UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly report pursuant Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
[ ] 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: 0-6511
O. I. CORPORATION
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(Exact name of registrant as specified in its charter)
OKLAHOMA 73-0728053
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State of Incorporation I.R.S. Employer
Identification No.
P.O. Box 9010
151 Graham Road
College Station, Texas 77842-9010
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (979) 690-1711
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
The number of shares outstanding of the common stock as of May 1, 2005 was
2,835,642.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
O.I. CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except par value)
March 31, December 31,
2005 2004
-------------- --------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,298 $ 1,541
Accounts receivable-trade, net of allowance for
doubtful accounts of $290 and $271, respectively 4,841 4,898
Investment in sales-type leases-current portion 328 273
Investments 9,172 8,586
Inventories 5,214 5,012
Current deferred income tax assets 720 698
Other current assets 210 181
-------------- --------------
Total current assets 21,783 21,189
Property, plant and equipment, net 3,377 3,404
Investment in sales-type leases, net of current 319 275
Long-term deferred income tax assets 303 287
Intangible assets, net 206 208
Other assets 34 24
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Total assets $ 26,022 $ 25,387
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,980 $ 1,897
Accrued liabilities 3,221 3,303
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Total current liabilities 5,201 5,200
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.10 par value, 3,000 shares
authorized, no shares issued and outstanding
Common stock, $0.10 par value, 10,000 shares
authorized 4,103 shares issued and
outstanding 410 410
Additional paid-in capital 4,326 4,326
Treasury stock, 1,278 and 1,296 shares,
respectively, at cost (5,583) (5,660)
Retained earnings 21,636 21,016
Accumulated other comprehensive income, net 32 95
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Total stockholders' equity 20,821 20,187
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Total liabilities and stockholders' equity $ 26,022 $ 25,387
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See notes to unaudited condensed consolidated financial statements.
2
O.I. CORPORATION
Condensed Consolidated Statements of Income
and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2005 2004
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Net revenues:
Products $ 7,002 $ 5,546
Services 698 848
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7,700 6,394
Cost of revenues:
Products 3,292 2,666
Services 353 392
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3,645 3,058
Gross profit 4,055 3,336
Selling, general and administrative expenses 2,313 2,009
Research and development expenses 938 734
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Operating income 804 593
Other income, net 111 126
Loss from unconsolidated investee -- (74)
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Income before income taxes 915 645
Provision for income taxes 295 219
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Net income $ 620 $ 426
============== ==============
Other comprehensive income/(loss), net of tax:
Unrealized gains/(losses) on investments (64) 69
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Comprehensive income $ 556 $ 495
============== ==============
Earnings per share:
Basic $ 0.22 $ 0.15
Diluted $ 0.21 $ 0.15
Shares used in computing earnings per share:
Basic 2,817 2,764
Diluted 2,904 2,847
See notes to unaudited condensed consolidated financial statements.
3
O.I. CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
2005 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 620 $ 426
Depreciation & amortization 145 127
Deferred income taxes (10) 67
Loss from unconsolidated investee -- 74
Change in working capital (278) 10
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Net cash flows provided by operating activities $ 477 $ 704
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (2,051) (1,372)
Maturity of investments 1,368 866
Proceeds from insurance policy -- 55
Purchase of property, plant & equipment (115) (115)
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Net cash flows (used in) investing activities $ (798) $ (566)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock pursuant to
exercise of employee stock options and employee
stock purchase plan
78 144
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Net cash flows provided by financing activities $ 78 $ 144
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (243) 282
Cash and cash equivalents, at beginning of quarter 1,541 2,869
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Cash and cash equivalents, at end of quarter $ 1,298 $ 3,151
============== ==============
See notes to unaudited condensed consolidated financial statements.
4
O.I. CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
O.I. Corporation (the "Company," "we" or "our"), an Oklahoma corporation, was
organized in 1963. The Company designs, manufactures, markets, and services
analytical, monitoring and sample preparation products, components, and systems
used to detect, measure, and analyze chemical compounds.
The accompanying unaudited condensed consolidated financial statements have been
prepared by O.I. Corporation and include all adjustments that are, in the
opinion of management, necessary for a fair presentation of financial results
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). All adjustments and provisions included in these statements are of
a normal recurring nature. All intercompany transactions and balances have been
eliminated in the financial statements. Certain prior period amounts in the
condensed consolidated financial statements have been reclassified for
comparative purposes. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2004.
2. INVENTORIES.
Inventories, which include material, labor, and manufacturing overhead, are
stated at the lower of first-in, first-out cost or market (in thousands):
Mar. 31, 2005 Dec. 31, 2004
-------------- --------------
Raw materials $ 3,556 $ 3,056
Work-in-process 995 1,072
Finished goods 663 884
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$ 5,214 $ 5,012
============== ==============
3. COMPREHENSIVE INCOME/(LOSS).
Other comprehensive income/(loss) refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are recorded as an element
of stockholders' equity. The Company's components of comprehensive income/(loss)
are net income and unrealized gains and losses on available-for-sale
investments.
4. EARNINGS PER SHARE.
The Company reports both basic earnings per share, which is based on the
weighted average number of common shares outstanding, and diluted earnings per
share, which is based on the weighted average number of common shares
outstanding and all dilutive potential common shares outstanding. Stock options
are the only dilutive potential common shares the Company has outstanding.
Incremental shares from assumed exercise of dilutive options for the three
months ended March 31, 2005 of 87,000 were added to the weighted average shares
used to calculate diluted EPS. Incremental shares from assumed exercise of
dilutive options for the same period of the prior year of 83,000 were added to
the weighted average shares used to calculate diluted EPS. There were no
adjustments made to net income as reported to calculate basic or diluted
earnings per share. For the three months ended March 31, 2005 there were no
anti-dilutive shares. For the same period of the prior year, there were options
to acquire 46,000 shares of common stock, at a weighted average exercise price
of $8.36 per share, that were not included in the computation of dilutive
earnings per share as their effect would have been anti-dilutive.
5
5. STOCK-BASED COMPENSATION.
At March 31, 2005, the Company had three stock-based employee compensation
plans. The 2003 Incentive Stock Option Plan from which stock options may be
granted, and two expired plans which have options outstanding but under which no
further stock options may be granted. The Company accounts for those plans under
the recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of FAS Statement No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
Three Months Ended
March 31
2005 2004
---------- ----------
(in thousands, except per share amounts)
Net income, as reported $ 620 $ 426
Deduct: Total stock-based compensation expense
determined under fair value based method
for awards granted, modified, or settled,
net of related tax effects 67 46
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Pro forma net income $ 553 $ 380
Earnings per share:
Basic -- as reported $ 0.22 $ 0.15
Basic -- pro forma $ 0.20 $ 0.14
Diluted -- as reported $ 0.21 $ 0.15
Diluted -- pro forma $ 0.19 $ 0.13
6. INTANGIBLE ASSETS, NET.
Intangible assets, net, consisted of patents, rights to licenses and trademarks
relating to technology used in the Company's products and licensed patents
covering technology anticipated to be used in potential future products.
Intangible assets, net, as of March 31, 2005 and December 31, 2004 were
approximately $206,000 and $208,000, net of accumulated amortization of $155,000
and $151,000, respectively. Total amortization expense on intangible assets for
the three months ended March 31, 2005 and 2004 was approximately $4,000 and
$2,000 respectively. The estimated aggregate amortization expense for the
remaining nine months of 2005 is $11,000, and approximately $15,000, $14,000,
$13,000 and $13,000 for each of the four succeeding fiscal years 2006 to 2009,
respectively.
7. PRODUCT WARRANTY LIABILITIES.
The changes in the Company's product warranty liability on March 31, 2005 were
as follows (in thousands):
Liabilities, beginning of year $ 651
Expense for new warranties issued --
Warranty claims (35)
------------
Liabilities, March 31, 2005 $ 616
============
8. RECENT PRONOUNCEMENTS.
In December 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (revised December 2003) ("FIN 46R"), "Consolidation of
Variable Interest Entities, an interpretation of ARB 51". The primary objectives
of FIN 46R are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights ("variable
interest entities" or "VIEs") and how to determine if a business enterprise
should consolidate the VIEs. This new model for consolidation applies to an
entity for which either: the equity investors (if any) do not have a controlling
financial interest; or the equity investment at risk is insufficient to finance
the entity's activities without receiving additional subordinated financial
support from other parties. In addition, FIN 46R requires that all enterprises
with a significant variable interest in a VIE make additional disclosures
regarding their relationship with the VIE. The interpretation requires public
entities to apply FIN 46R to all entities that are considered Special Purpose
Entities in practice and under the FASB literature that was applied before the
issuance of FIN 46R. The adoption of FIN 46R had no effect on the Company's
financial statements.
6
In March 2004, the FASB issued EITF No. 03-01, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments,"
which provides new guidance for assessing impairment losses on debt and equity
investments. The new impairment model applies to investments accounted for under
the cost or equity method and investments accounted for under SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities." EITF No.
03-01 also includes new disclosure requirements for cost method investments and
for all investments that are in an unrealized loss position. In September 2004,
the FASB delayed the accounting provisions of EITF No. 03-01; however the
disclosure requirements remain effective and the applicable ones were adopted
for our year-end 2004. We will evaluate the effect, if any, of EITF 03-01 when
final guidance is issued.
In March 2004, the EITF reached a consensus on EITF No. 03-16, "Accounting for
Investments in Limited Liability Companies" ("EITF 03-16"). The EITF concluded
that if investors in a limited liability company have specific ownership
accounts, they should follow the guidance prescribed in Statement of Position
78-9, "Accounting for Investments in Real Estate Ventures", and EITF Topic No.
D-46, "Accounting for Limited Partnership Investments." Otherwise, investors
should follow the significant influence model prescribed in Accounting
Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." The adoption of this Issue did not have a material
impact on the Company's financial condition, results of operations or cash
flows.
In December 2004, the Financial Accounting Standards Board issued Statement 123
(revised 2004), Share-Based Payment (Statement 123(R)). This Statement requires
that the costs of employee share-based payments be measured at fair value on the
awards' grant date using an option-pricing model and recognized in the financial
statements over the requisite service period. This Statement does not change the
accounting for stock ownership plans, which are subject to American Institute of
Certified Public Accountants SOP 93-6, "Employer's Accounting for Employee Stock
Ownership Plans." Statement 123(R) supersedes Opinion 25, Accounting for Stock
Issued to Employees and its related interpretations, and eliminates the
alternative to use Opinion 25's intrinsic value method of accounting, which the
Company is currently using.
Statement 123(R) allows for two alternative transition methods. The first method
is the modified prospective application whereby compensation cost for the
portion of awards for which the requisite service has not yet been rendered that
are outstanding as of the adoption date will be recognized over the remaining
service period. The compensation cost for that portion of awards will be based
on the grant-date fair value of those awards as calculated for pro forma
disclosures under Statement 123, as originally issued. All new awards and awards
that are modified, repurchased, or cancelled after the adoption date will be
accounted for under the provisions of Statement 123(R). The second method is the
modified retrospective application, which requires that the Company restates
prior period financial statements. The modified retrospective application may be
applied either to all prior periods or only to prior interim periods in the year
of adoption of this statement. The Company is currently determining which
transition method it will adopt and is evaluating the impact Statement 123(R)
will have on its financial position, results of operations, EPS and cash flows
when the Statement is adopted.
On March 29, 2005, the SEC issued Staff Accounting Bulletin "SAB" No. 107
regarding the interaction between SFAS 123(R) which was revised in December 2004
and certain SEC rules and regulations and provides the SEC's staff views
regarding the valuation of share-based payment arrangements for public
companies. The Company is evaluating the impact this guidance will have on its
financial condition, results of operation and cash flows.
On April 14, 2005, the SEC issued a press release that revised the required date
of adoption under SFAS 123(R). The new rule allows for companies to adopt the
provisions of SFAS 123R beginning on the first annual period beginning after
June 15, 2005. Based on the new required adoption date, the Company plans to
adopt SFAS 123(R) as of the beginning of the first quarter of 2006. The Company
is evaluating the impact this guidance will have on its financial condition,
results of operations and cash flows.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43" ("FAS 151"), which is the result of its efforts to converge U.S.
accounting standards for inventories with International Accounting Standards.
FAS No. 151 requires idle facility expenses, freight, handling costs, and wasted
material (spoilage) costs to be recognized as current-period charges. It also
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. FAS No.
151 will be effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. We are evaluating the impact of this standard on our
consolidated financial statements.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Act of 1934, as amended, concerning, among other things, (i) possible or assumed
future results of operations, contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," (ii) prospects for the
Company's business or products; (iii) other matters that are not historical
facts. These forward-looking statements are identified by their use of terms and
phrases such as "believes," "expects," "anticipates," "intends," "estimates,"
"plans" and similar terms and phrases.
These statements are based on certain assumptions and analyses made by the
Company in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it believes
are appropriate in the circumstances. The Company's business and results of
operations are subject to a number of assumptions, risks and uncertainties, many
of which are beyond the Company's ability to control or predict. Because of
these risks and uncertainties, actual results may differ materially from those
expressed or implied by forward-looking statements, and investors are cautioned
not to place undue reliance on such statements, which are not guarantees of
future performance and which speak only as of the date thereof.
Factors that could cause actual results to differ materially include, but are
not limited to,
- - Our failure to implement and maintain effective internal controls in our
business could have a material adverse effect on our business, financial
condition, results of operations and stock price.
- - Future changes in financial accounting standards or taxation rules may
adversely affect our reported results of operations.
- - The Company's purchase of certain assets of III may not result in a successful
product.
- - The Company's increased R&D efforts may not result in products that are
successful in the marketplace
- - The Company's operating results and financial condition could be harmed if the
industries, into which it sells its products, demand fewer products similar to
products sold by the Company.
- - Our acquisitions, strategic alliances, joint ventures and divestitures may
result in financial results that are different than expected.
- - Technological change could cause the company's products to become
non-competitive or obsolete.
- - Consolidation in the environmental instrument market and changes in
environmental regulations could adversely affect the Company's business
- - Reduced capital spending by the Company's customers could harm its business
- - Environmental contamination caused by ongoing operations could subject the
Company to substantial liabilities in the future.
- - Compliance with governmental regulations may cause the Company to incur
significant expenses, and failure to maintain compliance with certain
governmental regulations may have a negative impact on the Company's business
and results of operations.
- - Economic, political, and other risks associated with international sales could
adversely affect the Company's results of operations.
- - The Company faces competition from third parties in the sale of its products.
- - The Company could incur substantial costs in protecting and defending its
intellectual property, and loss of patent rights could have a material adverse
effect on the Company's business.
- - The Company's fluctuating quarterly operating results may negatively impact
stock price.
- - Although inflation has not had a material impact on the Company's operations,
there is no assurance that inflation will not adversely affect its operations in
the future.
8
- - Failure of suppliers to deliver sufficient quantities of parts in a timely
manner could cause the Company to lose sales and, in turn, adversely affect the
Company's results of operations.
- - The Company's inability to adjust its orders for parts or adapt its
manufacturing capacity in response to changing market conditions could adversely
affect the Company's earnings.
- - If the Company suffers loss to our facilities or distribution system due to
catastrophe, our operations could be seriously harmed.
- - The introduction of new products results in risks relating to start up of such
products, customer acceptance, employee training, distributor training, and
phase out of old products.
The cautionary statements contained or referred to herein should be considered
in connection with any written or oral forward-looking statements that may be
issued by the Company or persons acting on the Company's behalf. The Company
does not undertake any obligation to release any revisions to or to update
publicly any forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events. When
considering forward-looking statements, you should also keep in mind the risk
factors described in our Annual Report on Form 10-K for the year ended December
31, 2004.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto.
OPERATING RESULTS
Total net revenues for the three months ended March 31, 2005 increased
$1,306,000 or 20.4% to $7,700,000 compared to $6,394,000 for the same period of
the prior year. Product revenues increased $1,456,000, or 26.3% to $7,002,000
compared to $5,546,000 for the same period of the prior year. Sales were up in
all product lines with the exception of refrigerant monitoring products. The
increase in sales during the first quarter was driven by shipments of the
MINICAMS air-monitoring systems from backlog, and strong bookings and shipments
of total organic carbon analyzer products, and automated chemistry analyzer
products.
Revenues from services decreased $150,000 or 18% to $698,000 compared to
$848,000 for the same period of the prior year. Revenues from services decreased
compared to the three months ended March 31, 2004, primarily due to lower
revenues from in-house, factory repair and field repair services.
International revenues from sales of products and services increased for the
three months ended March 31, 2005, compared to the same period of the prior year
and were led by strong sales in Europe and Asia. Domestic sales were down for
the three months ended March 31, 2005, except for sales to government
organizations.
While overall sales increased, demand from environmental testing labs and the
pharmaceutical markets were erratic and unpredictable. Bookings and shipments
were delayed and skewed toward the end of the quarter.
The environmental instrument market which we serve has been flat or declining
over the past several years and we have not seen a fundamental improvement in
these markets. We remain cautiously optimistic about future sales and have
identified a number of products and strategies we believe will allow us to grow
our business despite this decline, including the acquisition of complementary
businesses, developing new products, developing new applications for its
technologies, and strengthening our presence in selected geographic markets. No
assurance can be given that we will be able to successfully implement these
strategies, or if successfully implemented, that these strategies will result in
the growth of our business.
Gross profit for the three months ended March 31, 2005 increased to $4,055,000
or 53% of revenues, compared to $3,336,000, or 52% of revenues, for the same
period of the prior year. The increase in gross profit was primarily due to the
increased sales of products with higher margins including the MINICAMS
air-monitoring systems, total organic carbon analyzer products, and automated
chemistry analyzer products.
Selling, general, and administrative ("SG&A") expenses for the three months
ended March 31, 2005 increased to $2,313,000 or 30% of revenues, compared to
$2,009,000, or 31% of revenues, for the same period of the prior year. SG&A
expenses for the three months ended March 31, 2005 increased compared to the
same period of the prior year due to wages and related expenses, legal costs,
accounting costs, and insurance costs.
9
Research and development ("R&D") expenses for the three months ended March 31,
2005 increased $204,000 to $938,000, compared to $734,000 for the same period of
the prior year. R&D expenses expressed as a percentage of revenues, increased to
12% compared to 11% for the same period of the prior year. The increase in R&D
expenses for the three months ended March 31, 2005 was due to increased expenses
related to the development of potential new products. In the second quarter of
2003, we announced a plan to intensify our R&D efforts to add new features to
existing products and develop new products, and cautioned that R&D spending may
increase over historical levels as a dollar amount, and as a percentage of
revenues. Such increases in R&D expenditures may create operating losses in
future periods.
Consistent with the previously announced plan to increase R&D spending, certain
assets of Intelligent Ion, Inc. (III) were purchased in December of 2004 as
referenced in the Company's 10-K report for 2004. The increase in R&D spending
was primarily due to expenses related to the technology acquired in December of
2004 and to ongoing project expenses related to potential new products,
including technology in the field of Mass Spectrometry. The success of the
product development effort remains highly dependent on the remaining efforts to
achieve technical viability, rapidly changing customer markets, time to market,
and the extent to which other suppliers enter the market. The nature of the
efforts to develop this technology into a commercially viable product consists
primarily of research, planning, designing, experimenting, and testing
activities necessary to determine that the technology can meet market
expectations, including functionality and technical requirements. Failure of our
research efforts to prove that the technology will function for the intended
purpose, or to bring a product to market in a timely manner could result in lost
opportunity to capitalize on emerging markets, and could have a material adverse
impact on the future prospects of these R&D efforts.
In addition to the product development above, the Company introduced new
products at the Pittsburgh Conference, a major industry trade show. The products
introduced included a new total organic carbon analyzer, discrete cyanide
analyzer and a new auto sampler for the gel permeation chromatography product
line. We expect to begin shipping these new products during 2005.
Operating income for the three months ended March 31, 2005 increased $211,000,
or 36% to $804,000, compared to $593,000 for the same period of the prior year.
The increase in operating income for the three months ended March 31, 2005 is
primarily due to the increase in revenues from product sales partially offset by
an increase in R&D and SG&A expenditures.
Other income, net, which is comprised of interest and dividend income from
investments, interest income from customer leases and gain/loss from
dispositions of Company property, decreased to $111,000 for the three months
ended March 31, 2005, compared to $126,000 for the same period of the prior year
primarily due to income recognized from the cash surrender value of a life
insurance policy in the first quarter of 2004.
In the first quarter of 2004, we incurred a loss from an unconsolidated
investee, which amounted to $74,000. The loss from this unconsolidated
investment represented our share of the results of operations from our
investment in the preferred shares of III. We incurred a loss of all of our
remaining investment in III in the third quarter of 2004, and acquired certain
assets of III in the fourth quarter of 2004. Accordingly, we incurred no such
expense in the period ending March 31, 2005.
Income before income taxes increased $270,000 or 42% to $915,000 compared to
$645,000 for the same period of the prior year primarily due to increased sales
partially offset by an increase in R&D, SG&A expenses and loss from
unconsolidated investee.
Provision for income taxes increased $76,000 for the three months ended March
31, 2005 to a provision of $295,000 compared to $219,000 for the same period of
the prior year. The effective tax rate was 32% for the quarter ended March 31,
2005 compared to 34% for the same period of the prior year.
Net income for the quarter ended March 31, 2005 increased $194,000 or 46% to
$620,000 compared to $426,000 for the same period of the prior year, primarily
due to increased sales partially offset by an increase in R&D SG&A expenses and
loss from unconsolidated investee. Basic and diluted earnings per share for the
quarter ended March 31, 2005 were $0.22 and $0.21 per share, respectively,
computed based on basic and diluted weighted average shares outstanding of
2,817,000 and 2,904,000, respectively, compared to basic and diluted earnings
per share of $0.15 per share for the same period of the prior year computed
based on basic and diluted weighted average shares outstanding of 2,764,000 and
2,847,000, respectively. Earnings per share increased due to the increase in net
income.
10
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $1,298,000 as of March 31, 2005, compared to
$1,541,000 as of December 31, 2004. Working capital as of March 31, 2005
increased to $16,582,000, compared to $15,989,000 as of December 31, 2004
primarily due to increases in inventory and short-term investments. Working
capital, as a percentage of total assets, was 64% as of March 31, 2005 and 63%
at December 31, 2004. The current ratio was 4.2 at March 31, 2005 and 4.1 at
December 31, 2004. Total liabilities-to-equity ratio decreased to 25% as of
March 31, 2005, compared to 26% as of December 31, 2004.
Net cash flow provided by operating activities for the quarter ended March 31,
2005 was $477,000, compared to $704,000 for the same period of the prior year.
The decrease in cash flow from operating activities in the three months ended
March 31, 2005 was primarily due to changes to working capital resulting from
increases in inventories and investments in sales-type leases. Net cash flow
(used in) investing activities was $(798,000) for the three months ended March
31, 2005, compared to $(566,000) for the same period of the prior year. The
increase in cash used in investing activities was primarily due to an increase
in the purchases of investments with excess cash. Net cash flow provided by
financing activities for the three months ended March 31, 2005 was $78,000
compared to $144,000 for the same period of the prior year. The decrease in cash
provided by financing activities was primarily due to a decrease in cash
received in connection with the issuance of stock to employees pursuant to the
exercise of stock option awards.
We have historically been able to fund working capital and capital expenditures
from operations, and expect to be able to finance our 2005 working capital
requirements from cash on hand and funds generated from operations. However,
demand for our products is influenced by the overall condition of the economy in
which we sell our products, by the capital spending budgets of our customers and
by our ability to successfully meet our customers' expectations. The
environmental instrument market which we serve has been flat or declining over
the past several years. Any further decline in our customers' markets or in
general economic conditions would likely result in a further reduction in demand
for our products and services and could harm our results of operations and,
therefore, harm the primary source of our cash flows.
Other matters that could affect the extent of funds required within the
short-term and long-term include future acquisitions of other businesses or
product lines, extensive investment in product R&D activities, or spending to
develop markets for our products. We may engage in discussions with third
parties to acquire new products or businesses or to form strategic alliances and
joint ventures. These types of transactions may require additional funds from
sources other than current operations. We believe that such funds would come
from traditional institutional debt financing or other third party financing.
The Company's initiative in 2003 to obtain a mass-selective detector for use in
a new product led to the strategic alliance with III and our investment in and
funding of III's development. At the time of acquiring certain III assets and at
year end 2004, we reported the following: "With the purchase of the assets of
III, the Company anticipates spending at least $1,500,000 to complete the
development of a commercial product or products based on the technology and
incorporate that technology into our products." We have been evaluating the
status of the product development that III was conducting under the Product
Purchase Agreement and at this time we are unable to update this statement. The
Company anticipates using its own employees and certain key contractors to
attempt to complete the product development. Such research efforts are
experimental and may cost more than planned. Nevertheless, we believe that we
have the working capital to maintain our commitment to this development effort.
In the second quarter of 2003, we announced a plan to undertake a more extensive
research, development, and engineering effort with the intent of developing
products with innovative technologies. The major goals in our efforts are (i)to
position the Company to serve new markets, (ii)to increase our position in the
beverage market, and (iii)to broaden our product offering in the process
analytical instruments market. Our plan to increase research and development
will increase R&D expenses. Such expenses will include hiring additional
personnel, purchasing supplies and component products for experimental use,
outsourcing certain work, and using consulting services. We expect that such
expenses will fluctuate quarterly based on the specific activity during the
quarter. Such fluctuating expenditures, together with fluctuating revenues, may
result in a quarterly or annual operating loss. We believe we have sufficient
cash on hand and funds from operations to maintain our commitment to this plan.
11
Since 1995, we have repurchased an aggregate of 1,755,978 shares at an average
purchase price of $4.13 per share, pursuant to the Company's stock repurchase
program. No repurchases were made during 2004 or during the three months ended
March 31, 2005. We may purchase up to an additional 19,022 shares under the
current stock repurchase program. We may seek approval from the Company's Board
of Directors to expand this program in the future if it believes repurchases
continue to be in the best interests of the Company. Expansion of this program
would also be funded from cash from operations. We do not expect to declare a
dividend in the foreseeable future.
The Company conducts some operations in leased facilities in Birmingham, Alabama
under an operating lease expiring on November 30, 2006, and a six-month, prepaid
lease expiring in June of 2005 for office space in Seattle, Washington. Future
minimum rental payments under the lease in Birmingham are $140,000 for 2005 and
$171,000 for 2006.
Other than the items discussed above, we are not aware of other commitments or
contingent liabilities that would have a materially adverse effect on the
Company's financial condition, results of operations, or cash flows.
SEGMENT INFORMATION
The Company manages its businesses primarily on a product and services basis.
The Company aggregates its segments as one reportable segment based on the
similar characteristics of their operations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to
implement critical accounting policies and to make estimates that could
significantly influence the results of operations and financial position. The
accounting policies and estimates, which significantly influence the results of
the Company's operations and its financial position, include revenue recognition
policies, the valuation allowance for inventories and accounts receivable,
evaluation of the impairment of and estimated useful lives of intangible assets,
and estimates for future losses on product warranties.
REVENUE RECOGNITION. The Company derives revenues from three sources: system
sales, part sales, and services. For system sales and parts sales, revenue is
generally recognized when persuasive evidence of an arrangement exists, delivery
has occurred, the contract price is fixed or determinable, title and risk of
loss have passed to the customer, and collection is reasonably assured. The
Company's sales are typically not subject to rights of return, and historically,
sales returns have not been significant. System sales that do not involve unique
customer acceptance terms or new specifications or technology with customer
acceptance provisions, and that involve installation services are accounted for
as multiple-element arrangements, where the fair value of the installation
service is deferred when the product is delivered and recognized when the
installation is complete. In all cases, the fair value of undelivered elements,
such as accessories ordered by customers, is deferred until the related items
are delivered to the customer. For certain other system sales that do involve
unique customer acceptance terms or new specifications or technology with
customer acceptance provisions, all revenue is generally deferred until customer
acceptance. Revenue related to part sales is recognized when the parts have been
shipped and title and risk of loss have passed to the customer. Deferred revenue
from such system sales is presented as unearned revenues in accrued liabilities
in the accompanying condensed consolidated balance sheets.
Products generally carry one year of warranty. Once the warranty period has
expired, the customer may purchase an extended product warranty typically
covering an additional period of one year. Extended warranty billings are
generally invoiced to the customer at the beginning of the contract term.
Revenue from extended warranties is deferred and recognized ratably over the
duration of the contracts. Unearned extended warranty revenue is included in
unearned revenues in accrued liabilities in the accompanying condensed
consolidated balance sheets.
ACCOUNTS RECEIVABLE. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the failure of its customers to make required
payments and for estimated sales returns. Customers may not make payments or
return products due to a variety of reasons including deterioration of their
financial condition or dissatisfaction with the Company's products. Management
makes regular assessments of doubtful accounts
12
and uses the best information available including correspondence with customers
and credit reports. If the Company determines that there is impairment in the
ability to collect payments from customers, additional allowances may be
required. Certain distributors or manufacturer's representatives in growing
geographic areas, on management approval, may exceed credit limits to
accommodate financial growth. Historically, the Company has not experienced
significant bad debt losses, but the Company could experience increased losses
if general economic conditions of its significant customers or any of the
markets in which it sells its products were to deteriorate. This could result in
the impairment of a number of its customers' ability to meet their obligations,
or if management made different judgments or utilized different estimates for
sales returns and allowances for doubtful accounts.
INVENTORIES. Inventories consist of electronic equipment and various components.
The Company operates in an industry where technological advances or new product
introductions are a frequent occurrence. Either one of these occurrences can
make obsolete or significantly impair customer demand for a portion of the
Company's inventory on hand. The Company regularly evaluates its inventory and
maintains a reserve for inventory obsolescence and excess inventory. As a
policy, the Company provides a reserve for products with no movement in six
months or more and which management determines, based on available market
information, are no longer saleable. The Company also applies subjective
judgment in the evaluation of the recoverability of the rest of its inventory
based upon known and expected market conditions and company plans. If the
Company's competitors were to introduce a new technology or product that renders
a product sold by the Company obsolete or unnecessary, it could have a
significant adverse effect on the Company's future operating results and
financial position.
The Company had changes in required reserves in recent periods due to
discontinuation of certain product lines and obsolescence related to new product
introductions, as well as declining market conditions. As a result, the Company
incurred net inventory charges of approximately $42,000 during fiscal 2004.
INTANGIBLE ASSETS. The Company's intangible assets primarily include product
patents. The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142 on January 1, 2002, as required. Accordingly, the Company reviews the
recoverability and estimated useful lives of other intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable.
PRODUCT WARRANTIES. Products are sold with warranties ranging from 90 days to
one year, and extended warranties may be purchased for some products. The
Company establishes a reserve for warranty expenditures and then adjusts the
amount of reserve, annually, if actual warranty experience is different than
accrued. The Company makes estimates of these costs based on historical
experience and on various other assumptions including historical and expected
product failure rates, material usage, and service delivery costs incurred in
correcting a product failure. Should actual product failure rates, material
usage, or service delivery costs differ from estimates, revisions to the
estimated warranty liability would be required.
13
RECENT PRONOUNCEMENTS-SEE NOTE 8 OF ITEM 1
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to a variety of market risks, including changes in
interest rates and the market value of its investments. In the normal course of
business, the Company employs established policies and procedures to manage its
exposure to changes in the market value of its investments.
The fair value of the Company's investments in debt and equity securities at
March 31, 2005 and December 31, 2004 was $9,172,000 and $8,586,000,
respectively. Year-to-date unrealized losses in the fair value of some of those
investments are primarily due to recent increases in interest rates. The
Company's investment policy is to manage its investment portfolio to preserve
principal and liquidity while maximizing the return on the investment portfolio
by investing in multiple types of investment grade securities. The Company's
investment portfolio is primarily invested in short-term securities, with at
least an investment grade rating to minimize credit risk, and preferred stocks.
Although changes in interest rates may affect the fair value of the investment
portfolio and cause unrealized gains or losses, such gains or losses would not
be realized unless the investments were sold. There were no realized gains or
losses on sales of such investments during the first quarter of 2005.
ITEM 4. CONTROLS AND PROCEDURES.
The Company maintains a set of disclosure controls and procedures designed to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. As of March 31, 2005, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the chief executive officer and principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the chief executive and principal
financial officer have concluded that the Company's disclosure controls and
procedures are effective. Subsequent to the date of their evaluation, there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls.
The Company's management, including the CEO and principal financial officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs.
14
PART II- OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
31.1 Principal Executive Officer certification pursuant to 18.
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer certification pursuant to 18.
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Principal Executive Officer certification pursuant to 18.
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Principal Financial Officer certification pursuant to 18.
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Form 8-K dated February 9, 2005, regarding entry into a Material
Definitive Agreement relating to base salary increases and fiscal 2004
performance related bonuses for O.I. Corporation's named executive officers.
15
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.
O. I. CORPORATION
---------------------------------
(Registrant)
Date: May 6, 2005 BY: /s/ William W. Botts
-------------- ------------------------------------
William W. Botts
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 6, 2005 BY: /s/ Juan M. Diaz
-------------- ------------------------------------
Juan M. Diaz
Vice President- Corporate Controller
(Principal Financial Officer and
Principal Accounting Officer)
16
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
31.1 Principal Executive Officer certification pursuant to 18. U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer certification pursuant to 18. U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Principal Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Principal Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002