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| YDNT > SEC Filings for YDNT > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
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:
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 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. Costs associated with the procurement and warehousing of inventories are included in cost of goods sold except for the Company's distribution only businesses, which are included in SG&A.
Goodwill and other intangible assets - In accordance with the Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Intangible Assets," 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. 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."
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 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.
Assets and Liabilities Acquired in Business Combinations - The Company periodically acquires businesses. All business acquisitions completed subsequent January 1, 2009 are accounted for under the provisions of SFAS No. 141R, "Business Combinations." Under SFAS No. 141R, 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. The changes related to income taxes also impact the accounting for acquisitions completed prior to the effective date of SFAS 141R. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. All business acquisitions completed subsequent to 2002 were accounted for under the provisions of SFAS No. 141, "Business Combinations," which requires the use of the purchase method. 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.
RESULTS OF OPERATIONS (In thousands, except per share data)
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Net Sales
Net sales decreased $631 or 2.6% to $23,764 in the first quarter of 2009 from $24,395 in the first quarter of 2008. While sales of the Company's consumable products were solid despite the economic downturn, the Company continues to have weak performance in its diagnostic product line. Sales of the Company's consumables products, which include preventive, infection control, endodontic, micro-applicators and home care product lines, remained essentially flat over the prior year quarter. The Company believes that the weak economic climate contributed to disappointing results in its diagnostic product line, which posted results $530 below that of the first quarter of 2008. A stronger U.S. dollar negatively impacted sales by approximately $264.
Gross Profit
Gross profit increased $372 or 2.9% to $13,310 in the first quarter of 2009 compared to $12,938 in the first quarter of 2008. Gross margin increased to 56.0% of net sales in the first quarter of 2009 from 53.0% in the first quarter of 2008. The additional gross profit was primarily a result of a shift in product mix, the impact of price increases introduced in the second half of 2008 and the benefits of operating efficiencies implemented in 2008, including facility consolidations and adjusted staff levels.
Selling, General, and Administrative Expenses
SG&A expenses decreased $53 or 0.6% to $8,315 in the first quarter of 2009 from $8,368 in the first quarter of 2008. SG&A decreased due to reduced marketing expenses and benefits of headcount reductions partially offset by increased incentive compensation relative to the performance of the business. As a percent of net sales, SG&A expenses increased 0.7 percentage points to 35.0% in the first quarter of 2009 compared to 34.3% in the first quarter of 2008 as a result of the factors explained above.
Income from Operations
Income from operations increased $425 or 9.3% to $4,995 in the first quarter of 2009 compared to $4,570 in the first quarter of 2008. The change was a result of the items explained above.
Interest expense, net decreased $265 to $154 in the first quarter of 2009 from $419 in the first quarter of 2008. The decrease was primarily attributable to reduced interest expense resulting from lower interest rates and lower borrowings on the Company's credit facility.
Other Income, net
Other income, net decreased $312 to $13 in the first quarter of 2009 from $325 in the first quarter of 2008. The decrease was primarily attributable to a foreign exchange impact on debt repaid from the Company's Irish subsidiary of approximately $300 in 2008.
Provision for Income Taxes
Provision for income taxes increased $54 for the first quarter of 2009 to $1,699 from $1,645 in the first quarter of 2008 as a result of higher pre-tax income offset partially by a decrease in the effective tax rate. The effective tax rate in the first quarter of 2009 was 35.00% compared to 36.75% in the first quarter of 2008 due to a reduction in the effective blended state rate resulting from changes in individual state filing requirements based on previous consolidation activity.
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 $3,965 and $4,309 for the first three months of 2009 and 2008, respectively. Net capital expenditures for property, plant and equipment were $1,367 and $159 for the three months of 2009 and 2008, respectively. Significant capital expenditures in 2009 included buildings, facility improvements, and production machinery and equipment. Future capital expenditures are expected to include facility improvements, production machinery and information systems. During the first quarter of 2009, the Company acquired the rights to distribute a product line which expands its infection control offerings. The Company paid approximately $1,300 in cash. The agreement also requires the Company to pay $60 annually for the next ten years.
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. In connection with the agreement, a portion of the recourse holdback pool was released to the Company in January 2009 for a total cash payment of $331. 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 the third party receives payments on the transferred notes, the Company reduces the corresponding notes receivable and secured borrowing balances. As of March 31, 2009, the residual amount of notes receivable transferred to a third party was $2,425, of which $1,021 is classified as a short-term notes receivable and $1,404 as a long-term notes receivable. A corresponding long-term and short-term liability have been recorded, net of the recourse holdback pool of $307, 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 March 31, 2009 and December 31, 2008, the Company was in compliance with all of these covenants. At March 31, 2009, the Company had $29,075 in outstanding borrowings under this agreement and $45,925 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.
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.
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