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Young Innovations 10-K 2010
y48794_10k2009.htm

 
 

 


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
(Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2009
or
[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.

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 or organization)
(I.R.S. Employer Identification No.)
   
13705 Shoreline Court East,
63045
Earth City, Missouri
(Zip Code)
(Address of principal executive offices)
 

Registrant's telephone number, including area code:314-344-0010

Securities registered pursuant to Section 12(b) of the Act:
 
 
Common Stock, $0.01 par value per share
The Nasdaq Stock Market LLC
(Title of class)
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]
 
 
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 had submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):  Large accelerated filer  [ ]  Accelerated filer  [X]  Non-accelerated filer  [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]

The aggregate market value of the registrant's Common Stock held by non-affiliates based on The Nasdaq Global Select Market closing price as of June 30, 2009 (the last business day of the registrant's most recently completed second fiscal quarter), was approximately $109 million. (For purposes of this calculation only, directors and executive officers have been deemed affiliates.)

Number of shares outstanding of the registrant's Common Stock at February 28, 2010:

7,974,261 shares of Common Stock, $0.01 par value per share

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed for its 2009 Annual Meeting of Stockholders (the “2009” Proxy Statement”) are incorporated by reference into Part III of this Report.
 
 

 

TABLE OF CONTENTS
PART I
 
Item 1. Business
 
Item 1A. Risk Factors
 
Item 1B. Unresolved Staff Comments
 
Item 2. Properties
 
Item 3. Legal Proceedings
 
Item 4. Reserved
PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Item 6. Selected Financial Data
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
Item 8.  Financial Statements and Supplementary Data
 
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
Item 9A. Controls and Procedures
 
Item 9B. Other Information
PART III
 
Item 10. Directors, Executive Officers and Corporate Governance
 
Item 11. Executive Compensation
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13. Certain Relationships and Related Transactions, and Director Independence
 
Item 14. Principal Accountant Fees and Services
PART IV
 
Item 15. Exhibits and Financial Statement Schedules


 
2

 


PART I

Item 1. Business (All $ amounts are noted in thousands).
 
General Overview
 
Young Innovations, Inc. and its subsidiaries (“the Company”) develops, manufactures and markets supplies and equipment used by dentists, dental hygienists, dental assistants and consumers.  The Company's product offering includes disposable and metal prophylaxis (“prophy”) angles, prophy cups and brushes, dental micro-applicators, panoramic X-ray machines, moisture control products, infection control products, dental handpieces (drills) and related components, endodontic systems, orthodontic toothbrushes, flavored examination gloves, children's toothbrushes, and children's toothpastes.
 
The Company’s manufacturing and distribution facilities are located in Missouri, Illinois, California, Indiana, Texas, Wisconsin and Ireland.
 
The Company markets its products primarily in the U.S.  The Company also markets its products in several international markets, including Canada, Europe, South America, Central America and the Pacific Rim.  International sales represented approximately 17% of the Company’s total net sales in 2009.
 
The Company is a Missouri corporation with its corporate headquarters located at 13705 Shoreline Court East, Earth City, Missouri 63045, in the St. Louis, Missouri metropolitan area; its telephone number is (314) 344-0010.  The telephone number for investor relations is (312) 644-4174.
 
Background
 
The Company was founded as Young Dental in the early 1900s.  As one of many small suppliers to the dental profession, Young Dental’s strength was manufacturing consistently reliable dental products.  As dentistry evolved, Young Dental employees worked with practicing dentists and academics to identify clinical problems.  Young Dental staff used their engineering and manufacturing expertise to create solutions to those problems.  Young Dental established a strong reputation and leading market position in disposable and metal prophy angles, the core products utilized by the dentist in the typical biannual teeth cleaning treatment.
 
In 1995, following the acquisition of The Lorvic Corporation, the Company incorporated as Young Innovations, Inc. in the state of Missouri.  Since then, the Company has acquired a number of complementary businesses, and introduced a variety of new products.  Through these acquisitions and new product introductions, the Company has expanded its preventive and infection control product offerings, and entered a number of new product areas, including dental diagnostic imaging, handpieces, home care products, and endodontics.  The Company believes its continued commitment to providing innovative products to meet the evolving needs of dental professionals has earned it a reputation for quality, reliability and value.
 
Business Strategy
 
The key elements of the Company’s strategy are:
 

·  
Enhance and Expand Customer Relationships.  Enhancing and expanding customer relationships are fundamental components of the Company’s strategy.  By understanding and responding to the needs of distributors, clinicians and patients, the Company seeks to serve a broader customer base by extending the reach of its existing products to new customers and new markets.
·  
Improve Operating Efficiency.  The Company strives to reduce costs and rationalize expenses across its operations in an effort to maximize profitability and better serve its customers.  In order to realize operating efficiencies, the Company seeks cost savings through manufacturing and process improvements, administrative and marketing synergies, and strategic facility consolidations.
·  
New Product Development and Acquisitions.  The Company brings products to market through two methods: internal product development and acquisitions. Internal product development focuses on evolutionary changes to its existing product lines to enhance patient care, increase patient comfort and improve practice productivity. The Company has typically entered new product categories through acquisitions. The Company intends to pursue acquisition opportunities that increase the breadth of its product and service offerings, enable entrance into attractive new markets, and enhance the growth and profitability of the business. The Company continually evaluates acquisition opportunities and has a proven track record of successfully acquiring and integrating acquired businesses. The following table provides a summary of the Company’s acquisition history:

 

3

 
Select Acquisitions
 
Company Name
 
Acquisition Year
 
Key Product Additions
The Lorvic Corporation
1995
Infection control products
Denticator International, Inc.
1996
Popular-priced disposable prophy angles
Panoramic Corporation
1998
Panoramic X-ray equipment and supplies
Athena Technology, Inc.
1999
Dental handpieces and related components
Plak Smacker, Inc.
2000
Home care products and flavored gloves
Biotrol and Challenge
(subsidiaries of Pro-Dex, Inc.)
2001
Infection control products, prophy pastes and other preventive products
Obtura Corporation &
Earth City Technologies, Inc.
2003
Endodontic products
D&N Microproducts, Inc.
2006
Panoramic X-ray equipment
Microbrush, Inc. and Microbrush International Ltd.
2006
Dental micro-applicators
 
Products
 
The Company’s $97,737 in sales for 2009 was derived from the manufacture and distribution of the products described below.  The Company offers many different products which fall within one of two general categories; consumables and diagnostics.  Consumables consist of preventive, infection control, micro-applicators, home care and endodontic products.  Diagnostics consist of X-ray machines and supplies.  Revenue from consumables was $88,381, $87,432 and $83,376 for 2009, 2008 and 2007, respectively.  Revenue from diagnostics was $9,356, $11,711 and $14,026 for 2009, 2008 and 2007, respectively.
 
Consumables:
 
 
·  
Prophy Angles.  The Company offers a broad line of prophy products.  The prophy angle, in combination with prophy paste, is used in the typical biannual teeth cleaning treatment that helps remove plaque and polishes teeth.  The Company offers a variety of pre-assembled Classic and Contra disposable prophy angles with cups or brushes attached under both the Young Dental (premium-priced) and Denticator (popular-priced) brand names, as well as through private-label relationships.  The Company believes it is a leading U.S. manufacturer and distributor of disposable prophy angles, with its extensive line of prophy products that suit the wide variety of customer needs and desires.

The Company also offers metal prophy angles, which are sealed to help prevent damage to the internal components of the angle and help it withstand repeated sterilizations.  The metal prophy angles are marketed together with an assortment of cups and brushes specifically designed to work together, which encourages recurring purchases of these products.
 
·  
Prophy pastes.  D-Lish, Festival and ProCare are some of the brand names of the Company’s prophy pastes.   Most pastes are available in a variety of textures (grits) and flavors, and some are sold in powder form.  Important functional features of prophy paste include stain removal, flavor and splatter control.
 
4

·  
Fluorides.  The Company has a variety of flavors of fluorides in gel formulation.   Fluorides are used to help prevent tooth decay.
 
·  
Handpieces and components.  Under the Athena Champion and Denticator brand names, the Company manufactures and markets low and high-speed dental handpieces.  Handpieces are used for teeth-cleaning and during restorative procedures, including removing decay during cavity preparation procedures.  The Company also provides repair and maintenance services for handpieces.
 
·  
Moisture control.  The Company offers a variety of moisture control products, including Dri-Aid and Surg-O-Vac, used to remove and absorb saliva or liquids during a variety of common dental procedures.

 
·  
Surface disinfectants.  Surface disinfectants are used to clean surfaces in the dental operatory, such as a dental chair or countertop that may be contaminated with bioburden (microorganisms).  The Company offers products that are used to clean and disinfect these surfaces under the brand names BIREX SE and Opti-Cide 3.  BIREX SE, one of the leading liquid surface disinfectants in the U.S. dental market, is a one-step chemistry that cleans and disinfects.  BIREX SE is a concentrate that is mixed by the user with tap water and is cost-effective and easy to store.  Opti-Cide 3 is a ready-to-use disinfectant with a quick microbial kill time available in liquid and wipe forms.
 
·  
Evacuation system cleaners.  The evacuation system is designed to remove debris from the patient’s mouth during a dental procedure.  Vacusol and NeutraVac, the Company’s evacuation system cleaners, remove debris that collects in the evacuation line.  When used with the Company’s atomizer, the solution is mixed with room air and flows through the evacuation lines.  Due to the unique air/liquid solution, the stress on the vacuum pump used in the evacuation system is minimized, which helps to extend pump life.
 
·  
Gloves and masks.  The Company offers many types of gloves, including latex, non-latex and powder-free gloves for dental professionals.  Flavored gloves, including cherry and grape, are often used by pediatric dentists to help provide a more positive, enjoyable experience for their younger patients.  Masks are used as a barrier by dental professionals.
 
·  
Ultrasonic cleaning systems.  The Company, under the Healthsonics and Purit brand names, manufactures and markets a line of ultrasonic cleaning systems primarily used to clean and disinfect dental hand instruments.  The Company also sells a line of solutions and accessories that are used in connection with these systems.
 
·  
Instrument disinfectants.  The Company offers a full line of solutions designed for disinfecting dental instruments, including Multicide Ultra and Biozyme LT.  Certain of these cleaners may also be used with ultrasonic cleaners.
 
 
 
·  
Home care kits.  These kits are given to patients to encourage good oral healthcare habits and contain products such as brushes, wax to protect the inside of the cheek from irritation due to brackets, a timer to monitor brushing time and floss.
 
·  
Toothbrushes.  The Company offers a broad line of toothbrushes for many age groups, including infants, children, teens and adults.  The Company also markets an “all-in-one” brush for patients with braces.  One end of the brush is a standard toothbrush, while the other end features a conical brush designed for access between brackets.
 
Endodontic.  >The Company sells endodontic products under the Obtura and Spartan brand names.  Endodontics is the part of dentistry associated with the treatment of tooth root, dental pulp and surrounding tissue.  The most common therapy in endodontics is the root canal procedure, which involves removing the organic root canal tissue and then filling the empty canal with gutta percha, a rubber-like filling material.  Endodontic procedures are performed by both general dentists and specialists (endodontists).  The Company’s endodontic products include:
 
5

·  
Obturation.  The Obtura family of endodontic units is gun-type, heat-softened gutta percha delivery systems.  This unique dispensing unit allows the dentist to deliver a consistent flow of warm gutta percha directly into the canal, similar to extruding hot glue from a glue gun, facilitating the canal-filling procedure.   Additionally, the Obtura systems help practitioners effectively seal the canal, which is an important component of the root canal procedure.
 
·  
Ultrasonic systems.  Under the Spartan brand name, ultrasonic scaling units and handpieces are marketed together with a variety of tips for different clinical applications. BUCtm tips are used for, among other things, gaining and refining access to the tooth root, while CPRtm tips are more often used in retreatment cases.  KiStm tips, used for microsurgery, offer a rough diamond coating for improved cutting.  The Company also offers additional ultrasonic tips for use in periodontal applications.

Diagnostics:

The Company markets panoramic dental X-ray systems and supplies in the U.S. under the Panoramic brand name.  The Company’s diagnostic products include:
 
·  
Digital Imaging.  The Company offers two direct digital products.  The PC-4000 is an integrated digital panoramic imaging system which produces a high-quality image of the entire dental arch.    The 1000-DR, a cost-effective digital sensor kit, converts a film-based x-ray machine with a cephalometric attachment.  The cephalometric attachment is a positioning device that allows for repeated images of a patients mouth and skull in the same position over time.  This feature is important for diagnosis and treatment planning for orthodontists and oral surgeons.  The PC-1000 can be converted to a digital format in the field.
 
·  
Film X-ray.  The Company offers two analog or film-based products.  The PC-1000 is a fully-equipped panoramic X-ray machine which produces a high-quality, single-film image of the entire mouth.  The PC-1000/Laser-1000 provides full-mouth panoramic radiographs and cephalometric images that display the patient’s anterior skull profile allowing additional diagnosis and treatment planning for orthodontics and TMJ syndrome.
 
·  
Rental Program and Services.  The Company offers a program for dental practices to install and pay for a film type panoramic machine for a per-image fee.  As a result, dentists can obtain a relatively expensive piece of equipment without significant capital outlay.  In addition, the dentist has the option to purchase the equipment at a depreciated price during the rental period.  The rental program generates an inventory of used equipment that is factory refurbished and re-sold to dental offices.  The Company also offers service on all its panoramic X-ray systems through a network of more than 200 independent nationwide technicians.
 
·  
Supplies and Accessories.  The Company offers its customers dental X-ray supplies, including film, film cassettes and intensifying screens, processing chemicals, and darkroom supplies.

 
Sales and Marketing of Professional Products
 
The Company markets its preventive, micro-applicator and infection control products to dental professionals worldwide primarily through a network of non-exclusive relationships with dental product distributors. All major distributors of dental products in North America sell the Company's products, including Henry Schein, Inc. and Patterson Companies, Inc., which accounted for 15.5% and 15.2%, respectively, of the Company's sales in 2009.  In addition to marketing through distributors in the U.S., the Company sells products directly to dental providers and dental hygiene schools, Veterans Administration healthcare facilities, and U.S. military bases.
 
The Company actively supports its distributor relationships with Company sales personnel and independent sales representatives in the U.S. and Canada as well as in countries outside of North America.  These sales representatives educate the Company’s distributors about the quality, reliability and features of its products.  The Company also advertises its products through industry publications.  To supplement its other marketing efforts, the Company provides product samples to dental professionals and exhibits its products at industry trade shows.  In addition, the Company seeks to generate interest in its products by providing information and marketing materials to influential lecturers and consultants in the dental industry.
 
The Company’s diagnostic, home care, endodontic and certain infection control products are marketed in the U.S. and Canada directly to the end user, primarily by direct mail, telemarketing, trade shows, and a limited amount of advertising in trade and professional journals.  The Company also sponsors seminars hosted by industry thought leaders.

6

Product Development
 
The Company’s engineers and chemists are focused on developing innovative professional dental products and are actively involved in improving the Company’s manufacturing processes.  Frequently, these products are designed and developed in response to needs articulated to the Company by dental professionals.  For example, the Company designed a short prophy cup for its line of prophy angles to allow for easier access to the back of the patient’s mouth.  The Company holds various patents and trademarks but does not consider its business to be materially dependent upon any individual patent or trademark.
 
Our commitment to internally-developed products requires an investment of resources.  The Company incurred research and development costs which are expensed as incurred totaling $797, $796 and $738, for 2009, 2008 and 2007, respectively.
 
The Company seeks to acquire product lines to strengthen its market presence.  During the first quarter of 2009, the Company acquired the rights to distribute a product line which expands our infection control offerings.  
 

The Company manufactures most of its products and product components other than certain infection control products, fluorides, children’s home care products, orthodontic kits and related supplies, and examination gloves.

Prophy and Related Products. The Company manufactures prophy and related products in its Earth City, Missouri, and Brownsville, Texas facilities.  The primary processes involved in manufacturing the Company's prophy and related products include precision metal turning and milling, rubber molding, plastic injection molding, component parts assembly and finished goods packaging.  In these processes, the Company uses a variety of computer numerically controlled (CNC) machining centers, injection molding machines and robotic assembly machines, and continues to invest in new and more efficient equipment and production lines.

Pastes. The Company blends and mixes all of its pastes at the Earth City, Missouri facility. The Company also owns equipment used to form and die-cut expanded polyethylene foam and extruded plastic into packaging materials, and equipment used to package its products in a variety of container sizes, including prophy paste in unit-dose containers.

Micro-applicators.  The Company manufactures micro-applicators and related products in its Grafton, Wisconsin and Dungarvan, Ireland facilities.  The primary processes involved in the manufacture of these products include plastic injection molding, application of adhesive and flocking, and packaging of finished goods.  The Company uses injection molding machines and robotic assembly machines in these manufacturing processes.

Handpieces and Components.  The Company uses a variety of CNC machines to manufacture a number of the components required to produce its high-speed and low-speed handpieces in its Earth City, Missouri facility.  Certain other handpiece component parts are sourced from a variety of Original Equipment Manufacturers (OEMs).  The Company assembles and provides repair services for its handpieces in its Earth City, Missouri facility.

Infection Control Products. The Company manufactures and packages a variety of infection control products, sterilants and cleaners, at the Earth City, Missouri facility.  Additionally, certain of the Company’s infection control products are sourced from domestic manufacturers.

Diagnostic Equipment. Diagnostic equipment is manufactured and assembled at the Company’s premises in Fort Wayne, Indiana.  The Company also manufactures its own diagnostic generators, a critical system component in our units.  Additionally, the Company sources sensors for its digital diagnostic equipment from an international manufacturer.

Home Care Products.  The Company sources most of its home care kit components, toothbrushes, and examination gloves from manufacturers in Asia, principally China, Taiwan, Malaysia, India and Vietnam.  Certain other toothbrush and toothpaste products are sourced from domestic manufacturers.

Endodontic Products.  Obturation and ultrasonic systems are manufactured at the Earth City, Missouri facility.  A variety of components and subassemblies are sourced domestically.

7

Supply. The Company purchases a wide variety of raw materials, including bar steel, brass, rubber and plastic resins from numerous suppliers. The majority of the Company's purchases are commodities readily available at competitive prices. The Company also purchases certain additional miscellaneous products from other manufacturers for resale.
 
Competition
 
The markets for the Company’s products are highly competitive.  The Company believes that the principal competitive factors in all of its markets are product features, reliability, name recognition, established distribution network, customer service and, to a lesser extent, price.  The relative speed with which the Company can develop, complete testing, obtain regulatory approval and sell commercial quantities of new products is also an important competitive factor.  Some of the Company’s competitors have greater financial, research, manufacturing, and marketing resources than the Company.  The Company’s competitors include: DENTSPLY International Inc.; Danaher Corporation; John O. Butler Company; Instrumentarium; Planmeca OY; StarDental, a division of DentalEZ Group; Procter and Gamble Co. and Colgate-Palmolive Co.
 
The Company competes with manufacturers of both branded and private-label dental products.  The Company believes it is a leading U.S. manufacturer or distributor of prophy angles and cups, liquid surface disinfectants, dental micro-applicators and obturation units designed for warm, vertical condensation.

FDA Regulation

The Company’s products are subject to regulation by, among other governmental entities, the U.S. Food and Drug Administration (“FDA”).    To the extent the products are marketed abroad, they are also subject to government regulation in the various foreign countries in which the products are produced or sold.  Some of these regulatory requirements and penalties for non compliance are more stringent than those applicable in the United States.  They also vary from country to country.

Medical Device Regulation.  Pursuant to the Federal Food, Drug, and Cosmetic Act (“Act”), and the FDA’s implementing regulations, FDA regulates the development, manufacture, sale, and distribution of medical devices, including their introduction into interstate commerce, as well as their testing, labeling, packaging, marketing, distribution, recordkeeping and reporting.  In general, if a dental device is subject to FDA regulation, compliance with the FDA requirements constitutes compliance with corresponding state regulations through some states may have additional licensure and other requirements and may conduct inspections of facilities on behalf of or in addition to inspections by the FDA.  Medical devices are classified for FDA regulatory purposes as Class I, Class II or Class III, depending on the degree of control necessary to provide a reasonable assurance of safety and effectiveness for the labeled use.  Currently, the Company’s dental device products are classified as either Class I or Class II devices.  Class I devices are subject to "general controls," such as labeling, good manufacturing practices (GMP), and a prohibition against adulteration and misbranding.  Class II devices are subject to general and "special controls," including premarket notification (510(k)), and other general and device-specific requirements.  All of the Company’s dental device products are subject to ongoing regulatory oversight by the FDA to ensure compliance with, among other things, product labeling, GMP/quality system regulation (QSR), recordkeeping, and medical device (adverse reaction) reporting requirements.  The Company’s medical imaging products as well as other products that emit radiation is also subject to additional FDA requirements for radiation safety.  The Company’s facilities are further subject to periodic inspection by the FDA, as well as state and local agencies.  Failure to satisfy FDA requirements can result in FDA enforcement actions, including product seizure, injunction, fines and civil penalties and/or criminal or civil proceedings.  In the medical device arena, the FDA may also request repair, replacement, or refund of the cost of any medical device manufactured or distributed by the Company.  The Company is also subject to state and local enforcement action and/or penalties, which may be greater than those imposed by the Act.

Drug Regulation.  The Company also markets drug products, such as fluorides, which are subject to regulation by the FDA and the counterpart agencies of the foreign countries where the products are sold.  The FDA regulates the development, manufacture, sale, and distribution of drugs, including their introduction into interstate commerce as well as their testing, labeling, packaging, marketing, distribution, recordkeeping and reporting.  In general, unless a drug product falls within an over-the-counter (OTC) monograph, is generally recognized as safe and effective for the labeled use, or is entitled to grandfather status, the drug must be approved by FDA pursuant to an approved new drug application before it may be legally marketed.  Drugs are also subject to post approval requirements such as adverse event reporting, record keeping and reporting requirements, cGMP manufacturing, advertising and promotion requirements.  Manufacturing facilities are subject to periodic and for cause inspections by FDA for compliance with FDA requirements.  The Company also operates as a wholesale prescription drug distributor in some states and is required to be licensed by individual states, subject to minimum FDA requirements and additional state requirements.  Failure to comply with the FDA’s drug regulatory requirements can result in issuance of an FDA Form 483 Inspectional Observations, Warning Letter, and/or other civil or criminal enforcement action or penalty.  The Company is also subject to state and local enforcement action and/or penalties, which may be greater than those imposed by the Act.

8

Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA)

Certain of our infection prevention products are classified as pesticides and are subject to regulation by the United States Environmental Protection Agency (EPA) under FIFRA, and by various state agencies under the laws of those states.  Generally, under FIFRA and state law, no one may sell or distribute a pesticide unless it is registered with the EPA and each state in which the product is sold.  Registrations must be renewed annually.  Registration includes approval by the EPA of the product’s label, including its claims and directions for use, which must be supported by data.  EPA or states may at any time require additional testing to determine whether a pesticide could cause adverse effects on the environment, including people, and whether it is efficacious.  The pesticide laws also require registrants to report adverse effects associated with their products to the EPA and the corresponding state agency.  Failure to pay annual registration fees or to provide necessary testing data, or new information regarding adverse effects of product, as well as other conduct, could result in fines and/or the suspension or cancellation of a pesticide registration.  The Company’s facilities are subject to periodic inspection by the EPA, as well as state and local agencies.  Failure to satisfy EPA requirements can result in EPA enforcement actions, including stop sale, use or removal orders, fines and civil penalties and/or criminal or civil proceedings.  The Company is also subject to state and local enforcement action and/or penalties, which may be greater than those imposed by FIFRA.

Environmental, Health and Safety Matters

Our operations involve production processes and the use and handling of materials that are subject to federal, state, and local environmental laws and regulations relating to, among other things, solid and hazardous waste disposal, air emissions, and waste water discharge.  We are also required to comply with federal and state laws and regulations relating to occupational health and safety.  If violations of any of these laws and regulations occur, or if toxic or hazardous materials are released into the environment as a result of our operations, the Company could be exposed to significant liability.

The Company believes it is in compliance in all material respects with respect to the laws and regulations applicable to it and its operations.
 
Other

During the second quarter, The Company renewed its credit agreement which reduces the borrowing capacity from $75,000 to $60,000, and expires in July 2012.  As of December 31, 2009, the Company had $13,979 in outstanding borrowings under this agreement and $46,021 available for borrowing.   The Company expects to fund working capital requirements from a combination of available cash balances and internally generated funds, and from the borrowing arrangement mentioned above.
 
Some seasonality exists in the business driven by timing of price increases, rebate incentives, tax incentives, and holiday buying patterns and promotions.
 
Employees
 
As of December 31, 2009, the Company employed approximately 400 people, none of whom were covered by collective bargaining agreements.  The Company believes its relations with its employees are good.
 
Website Access to Company Reports and Corporate Governance Materials
 
The Company makes available free of charge through our website, www.ydnt.com, (1) its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission; and (2) the Audit Committee, Compensation Committee and Nominating Committee charters and its Code of Ethics.  The Company’s website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.

 

 
9

 

Executive Officers of the Registrant

The executive officers of the Company, their ages and their positions with the Company are set forth below.  All officers serve at the pleasure of the board.

Name
Age
Position
Principal Occupation During Past 5 Years
Alfred E. Brennan
57
Chairman of the Board, Chief Executive Officer and Director
Chairman of the Board since October 2008 and Vice Chairman from July 2004 to October 2008, Chief Executive Officer since January 2004, President from July 1998 to July 2004, Chief Operating Officer from October 1997 until May 2002 and Director of the Company since August 1997.
 
George E. Richmond
 
 
76
 
 
Vice Chairman of the Board and Director
 
 
Vice Chairman of the Board since October 2008, Chairman of the Board from 1997 to October 2008, Chief Executive Officer from 1995 to 2002, Director of the Company since its organization in 1995, President of Young Dental Manufacturing Company ("Young Dental") (predecessor to the Company) from 1961 until 1997.
 
Arthur L. Herbst, Jr.
46
President and Chief Financial Officer
President since July 2004, Chief Operating Officer from May 2002 until July 2004, Chief Financial Officer from February 1999 until July 2004 and since February 2008, and Director from November 1997 to July 2004.
 
Daniel J. Tarullo
50
Vice President
Vice President of Business Development since July 2004, Director of Business Development from September 2003 to July 2004.
 
Julia A. Heap
35
Vice President of Finance and Controller
Vice President of Finance since May 2008, Corporate Controller since 2005, Assistant Corporate Controller from May 2002 until 2005.
 
       
       






 
10

 



Item 1A.  Risk Factors

Forward Looking Statements
This Annual Report (including, without limitation, Item 1 — "Business" and Item 7 — "Management's Discussion and Analysis of Financial Condition and Results of Operations") includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included herein are "forward-looking statements." Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.  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 this Annual Report and other reports filed with the Securities and Exchange Commission.

The Company makes no commitment to update these factors or to revise any forward-looking statements for events or circumstances occurring after the statement is issued.

At any time when the Company makes forward-looking statements, it desires to take advantage of the safe harbor which is afforded such statements under the Private Securities Litigation Reform Act of 1995.

Risk Factors
We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below, together with the cautionary statement under the caption “Forward Looking Statements” described above and other information contained in this Annual Report and our other filings with the Securities and Exchange Commission before purchasing our securities. Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. If any of these risks occur, our business, results of operations or financial condition could suffer, the market price of our Common Stock could decline and you could lose all or part of your investment in our Common Stock.

Acquisitions have been and continue to be an important part of our growth strategy; failure to consummate acquisitions could limit our growth and failure to successfully integrate acquisitions could adversely impact our results.
Our business strategy includes continued growth through strategic acquisitions, which depends upon our ability to identify potential acquisitions, the availability of suitable acquisition candidates at reasonable prices and the availability of financing on acceptable terms.  In addition, our growth strategy is dependent upon our ability to negotiate and consummate acquisitions and effectively integrate the acquisitions into our business.  Acquisitions involve integrating product lines, employees and manufacturing facilities and include risks relating to employee turnover and sales channel tension.  We cannot be certain that we will successfully manage all of these challenges and risks in the future and there can be no assurance that our future acquisitions will be successful.  Failure to consummate appropriate acquisitions would adversely impact our growth and failure to successfully integrate them would adversely affect our results.

The markets for our products are highly competitive. We compete with manufacturers of both branded and private-label dental products.  Some of our competitors have greater financial, research, manufacturing, marketing and other resources which could allow them to compete more successfully.  As a result we may not be able to achieve, maintain or increase market share or margins, or compete effectively against these companies.  In addition, new competitors are constantly entering the markets in which we participate.


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We rely heavily on key distributors, and if any of them stop doing business with us it would significantly impact our operating results.
In fiscal 2009, approximately 31% of our sales were made through two distributors.  If either of these two distributors were to materially change the timing of their order patterns, our financial results in any given short-term period could be adversely affected.   Additionally, the loss of either distributor as a customer, or a material change in our relationship with either distributor would have a material adverse effect on our results of operations and financial condition until we find an alternative means to distribute our products.

The strength of the dental market is impacted by general worldwide economic conditions.
 The Company’s success is dependant upon the demand for dental products, in particular, and overall worldwide economic conditions, in general.   In 2009, the Company was negatively impacted by the general worldwide economic conditions that began in late 2008.  We cannot predict the timing or duration of any economic slowdown or the timing or strength of a subsequent economic recovery.

If we are unable to successfully manage growth, our results could be materially adversely affected.
The Company is committed to growth in part through acquisition as well as organically through the development of new products which results in increased market share.  Our commitment to growth will continue to place a significant strain on our management, administrative, operational, and financial resources. In order to address these concerns, the Company is focused on attracting and retaining key employees who possess outstanding talent for achieving short and long-term objectives.  We will also have to continue to consolidate our operations and improve and upgrade operational, financial and accounting systems, controls and infrastructure as well as expand, train and manage our employees. Our failure to manage the future expansion of our business could have a material adverse effect on our revenues and profitability.

Changes in standard of care relating to dental health may impact future results.
The demand for dental products is impacted by the dental health care standards.  If the industry standards were to shift to a standard of care that changed the frequency or type of procedures performed or if third-party insurance coverage were to substantially change, the market for our Company’s products could be adversely affected.

Changes in the healthcare industry may impact future results.
The healthcare industry is in the process of undergoing significant changes in an effort to reduce costs.  These changes may include legislative healthcare reform.  Although the proposed legislation would increase insurance coverage there is uncertainty as to the how this might impact reimbursement rates to healthcare professionals.  We have no ability to predict what the impact of new legislation might have for the dental industry or our business.

Our business is subject to quarterly variations in operating results due to factors outside of our control.
Our business is subject to quarterly variations in operating results caused by a number of factors, including business and industry conditions, the timing of acquisitions, the buying patterns of our largest customers, technology changes, currency exchange rate fluctuations, and other factors beyond our control. All these factors make it difficult to predict operating results for any particular period.

Our future performance is materially dependent upon our senior management.
Our future success is substantially dependent upon the efforts and abilities of members of our existing senior management, particularly Alfred E. Brennan, Chairman and Chief Executive Officer, and Arthur L. Herbst, Jr., President and Chief Financial Officer, among others. The loss of the services of either Mr. Brennan or Mr. Herbst could have a material adverse effect on our business. We have employment agreements with each of Messrs. Brennan and Herbst.  We do not currently have “key man” life insurance policies on any of our employees. Competition for senior management is intense, and we may not be successful in attracting and retaining key personnel.

Difficulty in obtaining goods and services from our vendors and suppliers could adversely affect our business.
We are dependent on certain of our vendors and suppliers.  We believe we have good relationships with and are generally able to obtain attractive pricing and other terms from our vendors and suppliers.  However, if our raw material products, such as resin, were to increase in price significantly, the cost of manufacturing products would increase and our profitability may be impacted.  In addition, if our raw materials were not available for a period of time, this would impair our ability to obtain necessary materials which could adversely affect our revenue.  When possible, we attempt to have multiple sources for key materials and supplies.  If our vendors and suppliers were no longer able to supply product, we could face difficulty in immediately obtaining needed goods and services, which could adversely affect our business for a temporary period.

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Certain of our products and manufacturing facilities are subject to regulation, and our failure or the failure of our suppliers to comply with applicable laws and regulations and obtain or maintain the required regulatory approvals for these products could hinder or prevent their sale and increase our costs of regulatory compliance.  In addition, there can be no assurance we will be able to successfully reintroduce any products that may have been recalled.
Our ability to continue manufacturing and selling those of our products that are subject to regulation by the United States Food and Drug Administration, the Environmental Protection Agency, state, local or foreign laws or other federal, state or foreign governmental bodies or agencies is subject to a number of risks, including our ability to comply with existing laws and regulations and ongoing requirements, the promulgation of stricter laws or regulations, or the withdrawal of the approval needed to sell one or more of our products.  We are also subject to regulation by the Occupational Safety and Health Administration and the Securities and Exchange Commission, among others.  With respect to certain products we purchase, our ability to sell such products to our customers is dependent upon the supplier complying with all applicable laws and regulations.  The failure of the Company and/or our suppliers to comply with existing or future laws and regulations could have a material adverse affect on our operations.  The costs of complying with these regulations and the delays in receiving required regulatory approvals or new laws, regulations, or regulatory requirements adverse to our business may force the Company to discontinue selling products, make expensive changes to be able to continue to market existing products, make it more expensive and possibly prohibitive to introduce new products, require the Company to recall products, increase our costs of regulatory compliance or hinder our growth.  To the extent that we recall products, there can be no assurance that we will be able to timely and successfully reintroduce any products that may have been recalled into the market.

Technological change could result in loss of market share, product obsolescence and dependence on new products.
Our future success depends on the ability to anticipate and adapt to changes in technology, industry standards and customers’ changing demands.  If we do not timely acquire, develop, complete testing, obtain regulatory approval and sell commercial quantities of new products in response to a technological change or the changing demands of customers, we could lose market share and our products could become obsolete.

Loss of intellectual property protection and related disputes could negatively affect our results.
Our company utilizes copyright, trademark and trade secret laws, licenses and confidentiality and non-disclosure agreements to protect our intellectual property and proprietary technology.  There can be no assurance that the steps taken to protect our intellectual property or proprietary technology will be adequate or enforceable to prevent misappropriation.  In addition, the cost of prosecuting and defending such actions can be significant and have a material adverse effect on our results.

We rely upon others to assist in the education and promotion of our products, and the loss of the participation of these individuals could adversely affect our net sales.  Changes in the rules governing promotion of our products might likewise adversely affect our sales.
We work with various dental clinicians to educate the dental community on the features and benefits of our products. Some clinicians are a key component to our strategy for growing our sales. The inability or unwillingness of one or more of these clinicians to continue to assist us could negatively impact the sales of certain significant products.  If new laws are enacted or new regulations promulgated that restrict promotional communications about medical products, this may likewise adversely affect our sales.


Item 1B. Unresolved Staff Comments.

None.


 
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Item 2. Properties.

The Company's principal facilities are as follows:


Description
Square Feet
Location
Owned/Leased
Corporate Headquarters and Manufacturing
113,000
Earth City, Missouri
Owned
Manufacturing
12,000
Brownsville, Texas
Owned
Office and Manufacturing
48,200
Fort Wayne, Indiana
Owned
Office and Manufacturing
5,000
Fort Wayne, Indiana
Leased, on month to month terms
Office, Distribution and Manufacturing
95,000
Algonquin, Illinois
Owned
Office and Distribution
33,000
Corona, California
Owned
Office
6,500
Chicago, Illinois
Leased, expires August 2011
Office and Manufacturing
40,400
Grafton, Wisconsin
Leased, expires July 2012
Office and Manufacturing
29,700
Dungarvan, Ireland
Owned


The Company believes that its facilities are generally in good condition.

Item 3. Legal Proceedings.

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.
 
 
Item 4.  Reserved.


 
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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Prices and Dividends

The Company’s Common Stock is listed on The Nasdaq Global Select Market under the symbol "YDNT."

The following table sets forth the high and low closing prices of the Company’s Common Stock as reported by The Nasdaq Global Select Market and cash dividends declared during the last eight quarters.


   
Market Price
   
Cash Dividends Declared
 
Quarter
 
High
   
Low
       
2008
                 
First
  $ 26.59     $ 16.56     $ 0.04  
Second
  $ 21.34     $ 15.35     $ 0.04  
Third
  $ 22.80     $ 18.97     $ 0.04  
Fourth
  $ 19.58     $ 9.48     $ 0.04  
                         
2009
                       
First
  $ 16.97     $ 12.42     $ 0.04  
Second
  $ 22.38     $ 14.79     $ 0.04  
Third
  $ 26.41     $ 21.90     $ 0.04  
Fourth
  $ 27.71     $ 22.78     $ 0.04  
                         
                         


On December 31, 2009, there were approximately 95 holders of record of the Company's Common Stock.

The Company has paid quarterly dividends on its Common Stock since the third quarter of 2003.

Payment of future cash dividends will be at the discretion of the Company's Board of Directors and will be dependent upon the earnings and financial condition of the Company and any other factors deemed relevant by the Board of Directors, and will also be subject to any applicable restrictions contained in the Company's then existing credit arrangements.


 
Item 6. Selected Financial Data.

The following table presents selected financial data of the Company. This historical data should be read in conjunction with the Consolidated Financial Statements and the related notes thereto in Item 8, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7. All amounts except per share data are expressed in thousands.
 
 
Year Ended December 31
 
 
2009
   
2008
   
2007
   
2006 (1)
   
2005
Income Statement Data:
                           
  Net sales
    97,737     $ 99,143     $ 97,402     $ 90,805     $ 84,766  
  Cost of goods sold
    43,166       46,847       45,623       41,694       38,851  
  Gross profit
    54,571       52,296       51,779       49,111       45,915  
  Selling, general and administrative expenses
    33,033       32,543       31,019       25,628       22,090  
  Income from operations
    21,538       19,753       20,760       23,483       23,825  
  Interest expense (income) and other, net
    798       867       1,150       (28 )     (485 )
  Income from operations before
   provision for  income taxes
    20,740        18,886       19,610       23,511        24,310  
  Provision for income taxes
    7,259       6,705       6,677       8,732       8,972  
  Net income
  $ 13,481     $ 12,181     $ 12,933     $ 14,779     $ 15,338  
  Basic earnings per share
  $ 1.71     $ 1.52     $ 1.46     $ 1.65     $ 1.71  
  Basic weighted average common shares
     outstanding
    7,881       7,999       8,828       8,954       8,957  
  Diluted earnings per share
  $ 1.69     $ 1.51     $ 1.44     $ 1.61     $ 1.65  
  Diluted weighted average common shares
     outstanding
    7,966        8,069        8,982       9,182        9,312  
  Cash dividends declared per common share
  $ 0.16     $ 0.16     $ 0.16     $ 0.16     $ 0.16  
                                           
   
As of December 31
 
    2009       2008       2007       2006       2005  
Balance Sheet Data:
                                         
  Working capital
  $ 22,752     $ 23,493     $ 25,491     $ 25,982     $ 28,186  
  Total assets
    160,000       159,576       158,768       156,588       118,089  
  Long-term debt (including current maturities)
    13,979       29,349       36,646       21,810       -  
  Stockholders' equity
    120,865       106,277       103,338       117,498       103,564  
__________
(1)  
On July 31, 2006 and August 18, 2006, the Company acquired substantially all of the assets of Microbrush, Inc. and Microbrush International Ltd., respectively (collectively “Microbrush”).  The income statement data for the year ended December 31, 2006 includes results of operations for Microbrush, Inc. from July 31, 2006 through December 31, 2006 and Microbrush International Ltd. from August 18, 2006 through December 31, 2006.  The balance sheet data as of December 31, 2006 includes the Microbrush acquisition.


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Item 7. Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operation (in thousands).

General
 
Young Innovations, Inc. and its subsidiaries (“the Company”) develops, manufactures and markets supplies and equipment used by dentists, dental hygienists, dental assistants and consumers.  The Company's product offering includes disposable and metal prophylaxis (“prophy”) angles, prophy cups and brushes, dental micro-applicators, panoramic X-ray machines, moisture control products, infection control products, dental handpieces (drills) and related components, endodontic systems, orthodontic toothbrushes, flavored examination gloves, children's toothbrushes, and children's toothpastes.
 
The Company’s manufacturing and distribution facilities are located in Missouri, Illinois, California, Indiana, Texas, Wisconsin and Ireland.
 
The Company operates in one reporting segment, which is the development and manufacture of a broad line of products marketed to dental professionals.  The Company markets its products primarily in the U.S.  The Company also markets its products in several international markets, including: Canada, Europe, South America, Central America, and the Pacific Rim.  International sales represented approximately 17%, 18%, and 16% of the Company’s total net sales in 2009, 2008, and 2007, respectively.

Some of the risk factors that affect the Company’s business and financial results are discussed in “Item 1A: Risk Factors.”  We wish to caution the reader that the risk factors discussed in “Item 1A: Risk Factors”, and those described elsewhere in this report or our other Securities and Exchange Commission filings, could cause our actual results to differ materially from those stated in the forward-looking statements.

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Critical Accounting Policies

The SEC has requested that all registrants include in their MD&A a description of 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:

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 requires payment within 30 days from the date of invoice and offers cash discounts for early payment.  For certain acquired businesses that offer different terms, the Company migrates these customers to the terms referred above over time.

The Company offers discounts to its distributors if certain conditions are met.  Customer allowances, volume discounts and rebates, and other short-term incentive programs are recorded as a reduction in reported revenues at the time of sale.  The Company reduces product revenue for the estimated redemption of annual rebates on certain current product sales. Customer allowances and rebates are estimated based on historical experience and known trends.

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.  Historically, the level of product returns has not been significant.  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 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. 

Allowance for doubtful accounts – The Company has 41% of its December 31, 2009 accounts receivable balance with two large customers (see footnote 4 of the notes to consolidated financial statements set forth in Item 8) with the remaining balance comprised of amounts due from numerous customers, some of which are international.  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.  The Company believes that its reserves are adequate.  It is possible, however, that the accuracy of our estimation process could be impacted by unforeseen circumstances.  The Company continuously reviews its reserve balance and refines 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 (FIFO) basis.  Inventory values are based upon standard costs, which approximate actual costs.  Management regularly reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on estimated product demand and other information related to the inventory including planned introduction of new products and changes in technology.  If demand for the Company’s products is significantly different than management’s expectations, the value of inventory could be materially impacted.  Inventory write-downs are included in cost of goods sold.

Goodwill and other intangible assets – In accordance with Accounting Standards Codification (“ASC”)  Topic 350, “Intangibles- Goodwill and Other,” goodwill and other intangible assets with indefinite useful lives are reviewed by management for impairment at least 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.  ASC Topic 350 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 ASC Topic 360, “Property, Plant, and Equipment.”

Stock compensation - In accordance with ASC Topic 718, “Stock Compensation,” compensation cost is recognized within the financial statements at the grant date based on the award’s fair-value.  Stock option fair value is calculated by an option pricing model, and is recognized as expense ratably over the requisite service period. The option pricing models require judgmental assumptions including: volatility, forfeiture rates, and expected option life. If any of the assumptions used in the model change significantly, share-based compensation expense may differ in the future from that recorded in the current period.  The Company uses the Black-Scholes option pricing model.  Compensation expense is also recognized for restricted stock using the fair market value of our Common Stock at the date of grant.
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Assets Acquired and Liabilities Assumed in Business Combinations – The Company periodically acquires businesses.  All business acquisitions completed subsequent to January 1, 2009 are accounted for under the provisions of ASC Topic 805, “Business Combinations,” which requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date.  It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally expensed in the periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense.  The changes related to income taxes also impact the accounting for acquisitions completed prior to the effective date of ASC 805.  In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life.  Acquisitions completed prior to this adoption were made using the purchase method.  Future acquisitions will be impacted using the provisions of the new accounting standard.
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Results of Operations

The following table sets forth, for the periods indicated, certain items from the Company's statements of income expressed as a percentage of net sales.


 
 
Years Ended December 31
 
 
 
2009
   
2008
   
2007
 
Net sales
    100.0 %     100.0 %     100.0 %
Cost of goods sold
    44.2       47.3       46.8  
Gross profit
    55.8       52.7       53.2  
Selling, general and administrative expenses
    33.8       32.8       31.8  
Income from operations
    22.0       19.9       21.4  
Interest expense and other, net
    0.8        0.9        1.2  
Income from operations before provision
     for income taxes
    21.2       19.0       20.2  
Provision for income taxes
    7.4       6.7       6.9  
Net income
    13.8 %     12.3 %     13.3 %




 
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Year Ended December 31, 2009, Compared to Year Ended December 31, 2008
 
    Net Sales - Net sales for the year ended December 31, 2009 were $97,737, down 1.4% or $1,406 from $99,143 in the prior year.  The sales decrease is attributable to the general economic downturn that primarily impacted diagnostic product line sales which declined approximately 20.1% from 2008.  We experienced solid demand for our consumable products, which include preventive, infection control, endodontic, micro-applicator and home care product lines, increasing modestly by 1.1% from 2008, which helped to offset the weak demand for diagnostic sales.
 
    Gross Profit - Gross profit increased $2,275 or 4.4%, to $54,571 in 2009 from $52,296 in 2008 or 55.8% of sales in 2009 as compared to 52.7% 2008.  The increase in gross margin is attributable to improved manufacturing processes, price increases, and product mix.
 
    Selling, General and Administrative Expenses (SG&A) - SG&A expenses increased by 490, or 1.5% to $33,033 in 2009 from $32,543 in 2008.  Our SG&A as a percentage of sales was 33.8% in 2009 as compared to 32.8% in 2008.  The increase is attributable in part due to incentive compensation which is in-line with the Company’s overall performance and stock-based compensation which reflects the third year phase-in of expensing stock awards.
 
    Income from Operations - Income from operations increased $1,785 or 9.0% in 2009 to $21,538 from to $19,753 in 2008.  The change was a result of the factors described above.
 
    Interest Expense, net – Interest expense, net decreased to $665 in 2009 compared to $1,332 in 2008.  The decrease was attributable to lower levels of debt outstanding.
 
    Other (Income) Expense, net – The Company generated other (income)/expense of $133 versus ($465) in 2008. The 2009 impact was primarily attributable to foreign exchange impact on inventory purchases.  The largest impact in 2008 was attributable to a beneficial impact on debt repaid from the Company’s Irish subsidiary in 2008.
 
    Provision for Income Taxes - During the year ended 2009, the Company’s provision for income taxes increased to $7,259 versus $6,705 in 2008.  The effective tax rate in 2009 was 35.0% compared to 35.5% in 2008.   The effective tax rate is lower due to state law changes and rates.

Year Ended December 31, 2008, Compared to Year Ended December 31, 2007
 
    Net Sales - Net sales for the year ended December 31, 2008 were $99,143, up 1.8% or $1,741 from $97,402 in the prior year.  The sales increase reflects strong demand for the Company’s consumable products, which were offset by weak performance in its diagnostic product line.  The Company’s preventive, infection control, micro-applicators and home care product lines, which are included in the Company’s consumable products, posted solid growth in 2008.  In addition, a weaker U.S. dollar provided a benefit to sales of approximately $474.  The Company’s diagnostic product line posted disappointing results.  On a full year basis, the diagnostic product line sales were approximately $2,300 below the 2007 results.  The Company believes this product line continues to be negatively effected by on-going economic uncertainty, as the Company witnessed a significant increase in purchase deferrals at the end of the year.

    Gross Profit - Gross profit increased $517, or 1.0%, from $51,779 in 2007 to $52,296 in 2008.  The additional gross profit was primarily a result of the increased net sales.  Gross margin decreased to 52.7% in 2008 from 53.2% in 2007 as a result of changes in product mix and a $130 reallocation of selling, general and administrative expense into cost of goods sold. This was offset by reduction in staffing levels and the benefits of facility consolidations the Company has implemented over the past two years.
 
    Selling, General and Administrative Expenses (SG&A) - SG&A expenses increased by $1,524, or 4.9%, to $32,543 in 2008 from $31,019 in 2007.  Share-based compensation cost totaled $1,442 in 2008 compared to $1,071 in 2007.  SG&A increased primarily due to the full year impact of headcount additions in 2007 in addition to increased equity compensation, incentive compensation and facility expenses in accordance with the Company’s previously disclosed plans.  This was offset by a $130 reallocation of SG&A expenses to cost of goods sold.  As a percentage of net sales, SG&A expenses increased to 32.8% in 2008 from 31.8% in 2007 as a result of the factors explained above.

    Income from Operations - Income from operations in 2008 was $19,753 compared to $20,760 in 2007, a decrease of 4.9%.
 
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    Interest Expense, net – Interest expense, net increased to $1,332 versus $1,109 in 2007.  The increase was attributable to higher levels of debt partially offset by lower interest rates in 2008 compared to 2007.  The increase in debt levels was primarily related to the settlement of the earnout payment for the Microbrush acquisition and repurchases of the Company’s stock.
 
    Other (Income) Expense, net – Other (income) expense, net increased to $(465) versus $41 in 2007. This increase was primarily attributable to a foreign exchange impact on debt repaid from the Company’s Irish subsidiary of approximately $300.
 
    Provision for Income Taxes - During the year ended 2008, the Company’s provision for income taxes increased to $6,705 versus $6,677 in 2007 as a result of an increase in the effective tax rate.  The effective tax rate in 2008 was 35.5% compared to 34.1% in 2007.   The higher effective tax rate in 2008 is primarily attributable to recognition of a tax benefit in 2007 associated with the lower tax rate on earnings at the Company’s operations in Ireland due to lower local tax rates and certain earnings being permanently reinvested there in 2007.


Liquidity and Capital Resources

Sources of Cash

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 $22,480, $22,465, and $20,440, in 2009, 2008 and 2007, respectively.  Operating cash flow in 2009 improved slightly due increased net income, the reduction in inventories due to improved planning and facility consolidations and a reduction of in-house financing of equipment.  These improvements were somewhat offset by an increase in accounts receivable principally by the timing of collections received in 2009 compared to 2008.  The timing of payments did not adversely impact the aging of receivables.

On January 16, 2008, the Company transferred a majority of its X-ray equipment loans to a third party for a cash payment of $3,519.  The Company transferred $4,154 of the notes receivable portfolio for a purchase price of $4,140.  Of the purchase price, $621 is subject to a recourse holdback pool that has been established with respect to the limited recourse the third party has on the loans.  On May 5, 2008, the Company transferred additional X-ray equipment loans to a third party for a cash payment of $235.  There is an additional $42 subject to a recourse holdback pool.  As the transactions do not qualify as sales of assets under ASC Topic 860 “Transfers and Servicing” the transactions have been treated as financing and the loans remain on the Company’s balance sheet.  As the third party receives payments on the transferred notes, the Company reduces the corresponding notes receivable and secured borrowing balances.  As of December 31, 2009, the residual amount of notes receivable transferred to a third party was $1,501, of which $726 is classified as a short-term notes receivable and $775 as a long-term notes receivable.  A corresponding long-term and short-term liability has been recorded, net of the recourse holdback pool of $267, on the Company’s balance sheet.

The Company maintains a credit agreement with a borrowing capacity of $60,000, which expires in July 2012.  Borrowings under the agreement bear interest at rates ranging from LIBOR + 2.0% to LIBOR + 2.5%, or Prime, depending on the Company’s level of indebtedness.  Commitment fees for this agreement range from .5% to 1.0% of the unused balance. The agreement is unsecured and contains various financial and other covenants.  As of December 31, 2009, the Company was in compliance with all of these covenants.  During 2009, the Company borrowed under the credit facility to finance investments in facilities and for working capital needs.  At December 31, 2009, the Company had $13,979 in outstanding borrowings under this agreement and $46,021 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.

Uses of Cash
Consistent with historical spending, the Company’s uses of cash primarily relate to acquisition activity, capital expenditures, dividend distributions to shareholders, and stock repurchases.  Specific significant uses of cash over the three years are as follows:

21

2009
During the year the Company invested $4,010 in property, plant and equipment.  Significant expenditures were made to support facility expansion and improvements in addition to investments in production machinery.   We invested $1,657 to purchase dental distribution rights for a new surface disinfectant, a non-compete agreement and core technology which provides a manufacturing enhancement for our micro-applicator products. Lastly, we funded a capital call for a private equity fund investment for $300.

The Company also repurchased 19 shares of its Common Stock for $270.  Quarterly dividends of $0.04 per share were paid March 12, June 11, September 14, and December 14, 2009, for a total payment of $1,256.

2008
Net capital expenditures for property, plant and equipment were $3,214 in 2008.  Significant capital expenditures included facility expansion and improvements, production machinery and new equipment purchases.  In May 2008, the Company paid $2,735 as an earnout payment for certain performance targets achieved in the purchase of Microbrush Inc. and Microbrush International, Ltd.  The Company also repurchased 505 shares of its Common Stock for $9,406.  Quarterly dividends of $0.04 per share were paid March 14, June 16, September 15, and December 15, 2008, for a total payment of $1,281.

2007
Net capital expenditures for property, plant and equipment were $7,279 in 2007.  Significant capital expenditures included the construction of a distribution and manufacturing facility in Illinois, facility improvements, and new equipment purchases.  The Company also repurchased 1,000 shares of its Common Stock from trusts controlled by George E. Richmond, the Company’s Vice Chairman and principal stockholder, for an aggregate purchase price of $26,000.  In addition, the Company repurchased 53 shares of its Common Stock for $1,285.  Quarterly dividends of $0.04 per share were paid March 15, June 15, September 14, and December 14, 2007, for a total payment of $1,391.



   
Payments due by period
 
 
 
Contractual Obligations
 
Total
   
Less than
1 Year
   
1-3 years
   
4-5 years
   
Beyond 5 years
 
                               
Operating Leases (including buildings)
  $ 1,281     $ 508     $ 773     $ ---     $ --  
Long-Term Debt
  $ 13,979     $ --     $ 13,979     $ ---     $ --  
Liability for uncertain tax positions
  $  95     $ 95     $ --     $ ---     $ --  
Total
  $ 15,355     $ 603     $ 14,752     $ ---     $ --  

As of December 31, 2009 and 2008, there were no relationships with any other unconsolidated entities, financial partnerships, structured finance entities, or special purpose entities that were established for the purpose of facilitating off-balance-sheet arrangements or for other contractually narrow or limited purposes.

Recent Financial Accounting Standards Board Statements

See footnote 22 to the Company’s audited consolidated financial statements set forth in Item 8.

 
22

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk (amounts in thousands).

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.  Based on the Company’s average debt balance, a theoretical 100-basis-point increase in interest rates would have resulted in approximately $211, $317, and $258 of additional interest expense in the years ended December 31, 2009, 2008 and 2007, respectively.

Sales of the Company’s products in a given foreign country can be affected by fluctuations in the exchange rate.  The Company sells approximately 17% of its products outside the United States.  Of these foreign sales, 6% are denominated in Euros and 1% in Canadian dollars with the remainder denominated in U.S. dollars.  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.




 
23

 

Item 8. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders
Young Innovations, Inc.


We have audited the accompanying consolidated balance sheets of Young Innovations, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended.  In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule. We also have audited Young Innovations’ internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Young Innovations’ management is responsible for these financial statements, the financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule and an opinion on the company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

24

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Young Innovations, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, Young Innovations, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


/s/ Crowe Horwath LLP
Oak Brook, Illinois
March 12, 2010


 
25

 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Young Innovations, Inc.:

We have audited the accompanying consolidated statements of income, stockholders’ equity and cash flows of Young Innovations, Inc. and subsidiaries for the year ended December 31, 2007. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule for 2007.  These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Young Innovations, Inc. and subsidiaries for the year ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.  Also in our opinion, the related financial statement schedule for 2007, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP
Chicago, Illinois
March 12, 2008
 

 




 
26

 


MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Young Innovations, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting.  The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.  Internal control over financial reporting includes policies and procedures that:

·  
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
·  
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;
·  
provide reasonable assurance that receipts and expenditures of the Company are being made in accordance with authorization of management and directors of the Company; and
·  
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Internal control over financial reporting includes the controls themselves, monitoring and testing, and actions taken to correct deficiencies as identified.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility that controls can be circumvented or overridden, and misstatements due to error or fraud may occur and not be detected.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Further, conditions in our business change over time, and, therefore, internal control effectiveness may vary over time.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009.  In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.  Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting.  Based on this assessment and the foregoing criteria, management believes that, as of December 31, 2009, the Company’s internal control over financial reporting is effective.  The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by Crowe Horwath LLP, an independent registered public accounting firm, as stated in their report, which is included in Item 8 of this Report.


 
27

 


YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)



   
December 31
 
   
2009
   
2008
 
             
Assets
 
             
Current assets:
           
Cash and cash equivalents
  $ 67     $ 667  
Trade accounts receivable, net of allowance for doubtful accounts of $232 and $425 in 2009 and 2008, respectively
     11,397        10,421  
Inventories
    14,816       16,486  
Other current assets
    4,849       4,759  
Total current assets
    31,129       32,333  
Property, plant and equipment, net
    33,668       32,905  
Goodwill
    80,374       80,334  
Other intangible assets
    12,097       10,602  
Other assets
    2,732       3,402  
Total assets
  $ 160,000     $ 159,576  
                 
Liabilities and Stockholders’ Equity
 
   
Current liabilities:
               
Accounts payable and accrued liabilities
  $ 8,377     $ 8,840  
Total current liabilities
    8,377       8,840  
Long-term debt
    13,979       29,349  
Long-term secured borrowing
    550       1,281  
Deferred income taxes
    15,947       13,829  
Other noncurrent liabilities
    282       -  
Total liabilities
    39,135       53,299  
Stockholders’ equity:
Common Stock, voting, $.01 par value, 25,000 shares authorized; 10,219 shares issued in 2009 and 2008
     102        102  
Additional paid-in capital
    23,985       25,336  
Retained earnings
    145,756       133,531  
Common Stock in treasury, at cost; 2,294 and 2,452 shares in 2009 and 2008, respectively
    (49,090 )     (52,673 )
    Accumulated other comprehensive (loss) income
    112       (19 )
Total stockholders’ equity
    120,865       106,277  
Total liabilities and stockholders’ equity
  $ 160,000     $ 159,576  
                 
                 


The accompanying notes are an integral part of these statements.

 
28

 


YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)





   
Years Ended December 31
 
   
2009
   
2008
   
2007
 
                   
Net sales
  $ 97,737     $ 99,143     $ 97,402  
     Cost of goods sold
    43,166       46,847       45,623  
Gross profit
    54,571       52,296       51,779  
     Selling, general and administrative expenses
    33,033       32,543       31,019  
Income from operations
    21,538       19,753       20,760  
  Interest expense, net
    665       1,332       1,109  
  Other (income) expense, net
    133       (465 )     41  
Income from operations before provision for income taxes
    20,740       18,886       19,610  
      Provision for income taxes
    7,259       6,705       6,677  
Net income
  $ 13,481     $ 12,181     $ 12,933  
Basic earnings per share
  $ 1.71     $ 1.52     $ 1.46  
Diluted earnings per share
  $ 1.69     $ 1.51     $ 1.44  
Basic weighted average shares outstanding
    7,881       7,999       8,828  
Diluted weighted average shares outstanding
    7,966       8,069       8,982  



The accompanying notes are an integral part of these statements.

 
29

 

YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)


 
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
 
Retained
Earnings
 
Common
Stock in
Treasury
Accumulated Other Comprehensive (Loss) Income
 
 
 
Total
 
 
 
Comprehensive
Income
                 
BALANCE, January1, 2007
102
29,202
111,089
(22,939)
44
117,498
   
Net income
-
-
12,933
-
-
12,933
 
$  12,933
         Common Stock purchased
-
-
-
(27,285)
-
(27,285)
   
Stock options exercised
-
  (2,964)
-
   3,231
-
267
   
Issuance of restricted stock.
-
   (2,398)
-
   2,398
-
-
   
Share-based compensation
-
    1,071
-
-
-
1,071
   
Excess income tax benefit from stock options
 
-
 
       113
 
-
 
-
 
-
 
113
   
Cash dividends ($0.16 per share).
-
-
   (1,391)
-
-
(1,391)
   
Foreign currency translation adjustments
-
-
-
-
132
132
 
          132
Comprehensive income
_______
_______
_________
_________
___________
__________
 
   $13,065
BALANCE, December 31, 2007
102
25,024
 122,631
(44,595)
176
103,338
   
Net income
-
-
   12,181
-
-
12,181
 
         $12,181
Common Stock purchased
-
-
-
(9,438)
-
(9,438)
   
Stock options exercised
-
      (335)
-
  589
-
254
   
Issuance of restricted stock
-
     (771)
-
  771
-
-
   
Share-based compensation
-
   1,442
-
-
-
1,442
   
Excess income tax (shortfall) benefit from stock options
 
-
 
     (24)
 
-
 
-
 
-
 
(24)
   
Cash dividends ($0.16 per share)
-
-
  (1,281)
-
-
(1,281)
   
Foreign currency translation adjustments
-
-
-
-
(195)
(195)
 
      (195)
Comprehensive income
_______
_______
_________
_________
___________
__________
 
$11,986
 
BALANCE, December 31, 2008
 
         102
 
25,336
 
   133,531
 
   (52,673)
 
  (19)
 
     106,277
   
        Net income
-
-
      13,481
-
                 -
13,481
 
13,481
        Common Stock purchased
-
-
-
(270)
                 -
(270)
   
        Stock options exercised
-
(941)
-
1,859
      -
918
   
        Issuance of restricted stock,net
-
(2,183)
-
1,994
-
(189)
   
        Share-based compensation
-
1,687
-
-
-
1,687
   
        Excess income tax (shortfall) benefit from stock options
 
-
86
 
-
 
-
 
-
86
   
        Cash dividends ($0.16 per share)
-
 
     (1,256)
 
-
(1,256)
   
        Foreign currency translation adjustments
-
-
-
-
131
131
 
131
        Comprehensive income
_______
_______
_________
_________
___________
__________
 
13,612
 
BALANCE, December 31, 2009
 
         102
 
23,985
 
145,756
 
(49,090)
 
       112
 
120,865
   
                 

The accompanying notes are an integral part of these statements.


 
30

 

 
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


   
Years Ended December 31
 
   
2009
   
2008
   
2007
 
Cash flows from operating activities:
                 
Net income
  $ 13,481     $ 12,181     $ 12,933  
Adjustments to reconcile net income to net cash flows from operating activities:
                       
Depreciation and amortization
    4,015       4,013       4,161  
Share based compensation expense
    1,687       1,442       1,071  
Deferred income taxes
    1,734       1,898       1,156  
           Excess Tax Benefit from share exercises
    (86 )     --       --  
Loss on private equity investment fund
Changes in assets and liabilities, net of effects of acquisitions
and divestitures:
    75       89       33  
Trade accounts receivable
    (851 )     2,542       90  
Inventories
    1,707       (2,142 )     (199 )
Other current assets
    (42 )     646       1,548  
Other assets
    970       1,530       57  
Accounts payable and accrued liabilities
    (210 )     266       (410 )
                  Total adjustments
    8,999       10,284       7,507  
Net cash flows from operating activities
 
    22,480       22,465       20,440  
Cash flows from investing activities:
                       
Payments for acquisitions of businesses and intangible assets, net of cash acquired
    (1,657 )     (2,735 )     --  
Purchases of property, plant and equipment
    (4,010 )     (3,214 )     (7,279 )
    Purchases of private equity investment
    (300 )     (750 )     (150 )
Net cash flows from investing activities
    (5,967 )     (6,699 )     (7,429 )
Cash flows from financing activities:
                       
Payment of Deferred Finance Costs
    (158 )     --       --  
Payments on long-term debt
    (60,334 )     (58,363 )     (34,824 )
Borrowings on long-term debt
    44,964       51,066       49,660  
Payments of long-term secured borrowings
    (1,217 )     (1,602 )     --  
Borrowings of long-term secured borrowings
    346       3,754       --  
Excess tax benefit/(deficit) from share exercises
    86       (24 )     113  
Proceeds from stock options exercised
    918       443       283  
Purchases of treasury stock
    (459 )     (9,627 )     (27,299 )
Payment of cash dividends
    (1,256 )     (1,281 )     (1,391 )
Net cash flows from financing activities
    (17,110 )     (15,634 )     (13,458 )
Effect of exchange rate changes on cash and cash equivalents
    (3 )     7       (42 )
Net increase (decrease) in cash and cash equivalents
    (600 )     139       (489 )
Cash and cash equivalents, beginning of period
    667       528       1,017  
Cash and cash equivalents, end of period
    67     $ 667     $ 528  
    Non-cash Disclosure – Acquired property, plant and equipment in accounts payable
    155       --       --  



 


The accompanying notes are an integral part of these statements.

 
31

 

YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(in thousands, except per share data)

1.     ORGANIZATION:

 
Young Innovations, Inc. and its subsidiaries (“the Company”) develops, manufactures and markets supplies and equipment used by dentists, dental hygienists, dental assistants and consumers.  The Company's product offering includes disposable and metal prophylaxis (“prophy”) angles, prophy cups and brushes, dental micro-applicators, panoramic X-ray machines, moisture control products, infection control products, dental handpieces (drills) and related components, endodontic systems, orthodontic toothbrushes, flavored examination gloves, children's toothbrushes, and children's toothpastes.
 
The Company’s manufacturing and distribution facilities are located in Missouri, Illinois, California, Indiana, Texas, Wisconsin and Ireland.  Export sales were approximately 17%, 18%, and 16% of total net sales for 2009, 2008, and 2007 respectively.  Sales outside the U.S. are approximately 7% of total sales in each of 2009, 2008, and 2007.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The 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, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported period.  Actual results could differ from those estimates.  Some of the more significant estimates include allowances for doubtful accounts, inventory valuation reserves, rebate accruals, warranty reserves, liabilities for potential incentive compensation and uncertain income tax positions.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with an initial maturity of three months or less.

Inventories

Inventories are stated at the lower of cost (which includes material, labor and manufacturing overhead) or net realizable value.  Inventory values are based upon standard costs which approximate actual costs, determined by the first-in, first-out (FIFO) method.

Property, Plant and Equipment

Property, plant and equipment are stated at cost.  Expenditures for repairs and maintenance are charged to expense as incurred, and additions and improvements that significantly extend the lives of assets are capitalized.  Upon disposition, cost and accumulated depreciation are eliminated from the related accounts, and any gain or loss is reflected in the statements of income.  The Company provides depreciation using the straight-line method over the estimated useful lives of respective classes of assets as follows:

       Buildings and improvements       3 to 40 years
       Machinery and equipment           3 to 10 years
       Equipment rented to others      4 to 15 years

32

Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over fair value of net assets of businesses acquired.  Goodwill and indefinite life intangible assets acquired in a purchase business combination are not amortized, but are instead tested for impairment at least annually in accordance with the provisions of ASC Topic 350.  Additionally, ASC Topic 350 requires that intangible assets with estimable useful lives be amortized to their estimated residual values, and reviewed for impairment in accordance with ASC Topic 360, “Property, Plant, and Equipment”  Intangible assets primarily consist of trademarks, license agreements, core technology, patents and patent applications, product formulas, and supplier and customer relationships.  Trademarks have been determined to have indefinite useful lives, and therefore the carrying value is reviewed at least annually for recoverability in accordance with the requirements of ASC Topic 350.  Other intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, generally between 5 and 40 years, and tested for impairment whenever conditions indicate that an asset may be impaired.  The Company annually reviews the remaining useful lives of its finite-lived intangible assets to assess the appropriateness of their life.

Impairment of Long-Lived Assets

The Company assesses and measures any impairment of long-lived assets other than goodwill and indefinite life intangibles in accordance with the provisions of ASC Topic 360.  If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed.  If this review indicates that the carrying value of the asset will not be recovered, as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value.  The Company has not incurred any material impairment of long-lived assets during 2009, 2008 and 2007.

Fair Value of Financial Instruments

Financial instruments consist principally of cash, accounts receivable, notes receivable, accounts payable and debt.  The estimated fair value of these instruments approximates their carrying value.  Due to the short term nature of the notes receivable, book value approximates fair value.

Shipping and Handling

Shipping and handling costs are included as a component of cost of sales.  Shipping and handling costs billed to customers are included in sales.

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 requires payment within 30 days from the date of invoice and offers cash discounts for early payment.  For certain acquired businesses that offer different terms, the Company migrates these customers to the terms referred above over time. 

The Company offers discounts to its distributors if certain conditions are met.  Customer allowances, volume discounts and rebates, and other short-term incentive programs are recorded as a reduction in reported revenues at the time of sale.  The Company reduces product revenue for the estimated redemption of annual rebates on certain current product sales. Customer allowances and rebates are estimated based on historical experience and known trends.

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.  Historically, the level of product returns has not been significant.  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 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. 

The Company adopted the disclosure requirements of ASC Topic 605, “Revenue Recognition” (that is, gross versus net presentation) for tax receipts on the face of their income statements. The scope of this guidance includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes (gross receipts taxes are excluded). The Company presents such taxes on a net basis.

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Advertising Costs

Advertising costs are expensed when incurred.  Advertising costs were approximately, $3,381, $2,857, and $2,820, for 2009, 2008 and 2007, respectively.

Research and Development Costs

Research and development costs are expensed when incurred and totaled $797, $796, and $738 for 2009, 2008 and 2007, respectively.

Interest Expense, net

Interest expense, net includes interest paid related to borrowings on the Company’s credit facility, as well as interest income earned on various investments and notes receivable.  In 2009, 2008 and 2007, interest income totaled $208, $367, and, $407, respectively, and interest expense totaled $873, $1,699, and $1,516, respectively.

Other (Income) Expense, net

Other (income) expense, net includes foreign currency transaction gain/loss and other miscellaneous income, all of which are not directly related to the Company’s primary business.

Income Taxes

The Company accounts for income taxes under ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to accounting for and reporting income taxes.  Deferred income taxes are provided for temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities using rates which are expected to apply in the period the differences are estimated to reverse.

The Company adopted provisions of ASC 740, “Income Taxes,” related to the accounting for uncertain tax provisions at the beginning of the fiscal year 2007 with no material change to the financial statements. Topic 740 requires the Company to maintain a liability for underpayment of income taxes and related interest and penalties, if any, for uncertain income tax positions. In considering the need for and magnitude of a liability for uncertain income tax positions, the Company must make certain estimates and assumptions regarding the amount of income tax benefit that will ultimately be realized. The ultimate resolution of an uncertain tax position may not be known for a number of years, during which time the Company may be required to adjust these provisions, in light of changing facts and circumstances.

Share-Based Compensation

In accordance with ASC Topic 718, “Compensation- Stock Compensation,” compensation cost is recognized within the financial statements at the grant date based on the award’s fair-value.  Stock option fair value is calculated by an option pricing model, and is recognized as expense ratably over the requisite service period.  The option pricing models require judgmental assumptions, including:  volatility, forfeiture rates, and expected option life.  The Company uses the Black-Scholes option pricing model.  Compensation expense is also recognized for restricted stock over the vesting period using the fair market value of our Common Stock at the date of grant.

Foreign Currency Translation

The translation of financial statements into U.S dollars has been performed in accordance with ASC Topic 830, “Foreign Currency Matters.”  The local currency for all entities included in the consolidated financial statements has been designated as the functional currency.  Non-U.S. dollar denominated assets and liabilities have been translated into U.S. dollars at the rate of exchange prevailing at the balance sheet date.  Revenues and expenses have been translated at the weighted average of exchange rates in effect during the year.  Translation adjustments are recorded in accumulated comprehensive (loss) income.  Net currency transaction (gains) losses included in other (income) expense, net were $106, $(434), and $99 for 2009, 2008 and 2007, respectively.

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Segment Information

The Company operates as a single reportable operating segment. While management monitors the revenue streams of various products, the identifiable segments' operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company’s products are considered by management to be aggregated in one reportable operating segment.

Supplemental Cash Flow Information

Cash flows from operating activities include $5,417, $4,375, and $5,196 for the payment of federal and state income taxes and $691, $1,846, and $1,539 for the payment of interest related to borrowings on the Company’s credit facility during 2009, 2008 and 2007, respectively.


3.     INVESTMENTS:

On February 21, 2006, the Company invested in a private equity investment fund.  At December 31, 2009, the Company has an unfunded capital commitment of up to $300.   As of December 31, 2009, the total capital commitment paid by the Company was $1,950.  The investment is accounted for under the equity method of accounting and included in other assets on the Consolidated Balance Sheet.  Equity income (loss) is recorded using a three-month lag.  The Company’s loss attributed to this private equity investment was included in other (income) expense, net and totaled $75, $89, and $33, in 2009, 2008, and 2007 respectively.

4.     MAJOR CUSTOMERS AND CREDIT CONCENTRATION:

The Company generates trade accounts receivable in the normal course of business.  The Company grants credit to distributors and customers throughout the world and generally do not require collateral to secure the accounts receivable. The Company’s credit risk is concentrated among two distributors that together accounted for 41% and 36% of accounts receivable at December 31, 2009 and 2008, respectively.

The percentage of net sales made to major distributors of the Company’s continuing operations were as follows:

   
Years Ended
December 31
 
Distributor
 
2009
   
2008
   
2007
 
                   
Henry Schein, Inc.
    15.5 %     15.9 %     14.7 %
Patterson Companies, Inc.
    15.2 %     12.7 %     12.2 %

5.    NOTES RECEIVABLE:

The Company offers various financing options to its equipment customers, which includes notes payable to the Company.  The equipment is used to secure the notes.  Total revenue from sales of equipment financed by the Company was $49, $45, and $2,324 during 2009, 2008 and 2007, 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.

On January 16, 2008, the Company transferred a majority of its X-ray equipment loans to a third party for a cash payment of $3,519.  The Company transferred $4,154 of the notes receivable portfolio for a purchase price of $4,140.  Of the purchase price, $621 is subject to a recourse holdback pool that has been established with respect to the limited recourse the third party has on the loans.  On May 5, 2008, the Company transferred additional X-ray equipment loans to a third party for a cash payment of $235.  There is an additional $42 subject to a recourse holdback pool.  As the transactions do not qualify as sales of assets under ASC Topic 860, “Transfers and Servicing,” the transactions have been treated as financing and the loans remain on the Company’s balance sheet.  As the third party receives payments on the transferred notes, the Company reduces the corresponding notes receivable and secured borrowing balances.  As of December 31, 2009, the residual amount of notes receivable transferred to a third party was $1,501, of which $726 is classified as a short-term notes receivable and $775 as a long-term notes receivable.  A corresponding long-term and short-term liability has been recorded, net of the recourse holdback pool of $267, on the Company’s balance sheet.

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Notes receivable consist of the following:
   
December 31
 
   
2009
   
2008
 
             
Notes receivable, short-term
  $ 892     $ 1,258  
Notes receivable, long-term
    890       1,847  
                 
Total notes receivable
    1,782     $ 3,105  
                 
Notes receivable are included in other current assets and other assets in the accompanying Consolidated Balance Sheets.

Notes bear interest at rates ranging from 0% to 11.5%, and have a weighted average maturity of 21 months.  Interest income and expense related to the notes are included in the Consolidated Income Statement caption “interest expense, net.”

6.     INVENTORIES:

Inventories consist of the following:
   
December 31
 
   
2009
   
2008
 
             
Finished products
  $ 6,905     $ 7,925  
Work in process
    2,584       2,603  
Raw materials and supplies
    5,327       5,958  
Total inventories
  $ 14,816     $ 16,486  

7.     PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following:
   
December 31
 
   
2009
   
2008
 
             
Land
  $ 3,449     $ 3,449  
Buildings and improvements
    21,550       20,503  
Machinery and equipment
    27,560       24,492  
Equipment rented to others
    5,464       6,250  
Construction in progress
    1,527       1,205  
      59,550     $ 55,899  
                 
Less – Accumulated depreciation
    (25,882 )     (22,994 )
Total property, plant and equipment, net
  $ 33,668     $ 32,905  

The Company has no machinery and equipment under capital lease.  At December 31, 2009, $1,586 of net property, plant and equipment was located outside of the U.S.  Depreciation expense was $3,451, $3,481 and, $3,630 for 2009, 2008, and 2007, respectively.

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8.  OTHER ASSETS:

Other assets consist of the following:
   
December 31
 
   
2009
   
2008
 
             
Notes receivable, long-term
  $ 890     $ 1,847  
Investments
    1,670       1,445  
Other
    172       110  
Total other assets
  $ 2,732     $ 3,402  

9.       GOODWILL AND OTHER INTANGIBLE ASSETS:

Goodwill activity is as follows:
   
December 31
 
   
2009
   
2008
 
             
Balance, beginning of the year
  $ 80,334     $ 77,511  
Payment of earnout consideration (see footnote 3)
    --       2,735  
Foreign currency translation
    40       88  
Balance, end of the year
  $ 80,374     $ 80,334  

There have been no changes in goodwill related to impairment losses or write-offs due to sales of businesses during the years ended December 31, 2009, 2008 and 2007.

Other intangibles consist of the following:
   
As of December 31, 2009
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
 
Amortized intangible assets
                 
     License agreements
  $ 1,251     $ 382     $ 869  
     Core technology
    739       184       555  
     Patents
    2,265       1,094       1,171  
     Product formulas
    430       92       338  
     Customer relationships
    813       479       334  
     Non-compete agreements
    519       306       213  
     Supplier relationships
    399       332       67  
          Total
  $ 6,416     $ 2,869     $ 3,547  
                         
Intangible assets not subject to amortization
                       
     License Agreements
  $ 1,693             $ 1,693  
     Trademarks
    6,857               6,857  
          Total intangible assets
  $ 14,966     $ 2,869     $ 12,097  
                         

   
As of December 31, 2008
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
 
Amortized intangible assets
                 
     License agreements
  $ 1,200     $ 305     $ 895  
     Core technology
    591       153       438  
     Patents
    2,256       885       1,371  
     Product formulas
    430       82       348  
     Customer relationships
    813       358       455  
     Non-compete agreements
    371       254       117  
     Supplier re