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Young Innovations 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x                           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

 

OR

 

o            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, Earth City, Missouri 63045

(Address of principal executive offices)

(Zip Code)

 

(314) 344-0010

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one): Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o

 

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

 

Number of shares outstanding of the registrant’s Common Stock at October 20, 2008:

7,838,035 shares of Common Stock, par value $.01 per share

 

 

1

 

 



 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

 

 

September 30,

December 31,

 

2008

(unaudited)

2007

 

Assets

 

 

Current assets:

 

 

Cash and cash equivalents

$ 957

$ 528

Trade accounts receivable, net of allowance for doubtful accounts of $455

and $530 in 2008 and 2007, respectively

 

12,117

 

13,074

Inventories

16,195

14,381

Other current assets

3,925

4,878

 



Total current assets

33,194

32,861

Property, plant and equipment, net

32,739

32,992

Goodwill

80,347

77,511

Other intangible assets

10,735

11,133

Other assets

3,975

4,271

 



Total assets

$ 160,990

$ 158,768

 



 

 

 

Liabilities and Stockholders’ Equity

 

 

Current liabilities:

Accounts payable and accrued liabilities

 

$ 10,295

 

$ 7,370

 



Total current liabilities

Long-term debt

Long-term secured borrowing

Deferred income taxes

10,295

33,023

1,739

11,410

7,370

36,646

--

11,414

 



Total liabilities

56,467

55,430

Stockholders’ equity:

 

 

Common Stock, voting, $.01 par value, 25,000 shares authorized,

10,219 and 10,219 shares issued in 2008 and 2007, respectively

 

102

 

102

Additional paid-in capital

24,991

25,024

Retained earnings

130,743

122,631

Common Stock in treasury, at cost; 2,352 and 2,007 shares in 2008 and

2007, respectively

 

(51,307)

 

(44,595)

Accumulated other comprehensive (loss) income

(6)

176

 



Total stockholders' equity

104,523

103,338

 



Total liabilities and stockholders' equity

$ 160,990

$ 158,768

 



 

 

The accompanying notes are an integral part of these statements.

 

 

2

 

 



 

 

YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

$ 24,922

 

$ 24,652

 

$ 75,220

 

$ 72,361

 

 

Cost of goods sold

 

 

 

11,759

 

11,900

 

35,328

 

33,675

 

 

 

 

 

 


 


 


 


 

Gross profit

 

 

 

 

13,163

 

12,752

 

39,892

 

38,686

 

 

Selling, general and administrative expenses

7,955

 

7,601

 

24,962

 

23,005

 

 

 


 


 


 


 

Income from operations

 

 

 

5,208

 

5,151

 

14,930

 

15,681

 

 

Interest expense, net

 

 

 

324

 

358

 

1,069

 

761

 

 

Other (income) expense, net

 

 

 

(18)

 

33

 

(383)

 

51

 

 

 

 

 

 


 


 


 


 

Income before provision for income taxes

 

 

4,902

 

4,760

 

14,244

 

14,869

 

 

Provision for income taxes

 

 

1,754

 

1,685

 

5,164

 

5,501

 

Net income

 

 

 

 

$ 3,148

 

$ 3,075

 

$ 9,080

 

$ 9,368

 

 

 

 

 

 


 


 


 


 

Basic earnings per share

 

 

 

$ 0.40

 

$ 0.36

 

$ 1.13

 

$ 1.05

 

Diluted earnings per share

 

 

 

$ 0.39

 

$ 0.35

 

$ 1.11

 

$ 1.03

 

Basic weighted average shares outstanding

 

 

7,915

 

8,600

 

8,062

 

8,928

 

Diluted weighted average shares outstanding

 

 

8,013

 

8,773

 

8,153

 

9,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

3

 

 



 

 

YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

 

2008

 

2007

 

 

 


 


 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$ 9,080

 

$ 9,368

 

Adjustments to reconcile net income to net cash flows from

operating activities --

 

 

 

 

 

Depreciation and amortization

 

3,030

 

3,093

 

Share based compensation expense

 

1,073

 

758

 

Deferred income taxes

 

--

 

1,010

 

Loss on private equity investment

 

75

 

18

 

Changes in assets and liabilities, net of acquisitions --

 

 

 

 

 

Trade accounts receivable

 

885

 

(396)

 

Inventories

 

(1,840)

 

(148)

 

Other current assets

 

954

 

999

 

Other assets

 

971

 

(201)

 

Accounts payable and accrued liabilities

 

1,783

 

2,168

 

 

 


 


 

Total adjustments

 

6,931

 

7,301

 

 

 


 


 

Net cash flows from operating activities

 

16,011

 

16,669

 

 

 


 


 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Payments for acquisitions

 

(2,735)

 

--

 

Purchases of property, plant and equipment

 

(2,176)

 

(6,579)

 

Purchases of private equity investments

 

(750)

 

(150)

 

 

 


 


 

Net cash flows from investing activities

 

(5,661)

 

(6,729)

 

 

 


 


 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings of long-term debt

 

42,975

 

42,580

 

Payments of long-term debt

 

(46,598)

 

(23,390)

 

Borrowings of long-term secured borrowing

 

3,754

 

--

 

Payments of long-term secured borrowing

 

(1,248)

 

--

 

Proceeds from stock options exercised

 

443

 

170

 

Payment of cash dividend

 

(968)

 

(1,063)

 

Purchase of treasury stock

 

(8,325)

 

(27,054)

 

Tax benefit from stock options exercised

 

65

 

47

 

 

 


 


 

Net cash flows from financing activities

 

(9,902)

 

(8,710)

 

 

 


 


 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(19)

 

45

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

429

 

1,275

 

Cash and cash equivalents, beginning of period

 

528

 

1,017

 

 

 


 


 

Cash and cash equivalents, end of period

 

$ 957

 

$ 2,292

 

 

 


 


 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

4

 

 



 

 

YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(In thousands, except per share data)

 

GENERAL:

 

This report includes information in a condensed format and should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2007. The results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the results expected for the full year or any other interim period.

 

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to the rules of the Securities and Exchange Commission. In our opinion, the statements include all adjustments necessary (which are of a normal recurring nature) for the fair presentation of the results of the interim periods presented.

 

The balance sheet information at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

1.

ORGANIZATION:

Young Innovations, Inc. and its subsidiaries (“the Company”) 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.

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of Young Innovations, Inc. and its direct and indirect wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

 

Use of Estimates

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

 

Revenue Recognition

 

Revenue from the sale of products is recorded at the time title passes, generally when the products are shipped, as 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

 

5

 

 



 

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 within a 2-5 year period.

 

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.

 

Income Taxes

 

The Company uses an estimated annual effective income tax rate to compute the quarterly tax provision pursuant to Accounting Principles Board (“APB”) Opinion No. 28, “Interim Financial Reporting”, and Financial Accounting Standards Board (“FASB”) Interpretation No. 18, “Accounting for Income Taxes in Interim Periods”. Calculation of the estimated annual effective income tax rate requires significant judgment and is affected by, among others, variances in expected operating income for the year, projections of income earned and taxed in foreign jurisdictions, variances in non-deductible expenses, and changes in tax rates. When the Company’s estimate of the annual effective income tax rate changes the year-to-date effect of the change is recorded in the current period.

 

The Company adopted FASB No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), at the beginning of fiscal year 2007. As of December 31, 2007, the Company had $111 of unrecognized tax benefits. The entire amount of unrecognized tax benefits would favorably impact the effective income tax rate if recognized. Penalties and interest related to unrecognized tax benefits are included in income tax expense. As of December 31, 2007, the Company had accrued $29 of penalties and interest related to uncertain tax positions.

 

There has not been a significant increase or decrease in the amount of unrecognized tax benefits during the nine months ended September 30, 2008 and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

Based on the Company’s evaluation of the indefinite reversal criteria of APB Opinion No. 23 as it relates to investments in foreign subsidiaries, the Company has provided a deferred tax liability for United States income taxes on the undistributed earnings of its foreign subsidiary.

The Company and its subsidiaries are subject to domestic federal and state income taxes as well as foreign income taxes. Tax years 2004 through 2007 remain open to examination by the major taxing jurisdictions to which the Company reports. 

Interest Expense, net

 

Interest expense, net includes interest paid related to borrowings on the Company’s credit facility and secured borrowing, as well as offsetting interest income earned on various investments. For the nine months ended September 30, 2008 and 2007, interest income totaled $289 and $308, and interest expense totaled $1,358 and $1,069, 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.

 

6

 

 



 

 

 

Supplemental Cash Flow Information

 

Cash flows from operating activities include $3,192 and $3,385 for the payment of federal and state income taxes and $1,510 and $1,064 for the payment of interest or loan charges for the nine months ended September 30, 2008 and 2007, respectively.

 

Foreign Currency Translation

 

The translation of financial statements into U.S dollars has been performed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation.” The local currency for all entities included in the condensed 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 other comprehensive (loss) income. Net currency transaction gains included in other (income) expense, net were $349 and $100 for the nine months ended September 30, 2008 and 2007, respectively.

 

3.

ACQUISITIONS

 

On July 31, 2006, the Company entered into an agreement, through its wholly-owned subsidiaries Young Microbrush, LLC and Young Microbrush Ireland Ltd., with Microbrush, Inc., a Wisconsin corporation, and Microbrush International Ltd., a Republic of Ireland private limited company, (collectively, “Microbrush”), to acquire substantially all of Microbrush’s assets related to the manufacture, development and distribution of dental products. The acquisition of U.S. purchased assets was completed on July 31, 2006. The acquisition of Irish purchased assets was completed on August 18, 2006. The Company paid approximately $32,777 in cash, including direct transaction costs, in connection with the acquisition. Of the purchase price, $3,000 was paid into an escrow account pending settlement of any indemnification claims. Pursuant to the purchase agreement, the escrow was released on January 31, 2008 in full to the sellers. An additional $2,735 in purchase price was paid by the Company (“Earnout Payment”) on May 13, 2008 for certain performance targets achieved. The acquisition further establishes the Company as a leader in the category of consumable dental products, enabling the Company to expand its product offerings in this area.

 

The acquisition was financed through a combination of cash generated from operations as well as debt, and was accounted for as a purchase transaction. Debt incurred to finance the acquisition totaled $20,060. Upon initial allocation of the purchase price at the time of the acquisition, goodwill was determined to be $23,737. The finalization of the Microbrush purchase price allocation resulted in a $2,086 net increase to goodwill consisting of an increase of $2,735 related to the settlement of the Earnout Payment, an increase of $82 related to adjustments to the fair value of estimates of assets, an increase of $192 related to revised estimates of fees accrued related to the acquisition, a decrease of $578 related to revised estimates for intangible assets and a decrease of $345 related to restructuring accruals.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in connection with the acquisition.

 

Purchase Price

 

$

35,512

Less:

 

 

 

 

 

Current assets

 

 

3,295

 

Property, plant and equipment

 

 

2,775

 

Identifiable intangible assets, net

 

 

4,903

Plus:

 

 

 

 

 

Current liabilities

 

 

(1,284)

Goodwill

 

 

$

25,823

 

 

 



 

 

 

7

 

 



 

 

The allocation of the purchase price to identifiable intangible assets, along with their respective useful lives, is as follows:

 

Amortizable intangible assets:

 

 

 

Patents (10-12 years)

$

913

 

Non-compete agreement (5 years)

 

121

 

Customer relationships (8 years)

 

563

 

 

 


 

 

 

1,597

Indefinite-lived intangible asset (not subject to amortization):

    Trademark/Trade Name

 

 

3,306

 

 

$

4,903

 

 


 

The results of operations for the U.S. and the Irish components of Microbrush are included in the consolidated financial statements since July 31, 2006 and August 18, 2006, respectively.

 

4.

SHARE-BASED COMPENSATION:

 

The Company adopted the 1997 Stock Option Plan (the 1997 Plan) effective in November 1997 and amended the Plan in 1999 and 2001. A total of 1,725 shares of Common Stock were reserved for issuance under this plan which is administered by the compensation committee of the Board of Directors (Compensation Committee). The Company adopted the 2006 Long-Term Incentive Plan (the 2006 Plan) effective in May 2006. The 2006 Plan is intended to be a successor to the 1997 Plan. A total of 700 shares were authorized for grant under the 2006 Plan. Awards under the 2006 Plan may be stock options, stock appreciation rights, restricted stock, restricted stock units, and other equity awards.

 

Any employee of the Company or its affiliates, any consultant whom the Compensation Committee determines is significantly responsible for the Company’s success and future growth and profitability, and any member of the Board of Directors, may be eligible to receive awards under the 2006 Plan. The purpose of the 2006 Plan is to: (a) attract and retain highly competent persons as employees, directors, and consultants of the Company; (b) provide additional incentives to such employees, directors, and consultants by aligning their interests with those of the Company’s shareholders; and (c) promote the success of the business of the Company. The Compensation Committee establishes vesting schedules for each option issued under the Plan. Under the 1997 Plan, outstanding options generally vested over a period of up to four years while non-vested equity shares vested over five years. Under the 2006 Plan, outstanding options generally vest over a period of up to three years while non-vested equity shares vest over one, two, three, four and five year periods. All outstanding options expire ten years from the date of grant under the 1997 Plan and five years from the date of grant under the 2006 Plan.

 

Stock Options

During the nine months ended September 30, 2008 and 2007, the Company recorded pre-tax compensation expense of $178 and $120 related to the Company’s stock option shares. As of September 30, 2008, there was approximately $398 of unrecognized compensation expense related to stock options, which will be recognized over the weighted-average remaining requisite service period of 1.8 years. The total aggregate intrinsic value of options exercised during the three months ended September 30, 2008 and 2007 was $9 and $129, respectively, and $378 and $263 for the nine months ended September 30, 2008 and 2007, respectively. Payments received upon the exercise of stock options for the three months ended September 30, 2008 and 2007 totaled $7 and $109, respectively, and $443 and $170 for the nine months ended September 30, 2008 and 2007, respectively. The related tax benefit realized related to these exercises was $3 and $47 for the three months ended September 30, 2008 and 2007, respectively, and $65 and $47 for the nine months ended September 30, 2008 and 2007, respectively. The Company issues shares from treasury upon share option exercises.

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average estimated value of stock options granted during the nine months ended September 30, 2008 and 2007 was $5.27 and $7.10 per share, respectively, using the following weighted-average assumptions:

 

 

8

 

 



 

 

 

 

2008

2007

Dividend yield (1)

0.68%

0.55%

Expected volatility (2)

28%

25%

Risk-free interest rate (3)

2.35%

4.72%

Expected life (4)

3.5

3.5

 

(1) Represents cash dividends paid as a percentage of the share price on the date of grant.

(2) Based on historical volatility of the Company’s Common Stock over the expected life of the options.

(3) Represents the U.S. Treasury STRIP rates over maturity periods matching the expected term of the options at the time of grant.

(4) The period of time that options granted are expected to be outstanding based upon historical evidence.

The following table summarizes stock option activity for the nine months ended September 30, 2008:

 

 

 

 

 

Options

Shares

(000)

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate
Intrinsic Value

($000)






Outstanding at January 1, 2008

863

$ 24.71

 

 

Granted

38

$ 23.67

 

 

Exercised

(36)

$ 12.23

 

 

Forfeited or expired

(58)

$ 33.51

 

 

 


 

 

 

Outstanding at September 30, 2008

807

$ 24.59

4.33 yrs

$ 2,413

 


 

 

 

Exercisable at September 30, 2008

716

$ 24.29

4.40 yrs

$ 2,413

 


 

 

 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2008 and the exercise price, multiplied by the number of in-the-money options).

Non-Vested Equity Shares

Under the 2006 Plan, non-vested equity share units and restricted stock may be awarded or sold to participants under terms and conditions established by the Compensation Committee. The Company calculates compensation cost for restricted stock grants to employees and non-employee directors by using the fair market value of its Common Stock at the date of grant and the number of shares issued. This compensation cost is amortized over the applicable vesting period. During the nine months ended September 30, 2008 and 2007, the Company recorded pre-tax compensation expense of $894 and $638, respectively, related to the Company’s non-vested equity shares. As of September 30, 2008, there was approximately $2,926 of unrecognized compensation cost related to non-vested equity shares which will be amortized over the weighted-average remaining requisite service period of 2.8 years. The Company issues share grants from treasury.

 

The following table details the status and changes in non-vested equity shares for the nine months ended September 30, 2008:

 

 

 

Shares

(000)

Weighted-Average

Grant Date

Fair Value

 



Non-vested equity shares, January 1, 2008

134

$29.32

Granted

35

$23.02

Vested

(36)

$29.22

Forfeited

(1)

$29.15

 


 

Non-vested equity shares, September 30, 2008

132

$27.70

 


 

 

 

9

 

 



 

 

5.

INVESTMENTS:

 

On February 21, 2006, the Company invested in a private equity investment fund. At September 30, 2008, the Company had an unfunded capital commitment of up to $1,350. As of September 30, 2008, the total capital commitment paid by the Company was $1,650. The investment is accounted for under the equity method of accounting and included in other assets on the Condensed 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 $22 and $12 for the three months ended September 30, 2008 and 2007, respectively.

 

6.

NOTES RECEIVABLE:

 

The Company offers various financing options to its equipment customers, including notes payable to the Company. The equipment purchased is used as collateral to secure the notes. Total revenue from sales of equipment financed by the Company was $45 and $754 during the nine months ended September 30, 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 was 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 SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” the transactions have been treated as financing and the loans remain on the Company’s balance sheet. As of September 30, 2008, the amount of notes receivable transferred to a third party was $2,506, of which $767 is classified as a short-term notes receivable and $1,739 as a long-term notes receivable. A corresponding long-term and short-term liability have been recorded on the Company’s balance sheet.

 

Notes receivable consist of the following:

 

 

September 30,

December 31,

 

2008

2007

 



 

 

Notes receivable, short-term

$ 1,061

$ 1,571

Notes receivable, long-term

2,433

3,407

 



 

 

 

Total notes receivable

$ 3,494

$ 4,978

 



 

Notes receivable are included in other current assets and other assets in the accompanying condensed consolidated balance sheets.

 

7.

INVENTORIES:

 

Inventories consist of the following:

 

September 30,

December 31,

 

2008

2007

 



 

 

Finished products

$ 7,511

$ 6,081

Work in process

2,548

2,349

Raw materials and supplies

6,136

5,951

 



Total inventories

$ 16,195

$ 14,381

 



 

 

10

 

 



 

 

 

8.

PROPERTY, PLANT AND EQUIPMENT:

 

Property, plant and equipment consist of the following:

 

 

September 30,

December 31,

 

2008

2007

 



 

 

Land

$ 3,449

$ 3,449

Buildings and improvements

20,545

19,461

Machinery and equipment

23,521

24,384

Equipment rented to others

6,387

7,321

Construction in progress

1,349

1,227

 



 

$55,251

$55,842

 

 

 

Less: Accumulated depreciation

(22,512)

(22,850)

 



Total property, plant and equipment, net

$ 32,739

$ 32,992

 



 

 

9.

GOODWILL AND INTANGIBLE ASSETS:

 

Goodwill activity is as follows:

 

 

 

Balance at December 31, 2007

$ 77,511

Payment of earnout consideration (see footnote 3)

2,735

Foreign currency translation

101

 


Balance at September 30, 2008

$ 80,347

 


 

Other intangible assets consist of the following:

 

 

 

As of September 30, 2008

 

 


 

 

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

 

 




Amortized intangible assets

 

 

 

License agreements

$ 1,200

$ 290

$ 910

Core technology

591

145

446

Patents

2,256

834

1,422

Product formulas

430

79

351

Supplier relationships

399

264

135

Customer relationships

813

328

485

Non-compete agreements

508

379

129

 




Total

$ 6,197

$ 2,319

$ 3,878

 

 

 

 

 

Intangible assets not subject to amortization

 

 

 

Trademarks

$ 6,857

--

$ 6,857

 




Total intangible assets

$ 13,054

$ 2,319

$ 10,735

 




 

 

 

 

11

 

 



 

 

 

 

 

As of December 31, 2007

 

 


 

 

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

 

 




Amortized intangible assets

 

 

 

License agreements

$ 1,200

$ 245

$ 955

Core technology

591

123

468

Patents

2,256

678

1,578

Product formulas

430

71

359

Supplier relationships

399

224

175

Customer relationships

813

238

575

Non-compete agreements

508

342

166

 




Total

$ 6,197

$ 1,921

$ 4,276

 

 

 

 

Intangible assets not subject to amortization

 

 

 

Trademarks

$ 6,857

--

$ 6,857

 




Total intangible assets

$ 13,054

$ 1,921

$ 11,133

 




 

The costs of other intangible assets with finite lives are amortized over their expected useful lives using the straight-line method. The amortization lives are as follows: 10 to 20 years for patents, license agreements and core technology; 40 years for product formulations; and 5 to 8 years for supplier and customer relationships. Non-compete agreements are amortized over the length of the signed agreement. The weighted average life for amortizable intangible assets is 16 years. Aggregate amortization expense for the nine months ended September 30, 2008 and 2007 was $398 and $398, respectively. Estimated amortization expense for each of the next five years is as follows:

 

For the year ending 12/31/08

 

$     532

For the year ending 12/31/09

532

For the year ending 12/31/10

532

For the year ending 12/31/11

491

For the year ending 12/31/12

451

 

 

10.

CREDIT ARRANGEMENTS AND NOTES PAYABLE:

 

The Company has a credit arrangement that provides for an unsecured revolving credit facility with an aggregate commitment of $75,000 which expires in April 2010. The Company has a $41,977 unused line of credit at September 30, 2008. Borrowings under the arrangement bear interest at rates ranging from LIBOR +.75% to LIBOR +1.50% or Prime, depending on the Company’s level of indebtedness. Commitment fees for this arrangement range from .125% to .15% of the unused balance. The agreement is unsecured and contains various financial and other covenants. As of September 30, 2008 and December 31, 2007, the Company was in compliance with these covenants.

 

Long-term debt was as follows:

 

 

 

 

 

September 30,

2008

December 31,

2007

Revolving credit facility due 2010 with a weighted-average interest

rate of 3.66%

 

$ 33,023

 

$ 36,646

Less - current portion

--

--

 



 

$ 33,023

$ 36,646

 



 

 

12

 

 



 

 

In certain circumstances, the Company provides recourse for loans for equipment purchases by customers.  Certain banks require the Company to provide recourse to finance equipment for new dentists and other customers with credit histories that are not consistent with the banks' lending criteria.   In the event that a bank requires recourse on a given loan, the Company would assume the bank’s security interest in the equipment securing the loan. As of September 30, 2008 and December 31, 2007, respectively, approximately $854 and $75 of the equipment financed with various lenders was subject to such recourse. Recourse on a given loan is generally for the life of the loan. Based on the Company's past experience with respect to these arrangements, it is the opinion of management that the fair value of the recourse provided is minimal and not material to the results of operations or financial position of the Company.

 

 

11.

EARNINGS PER SHARE:

 

Basic earnings per share (Basic EPS) is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share (Diluted EPS) includes the dilutive effect of stock options and restricted stock, if any, using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

Three Months Ended

September 30,

Nine Months Ended

September 30,

 



 

2008

2007

2008

2007

 





 

(unaudited)

(unaudited)

 

 

 

 

 

Net income

$3,148

$3,075

$9,080

$9,368

Weighted average shares outstanding for basic earnings per share

 

7,915

 

8,600

 

8,062

 

8,928

Dilutive effect of stock options and restricted stock

 

98

 

173

 

91

 

154

Weighted average shares outstanding for diluted earnings per share

 

8,013

 

8,773

 

8,153

 

9,082

Basic earnings per share

$0.40

$0.36

$1.13

$1.05

Diluted earnings per share

$0.39

$0.35

$1.11

$1.03

 

12.

COMMITMENTS AND CONTINGENCIES:

 

The Company and its subsidiaries from time to time are parties to various legal proceedings arising in the normal course of business. Management believes that none of these proceedings, if determined adversely, would have a material adverse effect on the Company’s financial position, results of operations or liquidity.

 

The 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 accrual for warranty costs was $372 and $318 at September 30, 2008 and December 31, 2007, respectively. The following is a rollforward of the Company’s warranty accrual for the nine months ended September 30, 2008:

 

Balance, December 31, 2007

$ 318

Accruals for warranties issued during the year

345

Accruals related to pre-existing warranties

80

Warranty settlements made during the year

(371)

 


 

 

Balance, September 30, 2008

$ 372

 

 

13

 

 



 

 

 

 

13.

RELATED-PARTY TRANSACTIONS:

 

During the nine month period ended September 30, 2008 and 2007, respectively, the Company paid consulting fees of $38 and $38 to a corporation which is wholly owned by George E. Richmond, the Company’s Vice Chairman.

 

14.

SUBSEQUENT EVENTS:

 

On October 20, 2008, the Board declared a quarterly dividend of $0.04 per share, payable December 15, 2008 to shareholders of record on November 14, 2008.

 

15.

NEW ACCOUNTING STANDARDS

 

In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company does not believe that the adoption of this statement will have a material impact on its financial statements.

 

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) and expands disclosure about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. SFAS 157-2, “Effective Date of FASB Statement No. 157”, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with this staff position, the Company has only adopted the provisions of SFAS 157 with respect to its financial assets and liabilities that are measured at fair value within the financial statements as of January 1, 2008. The provisions of SFAS 157 have not been applied to non-financial assets and non-financial liabilities. The major categories of assets and liabilities that are measured at fair value, for which the Company has not applied the provisions of SFAS 157, are as follows: reporting units measured at fair value in the first step of a goodwill impairment under SFAS 142, long-lived assets, including intangible assets measured at fair value for an impairment assessment under SFAS 144.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). Under SFAS No. 141(R), an entity is required 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 be expensed in 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. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS No. 141(R) will change the accounting treatment for business combinations on a prospective basis beginning in the first quarter of 2009.

 

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115”, which permits entities to choose to measure many financial instruments and certain other items at fair value. The Company adopted SFAS 159 as of the beginning of its 2008 fiscal year and the adoption did not impact the Company’s financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). Under FAS 162, the GAAP hierarchy will now reside in the accounting literature established by the FASB. FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements in conformity with GAAP. FAS 162 will be effective on November 15, 2008. FAS 162 will not impact the Company’s financial statements.

 

14

 

 



 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The Company has included in its MD&A its 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. A “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company believes that the following accounting policies fit this definition:

 

Allowance for doubtful accounts – Accounts receivable balances are subject to credit risk. Management has reserved for expected credit losses, sales returns and allowances, and discounts based upon past experience as well as knowledge of current customer information. The Company believes that the reserves are adequate. It is possible, however, that the accuracy of the Company’s estimation process could be impacted by unforeseen circumstances. Management continuously reviews the 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 basis. Inventory values are based upon standard costs which approximate historical 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 knowledge related to the inventory. If demand for the Company’s products is significantly different than management’s expectations, the valuation of inventory could be materially impacted. Inventory write-downs are included in cost of goods sold.

 

Goodwill and other intangible assets – In accordance with the provisions of SFAS No. 142, goodwill and other long-lived assets with indefinite useful lives are reviewed by management for impairment annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If indicators of impairment are present, the determination of the amount of impairment would be based on management’s judgment as to the future operating cash flows to be generated from the assets. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

 

Contingencies – The Company and its subsidiaries from time to time are subject to various contingencies, including legal proceedings arising in the normal course of business. Management, with the assistance of external legal counsel, performs an analysis of current litigation and will record liabilities if a loss is probable and can be reasonably estimated.

 

Assets and Liabilities Acquired in Business Combinations – The Company periodically acquires businesses. All business acquisitions are accounted for under the provisions of SFAS No. 141, “Business Combinations,” which requires the use of the purchase method. The purchase method requires the Company to allocate the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The allocation of acquisition cost to assets acquired includes the consideration of identifiable intangible assets. The excess of the cost of an acquired business over the fair value of the assets acquired and liabilities assumed is recognized as goodwill. The Company’s measurement of fair values and certain pre-acquisition contingencies may impact the Company’s cost allocation to assets acquired and liabilities assumed for a period of up to one year following the date of an acquisition. The Company utilizes a variety of information sources to determine the value of acquired assets and liabilities. For larger acquisitions, third-party appraisers are utilized to assist the Company in determining the fair value and useful lives of identifiable intangibles, including the determination of intangible assets that have an indefinite life. The valuation of the acquired assets and liabilities and the useful lives assigned by the Company will impact the determination of future operating performance of the Company.

 

 

 

 

 

15

 

 



 

 

RESULTS OF OPERATIONS (In thousands, except per share data)

 

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

 

Net Sales

Net sales increased $270 or 1.1% to $24,922 in the third quarter of 2008 from $24,652 in the third quarter of 2007. The sales increase this quarter reflects continued solid overall demand for the Company’s consumable products, which offset weaker demand for the Company’s diagnostic product line. The increase in sales of the Company’s consumable products was primarily due to strong execution of sales and marketing in addition to a price increase of certain consumable products. The sales shortfall in the Company’s diagnostic product line was principally due to lower government and international sales and a lower conversion rate for outstanding proposals, as some dentists deferred purchases. In addition, reported sales increased by approximately $123 principally as a result of a weaker U.S. dollar against the Euro in the third quarter of 2008 compared to the third quarter of 2007.

Gross Profit

Gross profit increased $411 or 3.2% to $13,163 in the third quarter of 2008 compared to $12,752 in the third quarter of 2007. The additional gross profit was primarily a result of increased net sales. Gross margin increased to 52.8% of net sales in the third quarter of 2008 from 51.7% in the third quarter of 2007. Gross margin was impacted by changes in product mix, improved operating efficiencies and increased sales volume.

 

Selling, General, and Administrative Expenses

SG&A expenses increased $354 or 4.7% to $7,955 in the third quarter of 2008 from $7,601 in the third quarter of 2007. SG&A increased primarily due to increased personnel costs to support the growth of the business. Share-based compensation cost totaled $363 in the third quarter of 2008 compared to $325 in the third quarter of 2007. As a percent of net sales, SG&A expenses increased 1.1 percentage points to 31.9% in the third quarter of 2008 compared to 30.8% in the third quarter of 2007 as a result of the factors explained above.

 

Income from Operations

Income from operations increased $57 or 1.1% to $5,208 in the third quarter of 2008 compared to $5,151 in the third quarter of 2007. The change was a result of the items explained above.

 

Interest Expense, net  

Interest expense, net decreased $34 to $324 in the third quarter of 2008 from $358 in the third quarter of 2007. The decrease was attributable to lower interest rates in the third quarter of 2008 compared to the third quarter of 2007.

 

Other (Income) Expense, net  

Other (income) expense, net increased $(51) to $(18) in the third quarter of 2008 from $33 in the third quarter of 2007. This increase was due to higher levels of miscellaneous income.

 

Provision for Income Taxes

Provision for income taxes increased $69 in the third quarter of 2008 to $1,754 from $1,685 in the third quarter of 2007 as a result of higher pre-tax income as well as an increase in the effective tax rate. The effective tax rate in the third quarter of 2008 was 35.8% compared to 35.4% in the third quarter of 2007.

 

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

 

Net Sales

Net sales increased $2,859 or 4.0% to $75,220 in the first nine months of 2008 from $72,361 in the first nine months of 2007. The sales increase reflects continued solid overall demand for the Company’s consumable products, which offset weaker demand for the Company’s diagnostic product line. The sales shortfall in the Company’s diagnostic product line in the third quarter of 2008 was principally due to lower government and international sales and a lower conversion rate for outstanding proposals, as some dentists deferred purchases. In addition, reported sales increased by approximately $630 principally as a result of a weaker U.S. dollar against the Euro in the first nine months of 2008 compared to the first nine months of 2007.

 

 

16

 

 



 

 

Gross Profit

Gross profit increased $1,206 or 3.1% to $39,892 in the first nine months of 2008 compared to $38,686 in the first nine months of 2007. The additional gross profit was primarily a result of increased net sales. Gross margin decreased to 53.0% of net sales in the first nine months of 2008 compared to 53.5% in the first nine months of 2007. The slight decrease in gross margin is a result of changes in product mix offset by the positive impact of operating efficiencies and sales volume.

 

Selling, General, and Administrative Expenses

SG&A expenses increased $1,957 or 8.5% to $24,962 in the first nine months of 2008 from $23,005 in the first nine months of 2007. SG&A increased primarily due to continued investments in personnel costs, principally in sales and marketing, in addition to higher equity compensation expense. Share-based compensation cost totaled $1,073 in the first nine months of 2008 compared to $758 in the first nine months of 2007. As a percent of net sales, SG&A expenses increased 1.4 percentage points to 33.2% in the first nine months of 2008 compared to 31.8% in the first nine months of 2007 as a result of the factors explained above.

 

Income from Operations

Income from operations decreased $751 or 4.8% to $14,930 in the first nine months of 2008 compared to $15,681 in the first nine months of 2007. The change was a result of the items explained above.

 

Interest Expense, net  

Interest expense, net increased $308 to $1,069 in the first nine months of 2008 from $761 in the first nine months of 2007. The increase was attributable to higher debt levels offset by lower interest rates in the first nine months of 2008 compared to the first nine months of 2007.

 

Other (Income) Expense, net  

Other (income) expense, net increased $(434) to $(383) in the first nine months of 2008 from $51 in the first nine months of 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

Provision for income taxes decreased $337 in the first nine months of 2008 to $5,164 from $5,501 in the first nine months of 2007 as a result of lower pre-tax income as well as a decrease in the effective tax rate. The effective tax rate in the first nine months of 2008 was 36.3% compared to 37.0% in the first nine months of 2007.

 

Liquidity and Capital Resources

 

Historically, the Company has financed its operations primarily through cash flow from operating activities and, to a lesser extent, through borrowings under its credit facility. Net cash flow from operating activities was $16,011 and $16,669 for the first nine months of 2008 and 2007, respectively. Net capital expenditures for property, plant and equipment were $2,176 and $6,579 for the first nine months of 2008 and 2007, respectively. The decrease was attributable primarily to the completion of a distribution and manufacturing facility in 2007. Significant capital expenditures included buildings, facility improvements and new equipment purchases. Future capital expenditures are expected to include facility expansion and improvements, panoramic X-ray machines for the Company’s rental program, production machinery and information systems.

 

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 SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” the transactions have been treated as financing and the loans remain on the Company’s balance sheet. As of September 30, 2008, the amount of notes receivable transferred to a third party was $2,506, of which $767 is classified as a short-term notes receivable and $1,739 as a

 

17

 

 



 

long-term notes receivable. A corresponding long-term and short-term liability have been recorded on the Company’s balance sheet.

 

The Company maintains a credit agreement with a borrowing capacity of $75,000, which expires in April 2010. Borrowings under the agreement bear interest at rates ranging from LIBOR + .75% to LIBOR + 1.50%, or Prime, depending on the Company’s level of indebtedness. Commitment fees for this agreement range from .125% to .15% of the unused balance. The agreement is unsecured and contains various financial and other covenants. As of September 30, 2008 and December 31, 2007, the Company was in compliance with all of these covenants. At September 30, 2008 the Company had $33,023 in outstanding borrowings under this agreement and $41,977 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. If market and other conditions change from those we anticipate, our liquidity may be affected.

 

Forward-Looking Statements

 

Investors are cautioned that this report as well as other reports and oral statements by Company officials may contain certain forward-looking statements as defined in the Private Securities Litigation and Reform Act of 1995. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions and which include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates” or similar expressions. These statements are not guaranties of future performance and the Company makes no commitment to update or disclose any revisions to forward-looking statements, or any facts, events or circumstances after the date hereof that may bear upon forward-looking statements. Because such statements involve risks and uncertainties, actual actions and strategies and the timing and expected results thereof may differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those disclosed in the Company's Annual Report on Form 10-K and other reports filed with the SEC.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign exchange rates. From time to time, the Company finances acquisitions, capital expenditures and its working capital needs with borrowings under a revolving credit facility. Due to the variable interest rate feature on the debt, the Company is exposed to interest rate risk. A theoretical 100 basis point increase in interest rates would have resulted in approximately $246 and $164 of additional interest expense in the nine month periods ended September 30, 2008 and 2007, respectively. Alternatively, a 100 basis point decrease in interest rates would have reduced interest expense by approximately $246 and $164 in the nine month periods ended September 30, 2008 and 2007, respectively.

 

Sales of the Company’s products in a given foreign country can be affected by fluctuations in the exchange rate. For the nine months ended September 30, 2008, the Company sold less than 20% of its products outside of the United States. Of these foreign sales, 32% were denominated in Euros and 4% in Canadian dollars. The Company does not believe 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.

 

 

 

 

 

 

 

 

18

 

 



 

 

 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and that the information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the quarterly period ended September 30, 2008 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

 

19

 

 



 

 

PART II

OTHER INFORMATION

 

Items 1, 3, 4 and 5 are inapplicable and have been omitted.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007, except as described below. The description of these material changes does not represent a comprehensive list of risk factors that could cause our results to differ from those that are currently anticipated and, therefore, should be read in conjunction with the risk factors and other information disclosed in our 2007 Annual Report.

 

Our results of operations may be adversely impacted by a worldwide macroeconomic downturn. As a result, the market price of our common stock may decline.

 

In 2008, general worldwide economic conditions have declined due to the sequential effects of the subprime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, increased and volatile commodity and energy costs, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. These conditions make it difficult for our customers and us to accurately forecast and plan future business activities, and they could cause U.S. and foreign businesses to slow spending on our products, which would adversely impact our revenues and our ability to manage inventory levels, collect customer receivables and ultimately our profitability. We cannot predict the timing or duration of any economic slowdown or the timing or strength of a subsequent economic recovery.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

ISSUER PURCHASES OF EQUITY SECURITIES (in 000’s) (1)

 

 

 

 

 

 

 

 

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Program

Maximum Number of Shares that May Yet Be Purchased Under the Program

July 2008

32

$21.44

32

341

August 2008

52

$20.55

52

289

September 2008

28

$19.75

28

261

Total Third Quarter 2008

112

$20.60

112

 

 

 

(1)

The share repurchase program authorizing the purchase of up to 500 shares was announced May 6, 2008. The authorization will expire July 31, 2009 and replaces the previous share repurchase program which was scheduled to expire on July 31, 2008.

 

20

 

 



 

 

 

Item 6.

Exhibits.

 

Exhibits.

 

31.1

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

21

 

 



 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

YOUNG INNOVATIONS, INC.

 

November 6, 2008

/s/

Alfred E. Brennan, Jr.

 

----------------------

-----------------------------------------

Date

Alfred E. Brennan, Jr.

 

 

Chief Executive Officer

 

 

/s/

Arthur L. Herbst, Jr.

 

------------------------------------------

Arthur L. Herbst, Jr.

 

President and Chief Financial Officer

 

 

 

22

 

 

 

 

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