
goodwill during the nine months ended September 30, 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
8
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:
AS OF SEPTEMBER 30, 2003
------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
Patents $ 481 $ 223 $ 258
Product formulas 430 24 406
Supplier relationships 130 59 71
--- -- --
Total $1,041 $ 306 $ 735
Unamortized intangible assets
Trademarks $1,514 $1,514
------ ------
Total intangible assets $2,555 $ 306 $2,249
====== ===== ======
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 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 September 30, 2003 and 2002 was $21 and $16, 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
9
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 September 30, 2003 and December 31, 2002, the Company was in compliance with
all of these covenants.
Long-term debt was as follows:
SEPTEMBER 30, 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 87 143
-------- ---
87 4,304
Less: current portion 80 75
-------- ------
$ 7 $ 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 September 30, 2003,
and December 31, 2002 approximately $604 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 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------- ------------ ------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(unaudited) (unaudited)
Net income.................................. $ 3,306 $ 2,844 $ 9,460 $ 8,132
Weighted average shares outstanding for
basic earnings per share.................... 9,045 8,908 8,995 8,859
Dilutive effect of stock options and
restricted stock............................ 444 524 414 525
Weighted average shares outstanding for
diluted earnings per share.................. 9,489 9,432 9,409 9,384
Basic earnings per share.................... $ .37 $ 0.32 $ 1.05 $ .92
Diluted earnings per share.................. $ .35 $ 0.30 $ 1.01 $ .87
10
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.
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 $193 and $184 at September 30, 2003 and
December 31, 2002, respectively. There were no significant warranty costs during
the nine-month period ended September 30, 2003.
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 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.
12. SUBSEQUENT EVENTS:
In October 2003, the Company declared a quarterly dividend of $0.03 per share,
payable December 15, 2003, to shareholders of record on November 14, 2003.
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. 144.
Contingencies - The Company and its subsidiaries from time to time are subject
to various contingencies, including legal proceedings arising in the normal
course of business. Management, with the assistance of external legal counsel,
performs an analysis of current litigation and will record liabilities if a loss
is probable and can be reasonably estimated. The Company believes the reserve is
adequate, however it cannot guarantee that costs will not be incurred in excess
of current estimates.
RESULTS OF OPERATIONS (In thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
NET SALES
- ---------
Net sales increased $928 or 5.1% to $19,014 in the third quarter of 2003 from
$18,086 in the third quarter of 2002. The increase was a result of increased
sales in the Professional Segment, offset by a sales decline of $288 in the
Retail Segment. Solid response to promotional activity and strong end-user
demand all contributed to growth in sales of professional products during the
period. Sales of retail products in the quarter fell primarily due to the
discontinuation of a product line at one of the Company's customers.
GROSS PROFIT
- ------------
Gross profit increased $1,018 or 10.7% to $10,494 in the third quarter of 2003
from $9,476 in the third quarter of 2002. Gross margin increased to 55.2% of net
sales in the third quarter of 2003 from 52.4% in the third quarter of 2002.
Gross margin increased as a result of several factors including the realization
of productivity improvements in manufacturing, acquisition integration
activities and product mix.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
- ---------------------------------------------
SG&A expenses increased $395 or 8.3% to $5,167 in the third quarter of 2003 from
$4,772 in the third quarter of 2002. The increase was primarily due to an
increase in personnel expenses consistent with the growth of the Company. As a
12
percent of net sales, SG&A expenses increased slightly to 27.2% in the third
quarter of 2003 compared to 26.4% in the third quarter of 2002.
INCOME FROM OPERATIONS
- ----------------------
Income from operations increased $623 or 13.2% to $5,327 in the third quarter of
2003 from $4,704 in the third quarter of 2002. The increase was a result of the
items explained above.
OTHER INCOME (EXPENSE), NET
- ---------------------------
Other income (expense), net increased $68 to $27 in the third quarter of 2003
from ($41) in the second quarter of 2002. The increased income was primarily
attributable to a reduction in interest expense resulting from zero borrowings
on the Company's credit facility during the third quarter of 2003.
PROVISION FOR INCOME TAXES
- --------------------------
Provision for income taxes increased $229 for the third quarter of 2003 to
$2,048 from $1,819 in the third quarter of 2002 as a result of increased pre-tax
income. The Company recorded an effective tax rate of 38.25% for the third
quarter of 2003 compared to 39.0% for the third quarter of 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
NET SALES
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Net sales increased $2,863 or 5.4% to $55,397 in the first nine months of 2003
from $52,534 for the first nine months of 2002. The increase was a result of
increased sales in the Professional Segment, offset by a sales decline of $936
in the Retail Segment. Strong response to promotional activity and solid
end-user demand across product lines contributed to growth in sales of
professional products during the period. Sales of retail products in the first
nine months of the year fell significantly due to several factors, including
high inventory levels at one of the Company's major retail customers as a result
of weak consumer demand of a large holiday promotion at the end of 2002, the
discontinuance of certain product lines at one of the Company's customers, and
increased competition in the children's toothbrush category.
GROSS PROFIT
- ------------
Gross profit increased $2,122 or 7.6% to $30,213 for the first nine months of
2003 from $28,091 for the first nine months of 2002. The additional gross profit
was a result of the increased net sales and improved gross margin. Gross margin
increased to 54.5% of net sales for the first nine months of 2003 compared to
53.5% in the first nine months of 2002. Gross margin increased as a result of
several factors including the realization of productivity improvements in
manufacturing, acquisition integration activities and product mix.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
- ---------------------------------------------
SG&A expenses increased $498 or 3.4% to $14,961 for the first nine months of
2003 from $14,463 for the first nine months of 2002. The increases primarily
related to investments in personnel to support the growth of the business. As a
percent of net sales, SG&A expenses decreased slightly to 27.0% for the first
nine months of 2003 from 27.5% for the first nine months of 2002.
INCOME FROM OPERATIONS
- ----------------------
Income from operations increased $1,624 or 11.9% to $15,252 for the first nine
months of 2003 from $13,628 for the first nine months of 2002. The increase was
a result of the items explained above.
OTHER INCOME (EXPENSE), NET
- ---------------------------
Other income (expense), net increased $365 to $68 for the first nine months of
2003 from ($297) for the first nine months of 2002. The increased income was
primarily attributable to a reduction in interest expense resulting from lower
borrowings on the Company's credit facility, as well as lower expense associated
with the Company's one-third interest in International Assembly, Inc.
PROVISION FOR INCOME TAXES
- --------------------------
Provision for income taxes increased $661 for the first nine months of 2003 to
$5,860 from $5,199 for the first nine months of 2002 as a result of increased
pre-tax income. The Company recorded an effective tax rate of 38.25% for the
first nine months of 2003 compared to 39.0% for the first nine months of 2002.
13
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 $12,256 and
$11,657 for the first nine months of 2003 and 2002, respectively. Capital
expenditures for property, plant and equipment were $1,756 and $2,199 for the
first nine 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. During the third quarter
of 2003, the Company paid $606 for an acquisition made by YI Ventures LLC (a
wholly owned subsidiary).
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 September 30, 2003 and
December 31, 2002, the Company was in compliance with all of these covenants. As
of September 30, 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 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.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The statement applies to all entities and
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or normal operations
of long-lived assets, except for certain obligations of leases. This statement
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. The adoption of SFAS 143 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 guarantees 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 $5 and $35 of additional interest expense in the three month
periods ended September 30, 2003 and 2002, respectively. Alternatively, a 100
basis point decrease in interest rates would have reduced interest expense by
approximately $5 and $35 in the three month periods ended September 30, 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
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 the Company's disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits 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 were no changes in
the Company's internal control over financial reporting during the quarter ended
September 30, 2003 that have materially affected, or are reasonably likely to
materially affect, the Company's internal controls over financial reporting.
15
PART II
OTHER INFORMATION
Item 5. Exhibits and Reports on Form 8-K
(a) 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.
(b) Reports on Form 8-K.
A Form 8-K, dated July 22, 2003, was filed on July 23, 2003,
in response to Items 7, 9 and 12 to furnish a press release
announcing the Company's financial results for the quarter
ended June 30, 2003, as well as the declaration of a quarterly
dividend and authorization of share repurchase.
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.
November 12, 2003 /s/ Arthur L. Herbst, Jr.
- ---------------------- -------------------------------------
Date Arthur L. Herbst, Jr.
Executive Vice President, Chief
Operating Officer,& Chief Financial
Officer
16