UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 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
-----------------
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-0728053
- ---------------------- -------------------
State of Incorporation I.R.S. Employer
Identification No.
P.O. Box 9010
151 Graham Road
College Station, Texas 77842-9010
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (979) 690-1711
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]
As of June 30, 2005, there were 2,839,142 shares of the issuer's common stock,
$.10 par value, outstanding.
Page 1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O.I. CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except par value)
JUNE 30, DEC. 31,
2005 2004
----------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,662 $ 1,541
Accounts receivable-trade, net of allowance for
doubtful accounts of $302 and $271, respectively 4,895 4,898
Investment in sales-type leases, current portion 327 273
Investments, at market 8,981 8,586
Inventories 5,041 5,012
Current deferred income tax assets 793 698
Other current assets 262 181
----------- --------
Total current assets 21,961 21,189
Property, plant, and equipment, net 3,329 3,404
Investment in sales-type leases, net of current 374 275
Long-term deferred income tax assets 303 287
Intangible assets, net 246 208
Other assets 34 24
----------- --------
Total assets $ 26,247 $ 25,387
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,359 $ 1,897
Accrued liabilities 3,508 3,303
----------- --------
Total current liabilities 4,867 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, 2,839 and 2,807
outstanding, respectively 410 410
Additional paid-in capital 4,371 4,326
Treasury stock, 1,264 and 1,296 shares,
respectively, at cost (5,521) (5,660)
Retained earnings 22,079 21,016
Accumulated other comprehensive income, net 41 95
----------- --------
Total stockholders' equity 21,380 20,187
----------- --------
Total liabilities and stockholders' equity $ 26,247 $ 25,387
=========== ========
See notes to unaudited condensed consolidated financial statements
Page 2
O.I. CORPORATION
Condensed Consolidated Statements of Income
and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2005 2004 2005 2004
-------- ------- ------- -------
Net revenues:
Products $ 6,012 $ 6,666 $13,013 $12,212
Services 1,012 663 1,711 1,511
-------- ------- ------- -------
7,024 7,329 14,724 13,723
Cost of revenues:
Products 3,079 3,320 6,371 5,986
Services 386 380 739 772
-------- ------- ------- -------
3,465 3,700 7,110 6,758
Gross Profit 3,559 3,629 7,614 6,965
Selling, general & administrative expenses 2,121 2,118 4,435 4,127
Research and development expenses 967 731 1,905 1,465
-------- ------- ------- -------
Operating income 471 780 1,274 1,373
Other income, net 125 87 238 213
Loss from unconsolidated investee -- (88) -- (162)
-------- ------- ------- -------
Income before income taxes 596 779 1,512 1,424
Provision for income taxes 154 264 449 483
-------- ------- ------- -------
Net income $ 442 $ 515 $ 1,063 $ 941
Other comprehensive income, net of tax:
Unrealized gains/(losses) on
Investments, available-for-sale 9 (291) (54) (222)
-------- ------- ------- -------
Comprehensive income $ 451 $ 224 $ 1,009 $ 719
======== ======= ======= =======
Earnings per share:
Basic $ 0.16 $ 0.19 $ 0.38 $ 0.34
Diluted $ 0.15 $ 0.18 $ 0.37 $ 0.33
Shares used in computing earnings per share:
Basic 2,837 2,783 2,812 2,774
Diluted 2,898 2,861 2,888 2,854
See notes to unaudited condensed consolidated financial statements
Page 3
O.I. CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,063 $ 941
Depreciation & amortization 285 260
Deferred income taxes (96) 43
Gain on disposition of property -- (5)
Loss from unconsolidated investee -- 162
Change in working capital (547) (409)
-------- --------
Net cash flows provided by operating activities 705 992
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (2,643) (1,372)
Maturity of investments 2,170 979
Proceeds from insurance policy -- 55
Purchase of property, plant & equipment (202) (261)
Proceeds from sales of assets -- 7
Change in other assets (56) (7)
-------- --------
Net cash flows (used in) investing activities (731) (599)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash flows provided from issuance of common stock pursuant to exercise of
employee stock options and employee stock purchase plan 147 172
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 121 565
Cash and cash equivalents, at beginning of period 1,541 2,869
-------- --------
Cash and cash equivalents, at end of period $ 1,662 $ 3,434
======== ========
See notes to unaudited condensed consolidated financial statements
Page 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 "us"), 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):
June 30, 2005 Dec. 31, 2004
------------- -------------
Raw materials $ 3,742 $ 3,056
Work-in-process 642 1,072
Finished goods 657 884
-------- --------
$ 5,041 $ 5,012
======== ========
3. COMPREHENSIVE INCOME.
Other comprehensive income 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 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 and
six months ended June 30, 2005 of 61,000 and 77,000 respectively, were added to
the weighted average shares used to calculate diluted earnings per share.
Incremental shares from assumed exercise of dilutive options for the same period
of the prior year of 78,000 and 80,000, respectively, were added to the weighted
average shares used to calculate diluted earnings per share. There were no
adjustments made to net income as reported to calculate basic or diluted
earnings per share. For the three and six months ended June 30, 2005 there were
no anti-dilutive shares. For the three and six months ended June 30, 2004,
options to acquire 45,000 shares of common stock, respectively, at weighted
average exercise prices of $8.36 per share, were not included in the computation
of dilutive earnings per share as their effect would be anti-dilutive.
Page 5
5. STOCK-BASED COMPENSATION.
At June 30, 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 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 Six Months Ended
June 30 June 30
(in thousands, except per share amounts)
2005 2004 2005 2004
------ ------ ------ ------
Net income, as reported $ 442 $ 515 $1,063 $ 941
Deduct: Total stock-based compensation expense determined
under fair value based method for awards granted, modified,
or settled, net of related tax effects
20 18 41 36
------ ------ ------ ------
Pro forma net income 422 497 1,022 905
Earnings per share:
Basic -- as reported $ 0.16 $ 0.19 $ 0.38 $ 0.34
Basic -- pro forma $ 0.15 $ 0.18 $ 0.36 $ 0.33
Diluted -- as reported $ 0.15 $ 0.18 $ 0.37 $ 0.33
Diluted -- pro forma $ 0.15 $ 0.17 $ 0.35 $ 0.32
6. INTANGIBLE ASSETS, NET.
Intangible assets, net, consisted of patents relating to technology used in the
Company's products. Intangible assets, net, as of June 30, 2005 and December 31,
2004 were approximately $246,000 and $208,000, net of accumulated amortization
of $159,000 and $151,000, respectively. Total amortization expense on intangible
assets for the three and six months ended June 30, 2005 and 2004 was
approximately $4,000, $8,000, $4,000 and $6,000, respectively. The estimated
aggregate amortization expense for the remainder of 2005 and each of the four
succeeding fiscal years, 2006 to 2009, is approximately $7,000, $15,000,
$14,000, $13,000, and $13,000.
7. PRODUCT WARRANTY LIABILITIES.
The changes in the Company's product warranty liabilities for the six months
ended June 30, 2005 were as follows (in thousands):
Liabilities, beginning of year $ 651
Expense for new warranties issued 189
Warranty claims (224)
-----
Liabilities, June 30, 2005 $ 616
=====
8. RECENT PRONOUNCEMENTS.
In December 2004, the Financial Accounting Standards Board issued Statement 123
(revised 2004), Share-Based Payment (SFAS 123(R)). SFAS 123(R) 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. SFAS123(R) 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." SFAS 123(R) supersedes APB Opinion 25, "Accounting for Stock
Issued to Employees and its related
Page 6
interpretations", and eliminates the alternative to use APB Opinion 25's
intrinsic value method of accounting, which the Company is currently using.
SFAS 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 SFAS 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 SFAS 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 SFAS 123(R) will
have on its financial position, results of operations, earnings per share and
cash flows when SFAS 123(R) 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 123(R) 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", which is the result of its efforts to converge U.S. accounting
standards for inventories with International Accounting Standards. SFAS 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. SFAS 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.
The FASB has issued SFAS No. 154, "Accounting Changes and Error Corrections".
This new standard replaces APB Opinion No. 20, "Accounting Changes", and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements".
Among other changes, SFAS 154 requires that a voluntary change in accounting
principle be applied retrospectively with all prior period financial statements
presented on the new accounting principle, unless it is impracticable to do so.
SFAS 154 also provides that (1) a change in method of depreciating or amortizing
a long-lived nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and (2)
correction of errors in previously issued financial statements should be termed
a "restatement." SFAS 154 is effective for accounting changes and correction of
errors made in fiscal years beginning after December 15, 2005. Early adoption of
SFAS 154 is permitted for accounting changes and correction of errors made in
fiscal years beginning after June 1, 2005.
On June 8, 2005, the FASB issued a FASB Staff Position (FSP) interpreting FASB
Statement No. 143, Accounting for Asset Retirement Obligations . Specifically,
the FASB issued FSP FAS 143-1, "Accounting for Electronic Equipment Waste
Obligations." This standard addresses the accounting for obligations associated
with Directive 2002/96/EC, Waste Electrical and Electronic Equipment, which was
adopted by the European Union. The FSP provides guidance on how to account for
the effects of the Directive but only with respect to historical waste (i.e.,
waste associated with products placed on the market on or before August 13,
2005). The guidance in the FSP is required to be applied the later of
Page 7
(1) the first reporting period ending after June 8, 2005, or (2) the date of the
adoption of the law by the applicable EU-member country. As of June 30, 2005,
many EU-member countries had not yet adopted the Directive, the Company is still
evaluating the impact, if any, of FSP FAS 143-1 on its financial position, cash
flow or results of operations.
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 Intelligent Ion, Inc. including
intellectual property, design and prototypes relating to mass spectrometry (MS)
and the Company's plans to enter the field of MS 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 like or
similar to products sold by the Company.
- - Future 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.
Page 8
- - 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.
- - 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, including 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
FOR THE THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO JUNE 30,2004
REVENUES. Total net revenues for the three months ended June 30, 2005 decreased
$305,000, or 4.2%, to $7,024,000, compared to $7,329,000 for the same period of
the prior year.
Product revenues decreased $654,000, or 9.8% to $6,012,000, compared to
$6,666,000 for the same period of the prior year. Sales were flat or lower in
all product lines, with the exception of Total Organic Carbon (TOC) analyzers
and Automated Chemistry Analyzer (ACA) products. In the same period of the prior
year, sales were driven by Gas Chromatography (GC) components and systems,
including MINICAMS and the Eclipse Purge-and-Trap Sample Concentrator, a new
product in 2004. Sales of GC components and systems and other products were
lower primarily due to customers who have delayed their capital expenditure
decisions, and intensified competition for prospective sales. Although sales
typically improve in the second quarter after Pittcon, the major analytical
instruments industry trade show , we have experienced a delay in customer
capital expenditures. Moreover,
Page 9
unlike the Eclipse in the same period of the prior year, the three months ended
June 30, 2005 did not include significant sales from new products. Even though
new products were announced at Pittcon, shipments of the Aurora Total Organic
Carbon Analyzer did not begin until late in the second quarter, and a new
Discrete Automated Chemistry analyzer did not begin shipping in the second
quarter.
Revenues from services increased $349,000, or 52.6% to $1,012,000, compared to
$663,000 for the same period of the prior year. The increase was due in part to
approximately $253,000 in service revenue resulting from payment received for
services previously performed. We had not previously recognized revenues related
to the performance of these services due to doubts about the collectibility of
these amounts. This treatment was consistent with accounting principles
generally accepted in the United States and our revenue recognition policies.
The Company does not expect this same type of increase to recur in the immediate
succeeding quarters.
Domestic revenues for the three months ended June 30, 2005 decreased compared to
the same period of the prior year for the aforementioned reasons. International
revenues were mixed depending on the region. Sales to Latin America and Europe
increased, and sales to Asia Pacific were lower.
Although the outlook for the environmental instrument market is flat, we have
released several new products that we believe will better position the Company
for growth. However, any growth will be dependent on improved capital spending
in certain markets, including the domestic market, successful market penetration
of our new TOC products and release of the Discrete Automated Chemistry
analyzer. Our success in market penetration with other newly introduced products
has resulted in competitors lowering the price of their products and providing
services at discounted prices and in some cases including service at no cost.
As we view market demand, competitor actions, and prior year quarter sales
levels, no assurance can be given that sales will continue at the current
quarter rate or match prior year levels.
GROSS PROFIT. Gross profit for the three months ended June 30, 2005 decreased
$70,000, or 1.9% to $3,559,000, compared to $3,629,000 for the same period of
the prior year primarily due to a decrease in revenues relating to sales of GC
components and systems and an increase in warranty costs, partially offset by an
increase in service contract revenues. Gross profit represented 50.7% of
revenues for period, compared to 49.5% for the same period of the prior year.
SELLING, GENERAL, AND ADMINISTRATIVE. SG&A expenses for the three months ended
June 30, 2005 increased $3,000 to $2,121,000, compared to $2,118,000 for the
same period of the prior year. SG&A expenses increased as a percentage of
revenues for the three months ended June 30, 2005 to 30%, compared to 29% of
revenues for the same period of the prior year.
RESEARCH AND DEVELOPMENT. R&D expenses for the three months ended June 30, 2005
increased $236,000, or 32% to $967,000, compared to $731,000 for the same period
of the prior year. R&D expenses represented 13.8% of revenues for the period and
9.9% of revenues for the same period of the prior year. The increased R&D
expenditures were primarily due to cost relating to work on a potential new mass
spectrometer product. The Company has brought in-house development work for a
major component of the potential new product and accordingly incurred the
associated cost. We anticipate R&D expenses to remain at these levels and
perhaps increase, depending on the outcome of our ongoing efforts and actions we
may need to take in attempts to solve technical challenges encountered in our
efforts to create a commercial product from licensed intellectual property
relating to mass spectrometry.
OPERATING INCOME. Operating income for the three months ended June 30, 2005
decreased $309,000, or 39.6% to $471,000, compared to $780,000 for the same
period of the prior year. The decrease in operating income was primarily due to
a decrease in revenues and an increase in R&D expenses.
Page 10
OTHER INCOME, NET. Other income for the three months ended June 30, 2005
increased $38,000 to $125,000, compared to $87,000 for the same period of the
prior year. The increase was due to higher yields on fixed income investments.
INCOME BEFORE INCOME TAXES. Income before income taxes for the three months
ended June 30, 2005 decreased $183,000, or 23.5% to $596,000, compared to
$779,000 for the same period of the prior year primarily due to decreases in
revenues and an increase in R&D expenses, partially offset by an increase in
other income and a decrease in loss from an unconsolidated investee amounting to
$87,000.
PROVISION FOR INCOME TAXES. Provision for income taxes decreased $110,000 for
the three months ended June 30, 2005 to a provision of $154,000, compared to
$264,000 for the same period of the prior year. The effective tax rate was 26%
for the three months ended June 30, 2005, compared to 34% for the same period of
the prior year, primarily due to increased income tax credits for R&D
expenditures.
NET INCOME. Net income for the three months ended June 30, 2005 decreased
$73,000, or 14% to $442,000, compared to net income of $515,000 in the same
period of the prior year. Basic earnings per share was $0.16, and diluted
earnings per share was $0.15 for the three months ended June 30, 2005, compared
to basic and diluted earnings of $0.19 and $0.18 per share, respectively, for
the same period of the prior year. The decrease in net income for the three
months ended June 30, 2005 was primarily due to a decrease in revenues from
product sales compared to the same period of the prior year combined with an
increase in R&D expense, partially offset by an increase in other income and a
decrease in the effective tax rate.
FOR THE SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO JUNE 30,2004
Total net revenues for the six months ended June 30, 2005 increased $1,001,000,
or 7.3% to $14,724,000, compared to $13,723,000 for the same period of the prior
year. Product revenues increased $801,000, or 6.6% to $13,013,000, compared to
$12,212,000 for the same period of the prior year. The year-to-date increase in
product revenues was primarily due to sales of MINICAMS, TOC and ACA products in
the first quarter. Overall, the increases in sales in 2005 in the first quarter
were followed by a weaker second quarter in GC components and systems, including
MINICAMS, due to customer delays in capital expenditure decisions and
intensified competition.
Revenues from services increased $200,000, or 13.2% to $1,711,000, compared to
$1,511,000 for the same period of the prior year. The increase for services
provided is not expected to recur.
Domestic revenues increased although we noted some weakness during the second
quarter. International revenues for the six months ended June 30, 2005
increased, compared to the same period of the prior year. In particular, sales
to Europe increased, while sales to China and certain other Asian Pacific
countries decreased.
GROSS PROFIT. Gross profit for the six months ended June 30, 2005 increased
$649,000, or 9.3% to $7,614,000, compared to $6,965,000 for the same period of
the prior year, primarily due to an increase in revenues relating to sales of
TOC, ACA and MINICAMS, partially offset by an increase in warranty costs. Gross
profit represented 51.7% of revenues for period compared to 50.7% for the same
period of the prior year.
SELLING, GENERAL, AND ADMINISTRATIVE. SG&A expenses for the six months ended
June 30, 2005 increased $308,000, or 7.5% to $4,435,000, compared to $4,127,000
for the same period of the prior year, primarily due to increased costs for
employee benefits.
RESEARCH AND DEVELOPMENT. R&D expenses for the six months ended June 30, 2005
increased $440,000, or 30.0% to $1,905,000, compared to $1,465,000 for the same
period of the prior year. R&D expense represented 12.9% of revenues for the
period and 10.7% of revenues for the same period of the prior year as the
Company is continuing significant research and development efforts to introduce
more new products.
Page 11
OPERATING INCOME. Operating income for the six months ended June 30, 2005
decreased $99,000, or 7.2% to $1,274,000, compared to $1,373,000 for the same
period of the prior year. The decrease in operating income was primarily due to
increases in SG&A costs and R&D activities offsetting an increase in revenues.
OTHER INCOME, NET. Other income for the six months ended June 30, 2005 increased
$25,000 to $238,000, compared to $213,000 for the same period of the prior year.
The increase in other income was primarily due to higher yields on invested
cash.
INCOME BEFORE INCOME TAXES. Income before income taxes for the six months ended
June 30, 2005 increased $88,000, or 6.2% to $1,512,000, compared to $1,424,000
for the same period of the prior year, primarily due to having no loss on
unconsolidated investee and an increase in revenues and gross profit from sales
of products partially offset by an increase in SG&A and R&D expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes decreased $34,000 for the
six months ended June 30, 2005 to a provision of $449,000, compared to $483,000
for the same period of the prior year. The effective tax rate was 30% for the
six months ended June 30, 2005, compared to 34% for the same period of the prior
year, primarily due to increased income tax credits for R&D expenditures.
NET INCOME. Net income for the six months ended June 30, 2005 increased
$122,000, or 13% to $1,063,000, compared to net income of $941,000 for the same
period of the prior year. Basic earnings per share was $0.38 per share, and
diluted earnings per share was $0.37 per share for the six months ended June 30,
2005, compared to basic and diluted earnings of $0.34 and $0.33 per share for
the same period of the prior year. The increase in net income for the six months
ended June 30, 2005 was primarily due to an increase in revenues from sales of
products, compared to the same period of the prior year, partially offset by an
increase in R&D and SG&A spending.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities for the six months ended June 30, 2005 was
$705,000 compared to $992,000 for the same period of the prior year, and cash
and investments totaled $10,643,000 as of June 30, 2005, compared to $10,127,000
as of December 31, 2004. 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. Working capital as of June 30, 2005 increased to $17,094,000,
compared to $15,989,000 as of December 31, 2004. We continued to operate without
any borrowings.
Cash flow used in investing activities was $731,000. The Company invests a
portion of its excess funds generated from operations in short-term securities,
including money market funds, treasury bills, and a portion in preferred stocks.
The Company's primary plan for the use of cash is continuing significant
research and development efforts to introduce new products.
Other matters which could affect the extent of funds required within the
short-term and long-term, include future acquisitions of other businesses or
product lines. We may engage in discussions with third parties to acquire new
products or businesses or to form 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. We may also use our capital resources to enhance
the Company's competitiveness in the marketplace by providing favorable credit
terms to more customers, and increase stock levels of certain products to take
advantage of market opportunities.
Since 1995, we have repurchased an aggregate of 1,755,978 shares of our common
stock 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 six
months ended June 30, 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
Page 12
this program in the future if we believe 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 owns facilities in College Station, Texas, but conducts some
operations in leased facilities under an operating lease expiring on November
30, 2006. Future minimum rental payments under this lease for the remainder of
2005 are $97,000 and $173,000 for 2006. The Company believes its facilities to
be in good condition and believes they will be suitable for use for the
foreseeable future.
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 a warranty ranging from 90 days to one year. 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
Page 13
doubtful accounts 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 manufacturers
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 and
$33,000 during the six months ended June 30, 2005.
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.
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
December 31, 2004 and June 30, 2005 was $8,586,000 and $8,981,000, respectively.
A year-to-date unrealized loss in the fair value of those investments is $54,000
primarily due to recent
Page 14
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 such sales of investments during the second quarter.
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,
which 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 June 30, 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 chief executive officer 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.
PART II- OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders:
(a) An annual meeting of shareholders was held on May 9, 2005 at 11:00
a.m. at O.I. Corporation headquarters, 151 Graham Road, College
Station, Texas, for the purposes of considering and voting upon the
following matters: (i) the election of directors; and (ii) the
ratification of the appointment of independent public accountants.
(c)
Proposal No. 1 - Election of Directors For Withheld
- -------------------------------------- --------- --------
Jack S. Anderson 2,434,306 47,404
William W. Botts 2,440,457 41,253
Richard W. K. Chapman 2,443,321 38,389
Edwin B. King 2,441,121 40,589
Craig R. Whited 2,443,321 38,389
Proposal No. 2 - Ratification of Auditors For Against Abstain
- ----------------------------------------- --------- -------- -------
Grant Thornton LLP 2,477,100 815 3,795
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.
Page 15
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 May 13, 2005, regarding Item 1.01. Entry into a
Material Definitive Agreement: Indemnification Agreements with each
of its Directors and Executive Officers on May 10, 2005.
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: August 9, 2005 BY: /s/ William W. Botts
-----------------------------------
William W. Botts
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2005 BY: /s/ Juan M. Diaz
-----------------------------------
Juan M. Diaz
Vice President-Corporate Controller
(Principal Financial Officer and
Principal Accounting Officer)
Page 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
Page 17