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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 September 30, 2004
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 29, 2004: 9,059,191 shares of Common Stock, par value $.01 per share
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,
2004 2003
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 1,975 $ 938
Trade accounts receivable, net of allowance for doubtful
accounts of $625 and $641 in 2004 and 2003, respectively.......... 8,873 11,212
Inventories.......................................................... 11,568 9,017
Other current assets................................................. 4,238 3,403
------ ---------
Total current assets.............................................. 26,654 24,570
Property, plant and equipment, net..................................... 21,046 19,240
Goodwill............................................................... 52,847 51,003
Other intangible assets, net........................................... 5,910 5,824
Other assets........................................................... 1,601 847
------- ----------
Total assets...................................................... $108,058 $ 101,484
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................................. $ -- $ 2,852
Accounts payable and accrued liabilities............................. 9,802 9,042
------- ----------
Total current liabilities......................................... 9,802 11,894
Deferred income taxes.................................................. 6,627 6,627
Stockholders' equity:
Common stock, voting, $.01 par value per share, 25,000 shares
authorized, 9,039 and 9,004 shares issued and outstanding in
2004 and 2003, respectively....................................... 90 90
Additional paid-in capital........................................... 28,277 28,367
Deferred stock compensation.......................................... (682) (935)
Retained earnings.................................................... 79,442 71,426
Common stock in treasury, at cost, 1,121 and 1,157 shares in
2004 and 2003, respectively....................................... (15,498) (15,985)
------- ----------
Total stockholders' equity........................................ 91,629 82,963
------- ----------
Total liabilities and stockholders' equity........................$ 108,058 $ 101,484
========= =========
The accompanying notes are an integral part of these statements.
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,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $21,703 $19,014 $59,488 $55,397
Cost of goods sold 9,777 8,520 27,600 25,184
------------ ------------ ------------ ------------
Gross profit 11,926 10,494 31,888 30,213
Selling, general and administrative expenses 5,862 5,167 17,207 14,961
------------ ------------ ------------ ------------
Income from operations 6,064 5,327 14,681 15,252
Other income (expense), net 80 27 96 68
------------ ------------ ------------ ------------
Income before provision for income taxes 6,144 5,354 14,777 15,320
Provision for income taxes 2,351 2,048 5,654 5,860
------------ ------------ ------------ ------------
Net income $3,793 $3,306 $9,123 $9,460
============ ============ ============ ============
Basic earnings per share $0.42 $0.37 $1.01 $1.05
============ ============ ============ ============
Diluted earnings per share $0.40 $0.35 $0.97 $1.01
============ ============ ============ ============
Basic weighted average shares outstanding 9,039 9,045 9,037 8,995
============ ============ ============ ============
Diluted weighted average shares outstanding 9,389 9,489 9,412 9,409
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
------------- -------------
Cash flows from operating activities:
Net income $ 9,123 $ 9,460
------------- -------------
Adjustments to reconcile net income to net cash flows from
operating activities --
Depreciation and amortization 2,440 1,993
Loss on disposal of property, plant and equipment 119 --
Changes in assets and liabilities (net of effects of acquisitions) --
Trade accounts receivable 2,293 (1,221)
Inventories (2,248) 100
Other current assets (821) 223
Other assets (1,081) (9)
Accounts payable and accrued liabilities 236 1,710
------------- -------------
Total adjustments 938 2,796
------------- -------------
Net cash flows from operating activities 10,061 12,256
------------- -------------
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired (1,545) (606)
Purchases of property, plant and equipment (3,932) (1,756)
------------- -------------
Net cash flows from investing activities (5,477) (2,362)
------------- -------------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 9,568 --
Payments on long-term debt (12,420) (4,217)
Proceeds from stock options exercised 412 1,436
Payment of cash dividend (1,107) (274)
Purchase of treasury stock, net -- (66)
------------- -------------
Net cash flows from financing activities (3,547) (3,121)
------------- -------------
Net increase in cash and cash equivalents 1,037 6,773
Cash and cash equivalents, beginning of period 938 554
------------- -------------
Cash and cash equivalents, end of period $ 1,975 $ 7,327
============= =============
The accompanying notes are an integral part of these statements.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
GENERAL:
This report includes information in a condensed format and should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003. The results of operations for the three and nine months ended
September 30, 2004 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, 2003 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
1. ORGANIZATION:
Young Innovations, Inc. and subsidiaries (the "Company") develops, manufactures
and markets supplies and equipment used to facilitate the practice of dentistry
and to promote oral health. The Company's product offerings include disposable
and metal prophylaxis ("prophy") angles, prophy cups and brushes, panoramic
X-ray machines, dental handpieces (drills) and related components, orthodontic
toothbrushes, flavored examination gloves, children's toothbrushes, children's
toothpastes, moisture control products, infection control products, and
ultrasonic systems and obturation products used in endodontic surgeries (root
canal procedures). The Company's manufacturing and distribution facilities are
located in Missouri, California, Indiana, Colorado, Tennessee and Texas. Export
sales were less than 10% of total net sales for 2003 and 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of Young
Innovations, Inc. and its direct and indirect wholly owned subsidiaries. All
significant inter-company accounts and transactions are eliminated in
consolidation.
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, 2004 and December 31, 2003.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from operating activities include $2,788 and $3,532 for the payment
of federal and state income taxes and $78 and $82 for the payment of interest
for the nine months ended September 30, 2004 and 2003, 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 September 30, 2004, 1,529
options had been granted.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," the Company applies
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for the Plan.
Accordingly, no compensation cost has been recognized for grants made under the
Plan, all of which are made at exercise prices that are not less than the fair
value of the underlying stock on the date of grant. Had compensation costs for
the Plan been determined based upon the fair value of the options at the grant
date consistent with the methodology prescribed under SFAS No. 123, the
Company's net income and earnings per share would approximate the following pro
forma amounts:
Three Months Ended
September 30,
------------------------------
2004 2003
(Unaudited)
Net income, as reported..................... $3,793 $3,306
Less: Total stock-based employee
compensation expense determined under fair
value based method for all stock option
awards, net of related tax effects........... (163) (215)
Pro forma net income........................ $3,630 $3,091
Earnings per share:.........................
Basic - as reported.................... $0.42 $0.37
Basic - pro forma......................... $0.40 $0.34
Diluted - as reported..................... $0.40 $0.35
Diluted - pro forma....................... $0.39 $0.33
Amounts included in determination of net income:
Restricted stock compensation $ 52 $ 52
Nine Months Ended
September 30,
------------------------------
2004 2003
(Unaudited)
Net income, as reported..................... $9,123 $9,460
Less: Total stock-based employee
compensation expense determined under fair
value based method for all stock option
awards, net of related tax effects........... (505) (645)
Pro forma net income........................ $8,618 $8,815
Earnings per share:.........................
Basic - as reported.................... $1.01 $1.05
Basic - pro forma......................... $0.95 $0.98
Diluted - as reported..................... $0.97 $1.01
Diluted - pro forma....................... $0.92 $0.94
Amounts included in determination of net income:
Restricted stock compensation $ 156 $ 156
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, 2004 September 30, 2004
----------------------------------------------- ----------------------------------------------
Professional Retail Consolidated Professional Retail Consolidated
Net Sales.................. $ 20,891 $ 812 $ 21,703 $ 57,121 $ 2,367 $ 59,488
Income from operations $ 5,985 $ 79 $ 6,064 $ 14,519 $ 162 $ 14,681
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 from operations $ 5,313 $ 14 $ 5,327 $ 15,417 $ (165) $ 15,252
5. NOTES RECEIVABLE
During the normal course of business, the Company issues notes in connection
with equipment purchases by customers. The equipment is used to secure the note.
Notes receivable consist of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
Notes receivable, short-term........... $ 1,403 $ 746
Notes receivable, long-term............ 1,185 365
---------- ---------
Total notes receivable $ 2,588 $ 1,111
========== =========
Notes receivable are included in other current assets and other assets in the
accompanying condensed consolidated balance sheets.
6. INVENTORIES:
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
Finished products.................. $ 6,989 $ 5,178
Work in process.................... 1,901 1,327
Raw materials and supplies........ 2,678 2,512
---------- -------
Total inventories............. $ 11,568 $ 9,017
========== =======
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
Land...................................................... $ 1,611 $ 1,086
Buildings and improvements................................ 10,132 7,585
Machinery and equipment................................... 18,417 17,813
Equipment rented to others................................ 6,099 6,011
Construction in progress.................................. 635 1,199
-------- --------
36,894 33,694
Less: Accumulated depreciation........................... (15,848) (14,454)
-------- -------
Total property, plant and equipment, net....... $ 21,046 $ 19,240
========= =========
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill consists of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
Goodwill.............................. $ 57,645 $ 55,801
Less: Accumulated amortization....... (4,798) (4,798)
------- ------
Total goodwill, net........ $ 52,847 $ 51,003
=========== ===========
During the first quarter of 2004, YI Ventures LLC (a wholly-owned subsidiary)
acquired a company for $1,500. The company manufactures and distributes
ultrasonic equipment and solutions. The acquisition resulted in approximately
$1,500 of goodwill. The remaining increase in goodwill was the result of
adjustments to the fair value estimates of the assets and liabilities of Obtura
Spartan, which was acquired on December 1, 2003, and Midwest Laboratories, which
was acquired on September 16, 2003. There have been no changes in goodwill
related to impairment losses or write-offs due to sales of businesses during the
nine months ended September 30, 2004 and 2003..
Other intangible assets consist of the following, which are all included in the
Professional Segment:
AS OF SEPTEMBER 30, 2004
------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
License agreements $1,200 54 $ 1,146
Core technology 591 24 567
Patents 497 253 244
Product formulas 430 36 394
Supplier relationships 130 85 45
Noncompete agreements 250 44 206
------ ----- ---------
Total $3,098 $ 496 $ 2,602
Unamortized intangible assets
Trademarks $3,308 - $ 3,308
------ ----- ---------
Total intangible assets $6,406 $ 496 $ 5,910
AS OF DECEMBER 31, 2003
-----------------------
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
License agreements $ 1,200 $ 6 $ 1,194
Core Technology 591 4 587
Patents 497 230 267
Product formulas 430 27 403
Supplier relationships 130 65 65
----------- --------- -----------
Total $ 2,848 $ 332 $ 2,516
Unamortized intangible assets
Trademarks $ 3,308 - $ 3,308
----------- --------- -----------
Total intangible assets $ 6,156 $ 332 $ 5,824
The costs of other intangible assets with finite lives are amortized over their
expected useful lives using the straight-line method. The amortization lives are
as follows: 18 to 20 years for patents, license agreements and core technology,
40 years for product formulations and 5 years for supplier relationships. The
weighted average life for amortizable intangible assets is 26 years. Aggregate
amortization expense for the three months ended September 30, 2004 and 2003 was
$64 and $21, respectively. Estimated amortization expense for each of the next
five years is as follows:
For the year ending 12/31/04 $225
For the year ending 12/31/05 200
For the year ending 12/31/06 162
For the year ending 12/31/07 149
For the year ending 12/31/08 149
9. CREDIT ARRANGEMENTS AND NOTES PAYABLE:
On May 11, 2004 the Company amended its existing credit arrangement, which
provides for an unsecured revolving credit facility with an aggregate commitment
of $50,000. The amendment extended the term of the arrangement to September
2007. 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 .20% 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, 2004 and December 31, 2003, the Company was in
compliance with all of these covenants.
Long-term debt was as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
Revolving credit facility due 2007 with a
weighted-average interest rate of 2.81% at
September 30, 2004 $ -- $ 2,784
Capital lease obligations -- 68
------ ---------
-- 2,852
Less- current portion -- 2,852
---------- ---------
$ -- $ --
========== =========
In certain circumstances, the Company provides recourse for loans for X-ray
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, 2004, and December 31, 2003 approximately $237 and $561, 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 is minimal
and not material to the results of operations or financial position of the
Company.
10. 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
------------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2004 2003
---- ----
(unaudited)
Net income.................................. $ 3,793 $ 3,306
Weighted average shares outstanding for
basic earnings per share.................... 9,039 9,045
Dilutive effect of stock options and
restricted stock............................ 350 444
Weighted average shares outstanding for
diluted earnings per share.................. 9,389 9,489
Basic earnings per share.................... $ .42 $ .37
Diluted earnings per share.................. $ .40 $ .35
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2004 2003
---- ----
(unaudited)
Net income.................................. $ 9,123 $ 9,460
Weighted average shares outstanding for
basic earnings per share.................... 9,037 8,995
Dilutive effect of stock options and
restricted stock............................ 375 414
Weighted average shares outstanding for
diluted earnings per share.................. 9,412 9,409
Basic earnings per share.................... $1.01 $ 1.05
Diluted earnings per share.................. $ .97 $ 1.01
11. 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 $187 and $178 at September 30, 2004 and
December 31, 2003, respectively. There were no significant warranty costs during
the nine-month period ended September 30, 2004.
12. SUBSEQUENT EVENTS
On October 19, 2004, the Board of Directors declared a quarterly dividend of
$0.04 per share, payable December 15, 2004 to shareholders of record on November
15, 2004.
During October and November of 2004, the Company repurchased 19 shares of its
common stock from various stockholders for $615. The purchases were financed
through cash from operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In December 2001, the SEC requested that all registrants include in their MD&A
their most critical accounting policies, the judgments and uncertainties
affecting the application of those policies, and the likelihood that materially
different amounts would be reported under different conditions using different
assumptions. The SEC indicated that a "critical accounting policy" is one which
is both important to the portrayal of the company's financial condition and
results and requires management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. The Company believes that the following
accounting policies fit this definition:
Allowance for doubtful accounts - Accounts receivable balances are subject to
credit risk. Management has reserved for expected credit losses, sales returns
and allowances, and discounts based upon past experience as well as knowledge of
current customer information. We believe that our reserves are adequate. It is
possible, however, that the accuracy of our estimation process could be impacted
by unforeseen circumstances. We continuously review our reserve balance and
refine the estimates to reflect any changes in circumstances.
Inventory - The Company values inventory at the lower of cost or market on a
first-in, first-out basis. Inventory values are based upon standard costs which
approximate historical costs. Management regularly reviews inventory quantities
on hand and records a provision for excess or obsolete inventory based primarily
on estimated product demand and other knowledge related to the inventory. If
demand for the Company's products is significantly different than management's
expectations, the reserve could be materially impacted. Changes to the reserves
are included in cost of goods sold.
Goodwill and other intangible assets - The Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142 effective January 1,
2002. Goodwill and other long-lived assets with indefinite useful lives are
reviewed by management for impairment annually or whenever events or changes in
circumstances indicate the carrying amount may not be recoverable. If indicators
of impairment are present, the determination of the amount of impairment would
be based on management's judgment as to the future operating cash flows to be
generated from the assets. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144.
Contingencies - The Company and its subsidiaries from time to time are subject
to various contingencies, including legal proceedings arising in the normal
course of business. Management, with the assistance of external legal counsel,
performs an analysis of current litigation and will record liabilities if a loss
is probable and can be reasonably estimated. The Company believes the reserve is
adequate, however it cannot guarantee that costs will not be incurred in excess
of current estimates.
Assets and Liabilities Acquired in Business Combinations - The Company
periodically acquires businesses. All business acquisitions completed subsequent
to 2002 are accounted for under the provisions of SFAS No. 141, "Business
Combinations," which requires the use of the purchase method. All business
acquisitions completed in years prior to 2002 were accounted for under the
purchase method as set forth in APB No. 16, "Business Combinations." The
purchase method requires the Company to allocate the cost of an acquired
business to the assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition. The allocation of acquisition cost to
assets acquired includes the consideration of identifiable intangible assets.
The excess of the cost of an acquired business over the fair value of the assets
acquired and liabilities assumed is recognized as goodwill. The Company's
measurement of certain preacquisition contingencies may impact the Company's
cost allocation to assets acquired and liabilities assumed for a period of up to
one year following the date of an acquisition. The Company utilizes a variety of
information sources to determine the value of acquired assets and liabilities.
Third-party appraisers are utilized to assist the Company in determining the
fair value and useful lives of identifiable intangibles, including the
determination of intangible assets that have an indefinite life. The valuation
of the acquired assets and liabilities and the useful lives assigned by the
Company will impact the determination of future operating performance of the
Company.
RESULTS OF OPERATIONS (In thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2003
NET SALES
- ---------
Net sales increased $2,689 or 14.1% to $21,703 in the third quarter of 2004 from
$19,014 in the third quarter of 2003. The increase was primarily a result of
additional sales from acquired product lines, principally Obtura Spartan, which
contributed approximately $2,000 in sales in the third quarter of 2004. Solid
end-user demand, new product introductions and implementation of new sales and
marketing programs all contributed to the sales growth. Sales in the
professional segment increased $2,743 or 15.1% to $20,891 during the third
quarter as a result of the factors described above. Sales in the retail segment
decreased $54 or 6.2% to $812 in the third quarter of 2004, compared to $866 in
the prior year quarter.
GROSS PROFIT
- ------------
Gross profit increased $1,432 or 13.6%, to $11,926 in the third quarter of 2004
from $10,494 in the third quarter of 2003 as a result of increased net sales.
Gross margin remained consistent at 55.0% of net sales in the third quarter of
2004 compared to 55.2% in the third quarter of 2003. The Company continues to
believe the primary factors affecting gross margin are product mix and
production efficiency.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
- ---------------------------------------------
SG&A expenses increased $695 or 13.5% to $5,862 in the third quarter of 2004
from $5,167 in the third quarter of 2003. The increase was primarily due to
additional SG&A expenses resulting from the acquisition of Obtura Spartan. As a
percent of net sales, SG&A expenses remained consistent at 27.0% in 2004
compared to 27.2% in 2003.
INCOME FROM OPERATIONS
- ----------------------
Income from operations increased $737 or 13.8%, to $6,064 in the third quarter
of 2004 from $5,327 in the third quarter of 2003. The increase was a result of
the items explained above.
OTHER INCOME(EXPENSE), NET
- --------------------------
Other income(expense), net increased $53 to $80 in the third quarter of 2004
from $27 in the third quarter of 2003. The increase in income was primarily
attributable to a decrease in interest expense related to lower borrowings on
the Company's credit facility.
PROVISION FOR INCOME TAXES
- --------------------------
Provision for income taxes increased $303 for the third quarter of 2004 to
$2,351 from $2,048 in the third quarter of 2003 as a result of the increased
pre-tax income discussed above. The Company recorded an effective tax rate of
38.25% in 2004 and 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2003
NET SALES
- ---------
Net sales increased $4,091 or 7.4% to $59,488 in the first nine months of 2004
from $55,397 for the first nine months of 2003. Sales of professional products
increased 8.1%, or $4,300 to $57,121 in the first nine months of 2004. The
increase was primarily due to the acquisition of Obtura Spartan, on December 1,
2003, which contributed approximately $6,700 in the first nine months of 2004.
This increase was offset by the decline in sales in the second quarter of 2004
due to the restructuring of sales incentive programs with its distributors.
GROSS PROFIT
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Gross profit increased $1,675 or 5.5%, to $31,888 for the first nine months of
2004 from $30,213 for the first nine months of 2003. The additional gross profit
was a result of the increased net sales. Gross margin decreased to 53.6% in the
first nine months of 2004 from 54.5% of net sales for the first nine months of
2003. The decline in gross margin was primarily a result of overall product mix
as well as reduced production levels in the second quarter, offset by operating
efficiencies implemented throughout 2004.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
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SG&A expenses increased $2,246 or 15.0% to $17,207 for the first nine months of
2004 from $14,961 for the first nine months of 2003. The increase was primarily
due to additional SG&A expenses resulting from the acquisition of Obtura
Spartan. As a percent of net sales, SG&A expenses increased to 28.9% in 2004
from 27.0% in 2003. This increase as a percent of net sales is partially due to
the decrease in sales during the second quarter of 2004 as a result of the
restructuring of incentive programs as well as an increase in operating expenses
consistent with the growth of the Company.
INCOME FROM OPERATIONS
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Income from operations decreased $571 or 3.7%, to $14,681 for the first nine
months of 2004 from $15,252 for the first nine months of 2003. The decrease was
a result of the items explained above.
OTHER INCOME(EXPENSE), NET
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Other income(expense), net increased $28 to $96 for the first nine months of
2004 from $68 for the first nine months of 2003. The increase in income was
primarily attributable to a decrease in interest expense related to lower
borrowings on the Company's credit facility.
PROVISION FOR INCOME TAXES
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Provision for income taxes decreased $206 for the first nine months of 2004 to
$5,654 from $5,860 for the first nine months of 2003 as a result of decreased
pre-tax income. The Company recorded an effective tax rate of 38.25% in 2004 and
2003.
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 $10,061 and
$12,256 for the first nine months of 2004 and 2003, respectively. This decrease
in operating cash flow was primarily due to the increase in ending inventory for
the third quarter 2004 compared to the prior year quarter, as well as an
increase in notes receivable associated with equipment financing to customers.
As of September 30, 2004, the Company had approximately $2,600 of short and
long-term notes receivable compared to approximately $1,000 at December 31,
2003. Inventory increased due to: (i) timing of sales attributable to a
restructuring of distributor incentive programs in the second quarter of 2004,
(ii) the decision to build more inventory in anticipation of facility
consolidations in future quarters, and (iii) typical build-up of inventory to
prepare for year-end activity. Capital expenditures for property, plant and
equipment were $3,932 and $1,756 for the first nine months of 2004 and 2003,
respectively. During the first quarter of 2004, the Company acquired a warehouse
and office facility in Corona, California for approximately $2,800. The building
was occupied in April 2004. Consistent with the Company's historical capital
expenditures, future capital expenditures are expected to include facility
improvements, panoramic X-ray machines for the Company's rental program,
production machinery and information systems.
On May 11, 2004 the Company amended its existing credit arrangement, which
provides for an unsecured revolving credit facility with an aggregate commitment
of $50,000. The amendment extended the term of the arrangement to September
2007. 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 .20% of the unused balance. The agreement is unsecured,
contains various financial and other covenants as well as limitations on
indebtedness. As of September 30, 2004 and December 31, 2003, the Company was in
compliance with all of these covenants. As of September 30, 2004, the Company
had no outstanding borrowings under this agreement and $50,000 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.
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 $24 and $5 of additional interest expense in the nine month
periods ended September 30, 2004 and 2003, respectively. Alternatively, a 100
basis point decrease in interest rates would have reduced interest expense by
approximately $24 and $5 in the nine month periods ended September 30, 2004 and
2003, 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, President 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-14(c) and 15d-14(c)) 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 have been no
significant changes in our internal controls over financial reporting or in
other factors that could significantly affect these controls during the period
covered by this report.
PART II
OTHER INFORMATION
Item 6. 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 21, 2004, was filed on July 21, 2004,
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, 2004, as well as the declaration of a quarterly
dividend.
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 5, 2004 /S/ ARTHUR L. HERBST, JR.
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Date Arthur L. Herbst, Jr.
President
/S/ CHRISTINE R. BOEHNING
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Christine R. Boehning
Chief Financial Officer