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, 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 April 30, 2004:
9,039,377 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,
2004 2003
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 142 $ 938
Trade accounts receivable, net of allowance for doubtful accounts
of $600 and $641 in 2004 and 2003, respectively ................. 10,492 11,212
Inventories ........................................................ 9,973 9,017
Other current assets ............................................... 3,948 3,403
--------- ---------
Total current assets ............................................ 24,555 24,570
Property, plant and equipment, net ................................... 21,595 19,240
Goodwill ............................................................. 52,775 51,003
Other intangible assets, net ......................................... 5,958 5,824
Other assets ......................................................... 1,004 847
--------- ---------
Total assets .................................................... $ 105,887 $ 101,484
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............................... $ 3,925 $ 2,852
Accounts payable and accrued liabilities ........................... 8,953 9,042
--------- ---------
Total current liabilities ....................................... 12,878 11,894
Deferred income taxes ................................................ 6,627 6,627
Long-term debt, less current maturities .............................. -- --
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 ......................................... 28,297 28,367
Deferred stock compensation ........................................ (850) (935)
Retained earnings .................................................. 74,354 71,426
Common stock in treasury, at cost, 1,122 and 1,157 shares
in 2004 and 2003, respectively ................................... (15,509) (15,985)
--------- ---------
Total stockholders' equity ...................................... 86,382 82,963
--------- ---------
Total liabilities and stockholders' equity ...................... $ 105,887 $ 101,484
========= =========
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,
2004 2003
------- -------
Net sales $20,292 $17,743
Cost of goods sold 9,189 8,411
------- -------
Gross profit 11,103 9,332
Selling, general and administrative expenses 5,768 4,661
------- -------
Income from operations 5,335 4,671
------- -------
Other income, net 5 14
------- -------
Income before provision for income taxes 5,340 4,685
Provision for income taxes 2,043 1,792
------- -------
Net income $ 3,297 $ 2,893
======= =======
Basic earnings per share $ 0.37 $ 0.32
======= =======
Diluted earnings per share $ 0.35 $ 0.31
======= =======
Basic weighted average shares outstanding 9,032 8,930
======= =======
Diluted weighted average shares outstanding 9,458 9,325
======= =======
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,
2004 2003
------- -------
Cash flows from operating activities:
Net income $ 3,297 $ 2,893
------- -------
Adjustments to reconcile net income to net cash flows from
operating activities --
Depreciation and amortization 719 667
Loss on disposal of property, plant and equipment 106 --
Changes in assets and liabilities --
Trade accounts receivable 674 2,081
Inventories (653) 654
Other current assets (531) (10)
Other assets (362) --
Accounts payable and accrued liabilities (613) (1,361)
------- -------
Total adjustments (660) 2,031
------- -------
Net cash flows from operating activities 2,637 4,924
------- -------
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired (1,500) --
Purchases of property, plant and equipment (3,044) (392)
------- -------
Net cash flows from investing activities (4,544) (392)
------- -------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt 4,007 339
Payments on long-term debt (2,934) (4,518)
Proceeds from stock options exercised 407 563
Payment of cash dividend (369) --
------- -------
Net cash flows from financing activities 1,111 (3,616)
------- -------
Net increase (decrease) in cash and cash equivalents (796) 916
Cash and cash equivalents, beginning of period 938 554
------- -------
Cash and cash equivalents, end of period $ 142 $ 1,470
======= =======
The accompanying notes are an integral part of these statements.
4
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 months ended March 31, 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 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, 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 intercompany 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 our shipping terms are customarily
FOB shipping point. Revenue from the rental of equipment to others is recognized
on a month-to-month basis as the revenue is earned. The Company generally
warrants its products against defects and its most generous policy provides a
two-year parts and labor warranty on X-ray machines. The policy with respect to
sales returns generally provides that a customer may not return inventory except
at the Company's option with the exception of X-ray machines, which have a
90-day return policy. The Company owns X-ray equipment rented on a
month-to-month basis to customers. A liability for the removal costs of the
rented X-ray machines is capitalized and amortized over four years. A liability
for the removal costs of the purchased X-ray machines expected to be returned to
the Company is included in accounts payable and accrued liabilities at March 31,
2004 and December 31, 2003.
5
SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from operating activities include $589 and $34 for the payment of
federal and state income taxes and $20 and $15 for the payment of interest for
the three months ended March 31, 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 March 31, 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 Employee," and related interpretations in accounting for the Plan.
Accordingly, no compensation cost has been recognized for grants made under the
Plan, all of which are made at the exercise prices that are not less than the
fair value of the underlying stock on the date of grant. Had compensation costs
for the Plan been determined based upon the fair value of the options at the
grant date consistent with the methodology prescribed under SFAS No. 123, the
Company's net income and earnings per share would approximate the pro forma
amounts below:
Three Months Ended
March 31,
------------------------------
2004 2003
(Unaudited)
Net income, as reported .................. $ 3,297 $ 2,893
Less: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects ...................... (179) (215)
Pro forma net income ..................... $ 3,118 $ 2,678
Earnings per share:
Basic - as reported .................... $ 0.37 $ 0.32
Basic - pro forma ...................... $ 0.35 $ 0.30
Diluted - as reported .................. $ 0.35 $ 0.31
Diluted - pro forma .................... $ 0.33 $ 0.29
Amounts included in determination of net
income:
Restricted stock compensation .......... $ 52 $ 52
4. SEGMENT INFORMATION:
Segment information has been prepared in accordance with Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company has two operating segments
according to SFAS No. 131: professional and retail. The professional segment
sells products used by dentists, dental hygienists and dental assistants. The
retail segment sells products to consumers through mass merchandisers. There are
no significant determinable assets or interest costs for the retail segment.
6
The table below is a summary of certain financial information relating to the
two segments:
THREE MONTHS ENDED
MARCH 31, 2004
-----------------------------------------------
PROFESSIONAL RETAIL TOTAL
------------ ------ -----
Net sales.................... $ 19,494 $ 798 $ 20,292
Income from operations....... $ 5,309 $ 26 $ 5,335
THREE MONTHS ENDED
MARCH 31, 2003
-----------------------------------------------
PROFESSIONAL RETAIL TOTAL
------------ ------ -----
Net sales.................... $ 16,771 $ 972 $ 17,743
Income from operations....... $ 4,738 $ (67) $ 4,671
5. NOTES RECEIVABLE:
During the normal course of business, the Company occasionally issues notes for
equipment purchases by customers. The equipment is used to secure the note.
Notes receivable consist of the following:
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Notes receivable, short-term........... $ 976 $ 746
Notes receivable, long-term............ 537 364
-------- ---------
Total Notes Receivable $ 1,513 $ 1,110
======== =========
6. INVENTORIES:
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2004 2003
---------- ---------
Finished products................ $ 6,097 $ 5,178
Work in process.................. 1,307 1,327
Raw materials and supplies....... 2,569 2,512
-------- ---------
Total inventories........... $ 9,973 $ 9,017
======== =======
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
7
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Land................................................................. $ 1,686 $ 1,086
Buildings and improvements........................................... 10,026 7,585
Machinery and equipment.............................................. 17,862 17,813
Equipment rented to others........................................... 6,049 6,011
Construction in progress............................................. 858 1,199
--------- ---------
36,481 33,694
Less: Accumulated depreciation...................................... (14,886) (14,454)
-------- --------
Total property, plant and equipment, net.................. $ 21,595 $ 19,240
========= ==========
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill consists of the following:
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Goodwill............................................................. $ 57,573 $ 55,801
Less: Accumulated amortization...................................... (4,798) (4,798)
----------- ------------
Total goodwill, net....................................... $ 52,775 $ 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. 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, which are all included in the
Professional Segment:
AS OF MARCH 31, 2004
--------------------
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
License agreements $1,200 $ 21 $1,179
Core Technology 591 9 582
Patents 497 238 259
Product formulas 430 30 400
Supplier relationships 130 71 59
Covenant not to compete 175 4 171
------ ------ ------
Total $3,023 $ 373 $2,650
Unamortized intangible assets
Trademarks $3,308 3,308
----- ------
Total intangible assets $6,331 $ 373 $5,958
8
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: 20 years for license agreements and core technology, 18 to 20 years
for patents, 40 years for product formulations, 5 years for supplier
relationships and 7 years for covenants not to compete. The weighted average
life for amortizable intangible assets is 22 years. Aggregate amortization
expense for the three months ended March 31, 2004 and 2003 was $41 and $15,
respectively. Estimated amortization expense for each of the next five years is
as follows:
For the year ending 12/31/04 $ 152
For the year ending 12/31/05 152
For the year ending 12/31/06 139
For the year ending 12/31/07 126
For the year ending 12/31/08 126
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 $40,000. 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 .25% of the unused balance. The
agreement is unsecured and contains various financial and other covenants. As of
March 31, 2004 and December 31, 2003, the Company was in compliance with all of
these covenants. The current arrangement expires in September 2004.
Long-term debt was as follows:
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Revolving credit facility due 2004 with a weighted-average interest
rate of 3.28% at March 31, 2004 $ 3,877 $ 2,784
Capital lease obligations 48 68
--------- ----------
Current maturities of debt $ 3,925 $ 2,852
========= ==========
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, 2004, and
December 31, 2003 approximately $519 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
9
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. EARNINGS PER SHARE:
Basic earnings per share (Basic EPS) are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share (Diluted EPS) include the dilutive effect of stock
options and restricted stock, if any, using the treasury stock method. The
following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED
------------------
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
(unaudited)
Net income ............................ $3,297 $2,893
Weighted average shares outstanding for
basic earnings per share .............. 9,032 8,930
Dilutive effect of stock options and
restricted stock ...................... 426 395
Weighted average shares outstanding for
diluted earnings per share ............ 9,458 9,325
Basic earnings per share .............. $ .37 $ .32
Diluted earnings per share ............ $ .35 $ .31
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 $181 and $178 at March 31, 2004 and December
31, 2003, respectively. There were no significant warranty costs during the
three-month period ended March 31, 2004.
10
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 can not 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.
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.
11
RESULTS OF OPERATIONS (In thousands, except per share data)
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
NET SALES
- ---------
Net sales increased $2,549 or 14.4% to $20,292 in the first quarter of 2004 from
$17,743 in the first quarter of 2003. Sales of professional products increased
16.2% to $19,494, primarily due to the acquisition of Obtura Spartan, completed
in December 2003. Obtura Spartan contributed approximately $2,200 in sales in
the first quarter of 2004. Retail sales declined $174, or 17.9% to $798, in the
first quarter of 2004 from $972 in the first quarter of 2003.
GROSS PROFIT
- ------------
Gross profit increased $1,771 or 19.0%, to $11,103 in the first quarter of 2004
from $9,332 in the first quarter of 2003. The increase in gross profit was
primarily a result of the acquisition of Obtura Spartan. Gross margin increased
to 54.7% of net sales in the first quarter of 2004 from 52.6% in the first
quarter of 2003. The increase in gross margin was primarily due to overall
product mix as well as improved operating efficiencies.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
- ---------------------------------------------
SG&A expenses increased $1,107 or 23.8% to $5,768 in the first quarter of 2004
from $4,661 in the first quarter of 2003. The increase was primarily due to the
acquisition of Obtura Spartan. SG&A expenses, as a percent of net sales,
increased to 28.4% in 2004 from 26.3% in 2003. This change was largely the
result of the acquisition of Obtura Spartan as well as an increase in operating
expenses consistent with the growth of the Company.
INCOME FROM OPERATIONS
- ----------------------
Income from operations increased $664 or 14.2%, to $5,335 in the first quarter
of 2004 from $4,671 in the first quarter of 2003. The increase was a result of
the items explained above.
OTHER INCOME (EXPENSE), NET
- ---------------------------
Other income (expense), net decreased $9 to $5 in the first quarter of 2004 from
$14 in the first quarter of 2003. This decrease was primarily attributable to
the interest expense associated with a higher level of borrowings on the
Company's credit facility in the first quarter of 2004.
PROVISION FOR INCOME TAXES
- --------------------------
Provision for income taxes increased $251 for the first quarter of 2004 to
$2,043 from $1,792 in the first quarter of 2003 primarily as a result of
increased pre-tax income. The effective tax rate of 38.25% in 2004 is consistent
with the prior year 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 $2,637 and
$4,924 for the first three months of 2004 and 2003, respectively. Capital
expenditures for property, plant and equipment were $3,044 and $392 for the
first three 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.
The Company maintains a credit agreement with a borrowing capacity of $40,000
which currently expires in September 2004. 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 .25% of the unused balance. The agreement is unsecured, containing
various financial and other covenants. As of March 31, 2004 and December 31,
2003, the Company was in compliance with all of these covenants. As of March 31,
2004, there were $3,877 in 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.
12
FORWARD-LOOKING STATEMENTS
Investors are cautioned that this report as well as other reports and oral
statements by Company officials may contain certain forward-looking statements
as defined in the Private Securities Litigation and Reform Act of 1995.
Forward-looking statements include statements which are predictive in nature,
which depend upon or refer to future events or conditions and which include
words such as "expects", "anticipates", "intends", "plans", "believes",
"estimates" or similar expressions. These statements are not guaranties of
future performance and the Company makes no commitment to update or disclose any
revisions to forward-looking statements, or any facts, events or circumstances
after the date hereof that may bear upon forward-looking statements. Because
such statements involve risks and uncertainties, actual actions and strategies
and the timing and expected results thereof may differ materially from those
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, those disclosed in the Company's
Annual Report on Form 10-K and other reports filed with the Securities and
Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign exchange rates. From time to time, the
Company finances acquisitions, capital expenditures and its working capital
needs with borrowings under a revolving credit facility. Due to the variable
interest rate feature on the debt, the Company is exposed to interest rate risk.
A theoretical 100 basis point increase in interest rates would have resulted in
approximately $9 of additional interest expense in both three month periods
ended March 31, 2004 and 2003. Alternatively, a 100 basis point decrease in
interest rates would have reduced interest expense by approximately $9 in the
three month periods ended March 31, 2004 and 2003.
Sales of the Company's products in a given foreign country can be affected by
fluctuations in the exchange rate. However, the Company sells less than 10% of
its products outside of the United States. Of these foreign sales, approximately
97% are denominated in US dollars with the remaining 3% denominated in Canadian
dollars. As a result, the Company does not feel that foreign currency movements
have a material impact on its financial statements.
The Company does not use derivatives to manage its interest rate or foreign
exchange rate risks.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation as of the end of the period covered by this report, that our
disclosure controls and procedures are effective in all material respects to
ensure that information required to be disclosed in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There have been no significant changes in
our internal controls over financial reporting or in other factors that could
significantly affect these controls subsequent to the date of the previous
mentioned evaluation.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Executive Officer 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
(b) Reports on Form 8-K.
The Company filed a Form 8-K on February 4, 2004 announcing
results for the fourth quarter 2003 and year ended December
31, 2003 and declaring 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.
May 7, 2004 /s/ Arthur L. Herbst, Jr.
- ---------------------- -----------------------------------------
Date Arthur L. Herbst, Jr.
Executive Vice President, Chief Operating
Officer, & Chief Financial Officer
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