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, 2005
Commission file number 000-23213
YOUNG INNOVATIONS, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1718931
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
13705 Shoreline Court East, Earth City, Missouri 63045
(Address of principal executive offices) (Zip Code)
(314) 344-0010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ...X... No ........
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No ___
Number of shares outstanding of the Registrant's Common Stock at April 29, 2005:
9,023,303 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)
March 31, December 31,
2005 2004
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents .......................................... $ 5,774 $ 2,552
Trade accounts receivable, net of allowance for doubtful accounts
of $415 and $451 in 2005 and 2004, respectively ................... 9,208 9,976
Inventories ........................................................ 10,036 10,942
Other current assets ............................................... 4,403 3,640
Net assets from discontinued operations ........................... 310 --
--------- ---------
Total current assets ............................................ 29,731 27,110
Property, plant and equipment, net ................................... 21,897 22,137
Goodwill ............................................................. 52,690 52,617
Other intangible assets, net ......................................... 6,284 6,105
Other assets ......................................................... 1,329 1,860
--------- ---------
Total assets .................................................... $ 111,931 $ 109,829
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities ........................... 7,417 7,639
Net liabilities for discontinued operations ........................ -- 43
--------- ---------
Total current liabilities .......................................... 7,417 7,682
Deferred income taxes ................................................ 7,010 7,010
Stockholders' equity:
Common stock, voting, $.01 par value per share, 25,000 shares
authorized, 9,019 and 9,038 shares issued and outstanding in
2005 and 2004, respectively ...................................... 90 90
Additional paid-in capital ......................................... 29,028 29,033
Deferred stock compensation ........................................ (514) (598)
Retained earnings .................................................. 86,985 83,884
Common stock in treasury, at cost, 1,166 and 1,146 shares in 2005
and 2004, respectively ........................................... (18,085) (17,272)
--------- ---------
Total stockholders' equity ....................................... 97,504 95,137
--------- ---------
Total liabilities and stockholders' equity ...................... $ 111,931 $ 109,829
========= =========
The accompanying notes are an integral part of these statements.
2
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
2005 2004
-------------- --------------
Net sales $ 20,634 $ 19,494
Cost of goods sold 9,750 8,606
-------------- --------------
Gross profit 10,884 10,888
Selling, general and administrative expenses 5,377 5,579
-------------- --------------
Income from operations 5,507 5,309
Other income, net 112 5
-------------- --------------
Income before provision for income taxes 5,619 5,314
Provision for income taxes 2,149 2,033
-------------- --------------
Net income from continuing operations 3,470 3,281
Net income from discontinued operations 0 16
-------------- --------------
Net income $ 3,470 $ 3,297
============== ==============
Basic earnings per share $0.38 $0.37
Basic earnings per share from continuing operations $0.38 $0.37
Basic earnings per share from discontinued operations $0.00 $0.00
Diluted earnings per share $0.37 $0.35
Diluted earnings per share from continuing operations $0.37 $0.35
Diluted earnings per share from discontinued operations $0.00 $0.00
Basic weighted average shares outstanding 9,040 9,032
Diluted weighted average shares outstanding 9,385 9,458
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,
2005 2004
------------- -------------
Cash flows from operating activities:
Net income $ 3,470 $ 3,297
------------- -------------
Adjustments to reconcile net income to net cash flows from
operating activities --
Depreciation and amortization 746 719
Loss on disposal of property, plant and equipment -- 106
Changes in assets and liabilities --
Trade accounts receivable 748 674
Inventories 732 (653)
Other current assets (763) (531)
Other assets 178 (362)
Accounts payable and accrued liabilities (349) (613)
------------- -------------
Total adjustments 1,292 (660)
------------- -------------
Net cash flows from operating activities 4,762 2,637
------------- -------------
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired -- (1,500)
Purchases of property, plant and equipment (353) (3,044)
------------- -------------
Net cash flows from investing activities (353) (4,544)
------------- -------------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt -- 4,007
Payments on long-term debt -- (2,934)
Proceeds from stock options exercised 81 407
Purchases of treasury stock (898) --
Payment of cash dividend (370) (369)
------------- -------------
Net cash flows from financing activities (1,187) 1,111
------------- -------------
Net increase (decrease) in cash and cash equivalents 3,222 (796)
Cash and cash equivalents, beginning of period 2,552 938
------------- -------------
Cash and cash equivalents, end of period $ 5,774 $ 142
============= =============
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, 2005
(In thousands, except per share data)
GENERAL:
This report includes information in a condensed format and should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004. The results of operations for the three months ended March 31, 2005
are not necessarily indicative of the results expected for the full year or any
other interim period.
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules of the Securities and Exchange Commission. In our opinion, the statements
include all adjustments necessary (which are of a normal recurring nature) for
the fair presentation of the results of the interim periods presented.
The balance sheet information at December 31, 2004 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
1. ORGANIZATION:
Young Innovations, Inc. and its subsidiaries (the "Company") develop,
manufacture and market supplies and equipment used to facilitate the practice of
dentistry and to promote oral health. The Company's product offering includes
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, moisture control
products, infection control products, and ultrasonic systems and obturation
products used in endodontic surgeries (root canal procedures). The Company's
manufacturing and distribution facilities are located in Missouri, California,
Indiana, Colorado, Tennessee, Texas and Canada. Export sales were less than 10%
of total net sales for 2004 and 2003.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Young
Innovations, Inc. and its direct and indirect wholly owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from the sale of products is recorded at the time title passes,
generally when the products are shipped as our shipping terms are customarily
FOB shipping point. Young employs a variety of promotional activities,
including, but not limited to, rebate programs, free goods offers, off-invoice
pricing discounts, and free shipping promotions. The Company's income statement
classification and expense recognition and measurement for these promotional
activities is in accordance with the provisions of EITF 01-9: Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products). The Company generally warrants its products against defects
5
and its most generous policy provides a two-year parts and labor warranty on
X-ray machines. The policy with respect to sales returns generally provides that
a customer may not return inventory except at the Company's option with the
exception of X-ray machines, which have a 90-day return policy.
The Company owns X-ray equipment rented on a month-to-month basis to customers.
Revenue from the rental of equipment to others is recognized on a month-to-month
basis as the revenue is earned. A liability for the removal costs of the rented
X-ray machines is capitalized and amortized over four years. A liability for the
removal costs of the purchased X-ray machines expected to be returned to the
Company is included in accounts payable and accrued liabilities at March 31,
2005 and December 31, 2004.
The Company offers various financing options to its customers purchasing X-ray
machines, including notes payable to the Company and financing through third
parties. The equipment purchased is used to secure the notes. These transactions
are recorded as a sale upon the transfer of title to the purchaser, which
generally occurs at the time of shipment, at an amount equal to the sales price
of non-financed sales. Interest on these notes is accrued as earned and recorded
as interest income.
Supplemental Cash Flow Information
Cash flows from operating activities include $1,086 and $589 for the payment of
federal and state income taxes and $19 and $20 for the payment of interest for
the three months ended March 31, 2005 and 2004, respectively.
3. STOCK AWARDS:
Stock Options
The Company adopted the 1997 Stock Option Plan (the Plan) effective in November
1997 and amended the Plan in 1999 and 2001. A total of 1,725 shares of Common
Stock are reserved for issuance under this plan which is administered by the
compensation committee of the Board of Directors (Compensation Committee).
Participants in the Plan will be those employees whom the Compensation Committee
may select from time to time and those nonemployee directors as the Company's
Board of Directors may select from time to time.
On March 1, 2005, the Company granted 320 options to employees and nonemployee
directors. All options were vested immediately. As of March 31, 2005, a total of
1,849 options had been granted. Net of forfeits, 1,590 options have been
granted.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," the Company applies
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to 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 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:
6
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------------------ ------------------------------
As Reported Pro Forma As Reported Pro Forma
(Unaudited) (Unaudited)
Net income (loss) $ 3,470 $ (203) $ 3,297 $ 3,118
Net income (loss) from continuing operations 3,470 (203) 3,297 3,118
Net income from discontinued operations 0 0 0 0
Earnings per share:
Basic $0.38 ($0.02) $0.37 $0.35
Basic earnings per share from continuing operations $0.38 ($0.02) $0.37 $0.35
Basic earnings per share from discontinued operations $0.00 $0.00 $0.00 $0.00
Diluted $0.37 ($0.02) $0.35 $0.33
Diluted earnings per share from continuing operations $0.37 ($0.02) $0.35 $0.33
Diluted earnings per share from discontinued operations $0.00 $0.00 $0.00 $0.00
Amounts of stock-based compensation included in
determination of net income:
Restricted stock compensation $ 52 $ 52 $ 52 $ 52
4. DISCONTINUED OPERATIONS:
In December 2004, the Company completed the sale of the retail division of its
Plak Smacker subsidiary. The retail division, which has previously been reported
as a separate segment, sold toothbrushes, children's toothpaste and dental
accessories to mass merchandisers under the Plak Smacker brand name. The retail
operations are accounted for as discontinued operations and accordingly,
operating results and net assets are segregated in the accompanying Consolidated
Statements of Income and Consolidated Balance Sheets. The Company recorded a
pre-tax gain of $1,156 on the transaction, which was included in the
consolidated income statement caption "net income (loss) from discontinued
operations" during the fourth quarter of 2004. The net current liabilities of
this discontinued operations are primarily accounts receivable and accounts
payable. Results for discontinued operations are as follows (in thousands):
Three months ended
March 31,
------------------
2005 2004
---- ----
Net sales............................ $ - $ 798
Income before income taxes........... - 26
Provision for income taxes........... - 10
Net income........................... $ - $ 16
5. NOTES RECEIVABLE:
The Company offers various financing options to its customers, including notes
payable to the Company and financing through third parties. The equipment
purchased is used to secure the notes. Total revenue from sales of equipment
financed by the Company was $862 and $827 during the three months ended March
31, 2005 and March 31, 2004, respectively. These transactions are recorded as a
sale upon the transfer of title to the purchaser, which generally occurs at the
time of shipment, at an amount equal to the sales price of non-financed sales.
Interest on these notes is accrued as earned and recorded as interest income.
7
Notes receivable consist of the following:
March 31, December 31,
2005 2004
---- ----
Notes receivable, short-term........... $ 2,213 $ 1,764
Notes receivable, long-term............ 1,019 1,496
---------- ---------
Total notes receivable $ 3,232 $ 3,260
========== =========
6. INVENTORIES:
Inventories consist of the following:
March 31, December 31,
2005 2004
---- ----
Finished products.................. $ 5,679 $ 6,489
Work in process.................... 1,994 1,957
Raw materials and supplies......... 2,363 2,496
-------- --------
Total inventories............. $ 10,036 $ 10,942
======== ========
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
March 31, December 31,
2005 2004
---- ----
Land...................................................... $ 1,611 $ 1,611
Buildings and improvements................................ 11,196 11,149
Machinery and equipment................................... 19,162 18,786
Equipment rented to others................................ 5,930 5,952
Construction in progress.................................. 880 997
-------- --------
38,779 38,495
Less: Accumulated depreciation........................... (16,882) (16,358)
-------- --------
Total property, plant and equipment, net....... $ 21,897 $ 22,137
========= =========
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill activity for the quarter is as follows:
Goodwill at December 31, 2004............................. $ 57,415
Adjustments to allocation of purchase price............... 73
--------
Goodwill at March 31, 2005 $ 57,488
Less: Accumulated amortization........................... (4,798)
--------
Total goodwill, net............................ $ 52,690
========
8
During the first quarter of 2004, YI Ventures LLC (a wholly-owned subsidiary)
acquired Healthsonics Corporation for $1,500. The company manufactures and
distributes ultrasonic equipment and solutions. The final allocation of purchase
price resulted in $1,400 of goodwill, which is all deductible for tax purposes,
and $248 of other intangible assets. The final allocation resulted in a $220
increase in goodwill in the first quarter of 2005, which was primarily related
to changes in estimates related to severance liabilities and costs incurred to
consolidate the operations of the business into a pre-existing facility. In
addition, the Company allocated $248 of the purchase price to trademarks, with
an indefinite useful life. The remaining $101 increase in goodwill during the
quarter related to adjustments to the purchase price allocation for the Canadian
operations of Obtura Spartan, which were acquired in November of 2004.
There are no contingent payment obligations outstanding on any of the Company's
acquisitions. There have been no changes in goodwill related to impairment
losses or write-offs due to sale of businesses.
Other intangible assets consist of the following:
As of March 31, 2005
--------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
------ ------------ ------
Amortized intangible assets
License agreements $ 1,200 $ 80 $ 1,120
Core technology 591 40 551
Patents 499 269 230
Product formulas 430 41 389
Customer/supplier 380 96 284
relationships
Non-compete agreements 252 101 151
----------- --------- -----------
Total $ 3,352 $ 627 $2,725
Unamortized intangible assets
Trademarks $ 3,559 3,559
----------- -----------
Total intangible assets $ 6,911 $ 627 $ 6,284
=========== ========= ===========
As of December 31, 2004
-----------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
------ ------------ ------
Amortized intangible assets
License agreements $ 1,200 $ 65 $ 1,135
Core technology 591 32 559
Patents 499 263 236
Product formulas 430 37 393
Customer/supplier 380 86 294
relationships
Non-compete agreements 252 75 177
----------- --------- -----------
Total $ 3,352 $ 558 $ 2,794
Unamortized intangible assets
Trademarks $ 3,311 3,311
----------- -----------
Total intangible assets $ 6,663 $ 558 $ 6,105
=========== ========= ===========
The costs of other intangible assets with finite lives are amortized over their
expected useful lives using the straight-line method. The amortization lives are
as follows: 18 to 20 years for patents, license agreements and core technology,
40 years for product formulations and 5 years for supplier and customer
relationships. Non-compete agreements are amortized over the length of the
9
signed agreement. The weighted average life for amortizable intangible assets is
19 years. Aggregate amortization expense for the three months ended March 31,
2005 and 2004 was $69 and $41, respectively. Estimated amortization expense for
each of the next five years is as follows:
For the year ending 12/31/05 $ 250
For the year ending 12/31/06 215
For the year ending 12/31/07 200
For the year ending 12/31/08 200
For the year ending 12/31/09 200
9. CREDIT ARRANGEMENTS AND NOTES PAYABLE:
The Company has a credit arrangement that provides for an unsecured revolving
credit facility with an aggregate commitment of $50,000. Borrowings under the
arrangement bear interest at rates ranging from LIBOR +1% to LIBOR +2.25% or
Prime to Prime +.5% depending on the Company's level of indebtedness. Commitment
fees for this arrangement range from .15% to .20% of the unused balance. The
agreement is unsecured and contains various financial and other covenants. As of
March 31, 2005 and December 31, 2004, the Company was in compliance with all of
these covenants. The current arrangement expires in September 2007. As of March
31, 2005, and December 31, 2004, there were no borrowings on the Company's
credit arrangement and no capital lease obligations.
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, 2005, and
December 31, 2004, approximately $180 and $205, respectively, of the equipment
financed with various lenders was subject to such recourse. Recourse on a given
loan is generally eliminated by the bank after one year, provided the bank has
received timely payments on that loan. Based on the Company's past experience
with respect to these arrangements, it is the opinion of management that the
fair value of the recourse provided is minimal and not material to the results
of operations or financial position of the Company.
10. COMMON STOCK:
During the three month period ended March 31, 2005, the Company repurchased 25
shares of its Common Stock from various stockholders for $898. The purchases
were financed through cash generated from operations.
11. EARNINGS PER SHARE:
Basic earnings per share (Basic EPS) are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share (Diluted EPS) include the dilutive effect of stock
options and restricted stock, if any, using the treasury stock method. The
following table sets forth the computation of basic and diluted earnings per
share:
10
Three Months Ended
------------------
March 31, 2005 March 31, 2004
-------------- --------------
(unaudited)
Net income....................................... $ 3,470 $ 3,297
Net income from continuing operations......... 3,470 3,281
Net income from discontinued operations....... - 16
Weighted average shares outstanding for basic earnings per share
9,040 9,032
Dilutive effect of stock options and restricted stock 345 426
Weighted average shares outstanding for diluted earnings per
share............................................ 9,385 9,458
Basic earnings per share......................... $ 0.38 $ 0.37
Basic earnings per share from continuing $ 0.38 $ 0.37
operations.....
Basic earnings per share from discontinued operations...... $ 0.00 $ 0.00
Diluted earnings per share.................................... $ 0.37 $ 0.35
Diluted earnings per share from continuing operations...... $ 0.37 $ 0.35
Diluted earnings per share from discontinued operations.... $ 0.00 $ 0.00
12. COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries from time to time are parties to various legal
proceedings arising in the normal course of business. Management believes that
none of these proceedings, if determined adversely, would have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
The Company generally warrants its products against defects and its most
generous policy provides a two-year parts and labor warranty on X-ray machines.
The accrual for warranty costs was $304 and $280 at March 31, 2005 and December
31, 2004, respectively. There were no significant warranty costs during the
three-month period ended March 31, 2005.
13. SUBSEQUENT EVENT:
On April 18, 2005, the Company sold its one-third interest in International
Assembly, Inc., a Texas corporation ("IAI") for an amount which approximates the
carrying value. The transaction will be recorded in the Company's financial
statements for the quarter ended June 30, 2005.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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. We believe 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
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 were 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 pre-acquisition 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.
For larger acquisitions, 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.
12
RESULTS OF OPERATIONS (In thousands, except per share data)
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Net Sales
- ---------
Net sales increased $1,140 or 5.8% to $20,634 in the first quarter of 2005 from
$19,494 in the first quarter of 2004. Sales grew across a variety of the
Company's product lines.
Gross Profit
- ------------
Gross profit was relatively flat, at $10,884 in the first quarter of 2005
compared to $10,888 in the first quarter of 2004. Gross margin decreased to
52.7% of net sales in the first quarter of 2005 from 55.9% in the first quarter
of 2004. The decrease in gross margin was primarily due to overall product mix
as well as temporary operating inefficiencies related to facility consolidation
activities.
Selling, General, and Administrative Expenses
- ---------------------------------------------
SG&A expenses decreased $202 or 3.6% to $5,377 in the first quarter of 2005 from
$5,579 in the first quarter of 2004. The decrease was primarily due to lower
personnel costs relative to the first quarter of 2004.
Income from Operations
- ----------------------
Income from operations increased $198 or 3.7%, to $5,507 in the first quarter of
2005 from $5,309 in the first quarter of 2004. The increase was a result of the
items explained above.
Other Income (Expense), net
- ---------------------------
Other income (expense), net increased $107 to $112 in the first quarter of 2005
from $5 in the first quarter of 2004. This increase was primarily attributable
to less interest expense in the current year associated with no borrowings on
the Company's credit facility during the first quarter of 2005.
Provision for Income Taxes
- --------------------------
Provision for income taxes increased $116 for the first quarter of 2005 to
$2,149 from $2,033 in the first quarter of 2004 as a result of increased pre-tax
income. The effective tax rate of 38.25% in 2005 is consistent with the prior
year rate. Beginning in 2005, the Company believes it will be eligible for
benefits associated with Internal Revenue Code Section 199 (related to the
American Jobs Creation Act of 2004) and will continue to evaluate the effect of
this potential benefit on our effective tax rate.
Liquidity and Capital Resources
Historically, the Company has financed its operations primarily through cash
flow from operating activities and, to a lesser extent, through borrowings under
its credit facility. Net cash flow from operating activities was $4,762 and
$2,637 for the first three months of 2005 and 2004, respectively. Capital
expenditures for property, plant and equipment were $353 and $3,044 for the
first three months of 2005 and 2004, respectively. During the first quarter of
2004, the Company acquired a warehouse and office facility in Corona, California
for approximately $2,800. The building was occupied in April 2004. Consistent
with the Company's historical capital expenditures, future capital expenditures
are expected to include facility improvements, panoramic X-ray machines for the
Company's rental program, production machinery and information systems.
The Company maintains a credit agreement with a borrowing capacity of $50,000
which currently expires in September 2007. The Company expects this agreement to
be extended under similar terms. Borrowings under the agreement bear interest at
rates ranging from LIBOR + 1% to LIBOR + 2.25% or Prime to Prime + .5% depending
on the Company's level of indebtedness. Commitment fees for this agreement range
from .15% to .20% of the unused balance. The agreement is unsecured and contains
various financial and other covenants. As of March 31, 2005 and December 31,
2004, the Company was in compliance with all of these covenants. As of March 31,
2005, there were no outstanding borrowings under this agreement. Management
believes through its operating cash flows as well as borrowing capabilities, the
Company has adequate liquidity and capital resources to meet its needs on a
short and long-term basis.
13
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 $5 and $9 of additional interest expense in the three month
periods ended March 31, 2005 and 2004. Alternatively, a 100 basis point decrease
in interest rates would have reduced interest expense by approximately $5 and $9
in the three month periods ended March 31, 2005 and 2004.
Sales of the Company's products in a given foreign country can be affected by
fluctuations in the exchange rate. However, the Company sells less than 10% of
its products outside of the United States. Of these foreign sales, approximately
99% are denominated in US dollars with the remaining amount denominated in
Canadian dollars. As a result, the Company does not feel that foreign currency
movements have a material impact on its financial statements.
The Company does not use derivatives to manage its interest rate or foreign
exchange rate risks.
Item 4. Controls and Procedures
Our Chief Executive Officer, President, and Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by this
report, that our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934 is accumulated and communicated to our
management, including our Chief Executive Officer, President, and Chief
Financial Officer to allow timely decisions regarding required disclosure and
that the information is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission's rules and
forms. There have been no changes in our internal control over financial
reporting that occurred during the quarterly period ending March 31, 2005 that
have materially affected, or that are reasonably likely to materially affect our
internal control over financial reporting.
14
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES (in 000's except per share amounts) (1)
Total Number Maximum
of Shares Number of
Purchased as Shares that
Total Average Part of May Yet Be
Number of Price Publicly Purchased
Shares Paid per Announced Under the
Period Purchased Share Program Program
------ --------- ----- ------- -------
January 2005 0 $ - 0 440
February 2005 0 $ - 0 440
March 2005 25 $35.27 25 415
Total First Quarter 2005 25 $35.27 25
(1) The share repurchase program authorizing the purchase of up to 500
shares was announced May 6, 2004 and will expire in July 2005.
Item 6. Exhibits
31.1 Certification pursuant to 18 U.S.C Section 1350
as adopted pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.2 Certification pursuant to 18 U.S.C Section 1350 as
adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.3 Certification pursuant to 18 U.S.C Section 1350 as
adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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 2, 2005 /s/ Arthur L. Herbst, Jr.
- ---------------------- ---------------------------------
Date Arthur L. Herbst, Jr.
President
15
/s/ Christine R. Boehning
----------------------------------
Christine R. Boehning
Vice President and Chief Financial
Officer
16