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, 2006
[ ] 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the common stock as of May 1, 2006 was
2,876,756.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
O.I. CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except par value)
March 31, December 31,
2006 2005
----------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,854 $ 1,727
Accounts receivable-trade, net of allowance for
doubtful accounts of $335 and $326, respectively 6,273 6,324
Investment in sales-type leases-current portion 292 307
Investments, at market 9,263 9,841
Inventories 5,006 4,617
Current deferred income tax assets 920 904
Other current assets 195 179
------- -------
Total current assets 24,803 23,899
Property, plant and equipment, net 3,183 3,229
Investment in sales-type leases, net of current 246 190
Long-term deferred income tax assets 587 539
Intangible assets, net 304 276
Other assets 31 26
------- -------
Total assets $29,154 $28,159
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,757 $ 1,428
Accrued liabilities 4,035 3,963
------- -------
Total current liabilities 5,792 5,391
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 4,402 4,374
Treasury stock, 1,233 and 1,250 shares,
respectively, at cost (5,379) (5,456)
Retained earnings 23,980 23,502
Accumulated other comprehensive loss, net (51) (62)
------- -------
Total stockholders' equity 23,362 22,768
------- -------
Total liabilities and stockholders' equity $29,154 $28,159
======= =======
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,
---------------
2006 2005
------ ------
Net revenues:
Products $6,476 $7,002
Services 1,333 698
------ ------
7,809 7,700
Cost of revenues:
Products 3,184 3,292
Services 662 353
------ ------
3,846 3,645
Gross profit 3,963 4,055
Selling, general and administrative expenses 2,455 2,313
Research and development expenses 742 938
------ ------
Operating income 766 804
Other income, net 122 111
------ ------
Income before income taxes 888 915
Provision for income taxes 266 295
------ ------
Net income $ 622 $ 620
====== ======
Other comprehensive income/(loss), net of tax:
Unrealized gains/(losses) on investments 12 (64)
------ ------
Comprehensive income $ 634 $ 556
====== ======
Earnings per share:
Basic $ 0.22 $ 0.22
Diluted $ 0.21 $ 0.21
Shares used in computing earnings per share:
Basic 2,859 2,817
Diluted 2,940 2,904
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,
-----------------
2006 2005
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 622 $ 620
Depreciation & amortization 144 145
Deferred income taxes (70) (10)
Change in working capital (132) (278)
------- -------
Net cash flows provided by operating activities $ 564 $ 477
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (2,433) (2,051)
Maturity of investments 3,034 1,368
Purchase of property, plant & equipment (142) (115)
------- -------
Net cash flows provided by (used in) investing
activities $ 459 $ (798)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock pursuant to
exercise of employee stock options and employee
stock purchase plan 104 78
------- -------
Net cash flows provided by financing activities $ 104 $ 78
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,127 (243)
Cash and cash equivalents, at beginning of quarter 1,727 1,541
------- -------
Cash and cash equivalents, at end of quarter $ 2,854 $ 1,298
======= =======
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. 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, 2005.
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, 2006 Dec. 31, 2005
-------------- --------------
Raw materials $3,901 $3,297
Work-in-process 376 651
Finished goods 729 669
------ ------
$5,006 $4,617
====== ======
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, 2006 of 81,000 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 87,000 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. There were no anti-dilutive shares for the three months
ended March 31, 2006 or for the same period of the prior year.
5. STOCK-BASED COMPENSATION.
On January 1, 2006, we adopted the provisions of Statement 123 (revised 2004)
(Statement 123(R)), Share-Based Payment, which revises Statement 123, Accounting
for Stock-Based Compensation, and supersedes APB Opinion 25, Accounting for
Stock Issued to Employees. Statement 123(R) requires us to recognize expense
related to the fair value of our stock-based compensation awards, including
employee stock options.
Prior to the adoption of Statement 123(R), we accounted for stock-based
compensation awards using the intrinsic value method of Opinion 25. Accordingly,
we did not recognize compensation expense in our statements of income for
options we granted that had an exercise price equal to the market value of the
underlying common stock on the date of grant. As required by Statement 123, we
also provided certain pro forma disclosures for stock-based awards as if the
fair-value-based approach of Statement 123 had been applied.
We have elected to use the modified prospective transition method as permitted
by Statement 123(R) and therefore have not restated our financial results for
prior periods.
5
Under this transition method, we will apply the provisions of Statement 123(R)
to new awards and to awards modified, repurchased, or cancelled after January 1,
2006. Additionally, we will recognize compensation cost for the portion of
awards for which the requisite service has not been rendered (unvested awards)
that are outstanding as of January 1, 2006, as the remaining service is
rendered. The compensation cost we record for these awards will be based on
their grant-date fair value as calculated for the pro forma disclosures required
by Statement 123.
Our pre-tax compensation cost for stock-based employee compensation was $17,000
($10,000 after tax effects) for the first three months of fiscal 2006. As a
result of the adoption of Statement 123(R), our financial results were lower
than under our previous accounting method for share-based compensation by the
following amounts:
Three Months
Ended
March 31, 2006
--------------------
(in 000s, except per
share amounts)
Income before income taxes $17
Net income $10
Basic earnings per share --
Diluted earnings per share --
Statement 123(R) requires that cash flows from the exercise of stock options
resulting from tax benefits in excess of recognized cumulative compensation cost
(excess tax benefits) be classified as financing cash flows. For the three
months ended March 31, 2006, the excess tax benefits was $8,000.
The following table illustrates the effect on net income after tax and net
income per common share as if we had applied the fair value recognition
provisions of Statement 123 to stock-based compensation for the three-month
period ended March 31, 2005:
Three Months
Ended
March 31, 2005
--------------------
(in 000s, except per
share amounts)
Net income:
Net income, as reported $ 620
Deduct: Stock-based employee compensation expense determined
under fair value-based method for all awards, net of related
tax effects 15
-----
Pro forma net income $ 605
Basic earnings per common share:
As reported $0.22
Pro forma $0.21
Diluted earnings per common share:
As reported $0.21
Pro forma $0.21
No options were granted during the three months ended March 31, 2006 and 2005.
STOCK OPTION PLANS
We have three stock option plans, two of which have expired and one with shares
available for grant at March 31, 2006 as follows:
Plan
-----------------
2003 Incentive
Compensation Plan
Minimum exercise price as a percentage of fair market
value at date of grant 100%
Plan termination date December 31, 2012
Shares available for grant at March 31, 2006 272,000
Option grants under all three plans have a contractual life of ten years, except
grants
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to non-employee directors which have a contractual life of three years. Option
grants vest equally on each anniversary of the grant date, commencing with the
first anniversary, except grants to non-employee directors which vest 100% after
six months. We recognize compensation costs for these awards on a straight-line
basis over the service period.
The following is a summary of the changes in outstanding options for the three
months ended March 31, 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Shares Exercise Contractual Intrinsic
(000) Price Life Value (000)
------ -------- ----------- -----------
Outstanding at beginning of period 235 $5.60 4.3 years
Granted -- -- --
Exercised (17) $4.94 --
Forfeited (1) -- --
Expired (--) -- --
---
Outstanding at end of period 217 $5.65 5.5 years $1,843
Vested or expected to vest at end of
period 19 $6.92 7.2 years $ 136
Exercisable at end of period 189 $5.60 5.3 years $1,611
No options were granted during the first three months of fiscal 2006 and 2005.
The total intrinsic value of share options exercised during the first three
months of fiscal 2006 and 2005 was $152,000 and $115,000, respectively.
OTHER INFORMATION
As of March 31, 2006, we have $97,000 of total unrecognized compensation cost
related to non-vested awards granted under our various share-based plans, which
we expect to recognize over a weighted-average period of 7.2 years.
We received cash from options exercised during the first three months of fiscal
years 2006 and 2005 of $82,000 and $73,000, respectively. The impact of these
cash receipts is included in financing activities in the accompanying
consolidated statements of cash flows.
The Company's practice has been to issue shares for option exercises out of
treasury stock. We believe that we have sufficient shares in our treasury to
satisfy any exercises in 2006, therefore we do not expect to repurchase any
shares in 2006.
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, 2006 and December 31, 2005 were
approximately $304,000 and $276,000, net of accumulated amortization of $171,000
and $166,000, respectively. Total amortization expense on intangible assets for
the three months ended March 31, 2006 and 2005 was approximately $5,000 and
$4,000 respectively. The estimated aggregate amortization expense for the
remaining nine months of 2006 is $12,000, and approximately $15,000, $15,000,
$15,000 and $14,000 for each of the four succeeding fiscal years 2007 to 2010,
respectively.
7. PRODUCT WARRANTY LIABILITIES.
The changes in the Company's product warranty liability for the three months
ended March 31, 2006 were as follows (in thousands):
Liabilities, beginning of year $ 636
Expense for new warranties issued 167
Warranty claims (167)
-----
Liabilities, March 31, 2006 $ 636
=====
8. COMMITMENTS AND CONTINGENCIES
Other than as described below, there are no material pending legal proceedings
other than ordinary, routine litigation incidental to the business to which the
Company is a party or of which any of its property is subject.
7
The Company and its wholly-owned subsidiary CMS Research Corp. ("CMS Research")
have been sued by Aviv Amirav ("Amirav") in a Complaint filed in the United
States District Court for the Southern District of New York on January 26, 2006
styled Amirav v. CMS Research Corp. and O.I. Corporation, Case No. 06-Civ-00659.
The Complaint alleges (i) infringement and contributory infringement of United
States patent no. 5,153,673, issued to Amirav, and (ii) breach of a license
agreement between Amirav and CMS Research. Amirav's Complaint seeks (i)
preliminary and permanent injunctive relief, (ii) actual damages in an
unspecified amount, treble damages, and punitive damages, and (iii) attorneys'
fees, interest, and other relief. The Company is currently preparing its answer
to the complaint, and plans to vigorously oppose the plaintiff's. It is not
possible at this stage of the case to determine what liability exposure, if any,
is faced by the Company; however, an unfavorable outcome, including a
determination that the Company is not entitled to the license and/or a
determination that the Company's sales under the license are infringing
transactions, could have a material adverse impact on the Company's results of
operations. The ultimate resolution of these matters could have a material,
adverse effect on the Company's financial position and results of operations.
9. RECENT PRONOUNCEMENTS.
The Company adopted 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.
The Company adopted 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."
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 SFAS 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 (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 March 31, 2006,
many EU-member countries had not yet adopted the Directive and the Company is
still evaluating the impact, if any, of FSP FAS 143-1 on its financial position,
cash flow, or results of operations.
The Company adopted FASB Staff Position (FSP) SFAS 115-1 and SFAS 124-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." This FSP provides guidance on determining if an investment is
considered to be impaired, if the impairment is other-than-temporary and the
measurement of an impairment loss. It also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The guidance in this FSP amends Statement 115,
Accounting for Certain Investments in Debt and Equity Securities, and is
effective for reporting periods beginning after December 15, 2005. The Company
was already accounting for investments in accordance with this guidance, and
therefore, the adoption of this FSP did not have a material impact on the
Company's results of operations or financial position.
In February 2006, the FASB issued Statement No. 155, "Accounting for Certain
Hybrid Financial Instruments" ("SFAS 155"), which amends FASB Statement No. 133
and FASB Statement 140, and improves the financial reporting of certain hybrid
financial instruments by requiring more consistent accounting that eliminates
exemptions and provides a means to simplify the accounting for these
instruments. Specifically, FASB Statement No. 155 allows financial instruments
that have embedded derivatives to be accounted for as a whole (eliminating the
need to bifurcate the derivative from its host) if the holder elects to account
for the whole instrument on a fair value basis. SFAS 155 is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The Company does not
intend to issue or acquire the hybrid instruments included in the scope of SFAS
155 and does not expect the adoption of SFAS 155 to affect future reporting or
disclosures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
8
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,
- - The Company could incur substantial costs in protecting and defending its
intellectual property, and loss of patent or license rights could have a
material adverse effect on the Company's business.
- - 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 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.
- - The Company's results of operations are dependent on its relationship with
Agilent Technologies, Inc. "Agilent".
- - 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.
- - Environmental contamination caused by ongoing operations could subject the
Company to substantial liabilities in the future.
- - 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'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,
9
customer acceptance, employee training, distributor training, and phase out
of old products.
- - The information systems the Company utilizes could fail or lose
compatibility or vendors could stop supporting them.
- - Some of our products may be subject to product liability claims that could
be costly to resolve and affect our results of operations.
- - Enacted changes in the securities laws and regulations have and are likely
to continue to increase our costs.
- - Our sales in international markets are subject to a variety of laws and
political and economic risks that may adversely impact our sales and
results of operations in certain regions.
- - We must recruit and retain key employees in order to be successful.
- - If we do not introduce successful new products and services in a timely
manner, our products and services will become obsolete, and our operating
results will suffer.
- - We are subject to laws and regulations governing government contracts, and
failure to address these laws and regulations or comply with government
contracts could harm our business by leading to a reduction in revenue
associated with these customers.
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, 2005.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto.
RECENT DEVELOPMENTS
On January 31, 2006, the Company entered into a Letter Contract with Wyle
Laboratories, Inc. Life Sciences, Systems and Services ("Wyle"). Under the
Letter Contract, the Company will assist Wyle in the planning, acquisition of
materials, development of software and hardware, systems engineering, and
fabrication of components that Wyle will use to deliver a Total Organic Carbon
Analyzer ("TOCA") for use on the International Space Station. The initial value
of this contract is up to $722,566 with a potential value of $1.8 million. The
Company's work on the project began immediately and is being conducted in the
Company's facilities in College Station, Texas, with completion anticipated no
later than the end of the third quarter of 2006. We believe the research,
development, and engineering work required and funded under this agreement will
provide insights into technology and components which could further enhance the
performance of our existing products and become the basis of potential new
products. The project was of interest to us because it provided funding to the
Company that will offset expenses to perform work which we believe will result
in technology that will be useful in our commercial products.
OPERATING RESULTS
Total net revenues for the three months ended March 31, 2006 increased $109,000
or 1.4% to $7,809,000 compared to $7,700,000 for the same period of the prior
year. Total revenue increased due to an increase in service revenue which more
than offset a decline in product revenue. Service revenue increased 91% due to
billings in the amount of approximately $408,000 under the Letter Contract with
Wyle.
Product revenues decreased $526,000, or 7.5% to $6,476,000 compared to
$7,002,000 for the same period of the prior year. Product revenue decreased due
to lower shipments of Minicams products, which more than offset increased sales
of other GC products, TOC Analyzers, and Automated Chemistry Analyzers.
Product revenue was influenced by market conditions, which varied broadly on a
worldwide basis. The Company's products serve markets domestically that are
mature, including the environmental testing market, which in the past few years
has been in a gradual consolidation. In most domestic market segments the
Company experiences increasing competitive pressures, including lower prices,
demand for product delivery upon order placement, and pressure to provide
extended warranty and other after-sales services as bundled pricing packages at
discounts. The Company's strategy to overcome these market pressures has been
and continues to be to develop new technology which differentiates the Company's
products by offering customers greater productivity in their business operations
and expanding the range of analyses performed by the products. The Company's
newer products have allowed it to grow its position in certain market segments.
International product revenues increased, driven by continued demand from
emerging markets such as China, improved performance of existing distributors,
and the replacement of non-performing distributors with new distributors. Sales
in Europe and Latin America increased while sales were lower in the parts of
Asia outside China compared to the prior period.
10
Demand for the Company's products was unpredictable. Delays in customer orders
have resulted in a lower backlog for the beginning of the second quarter. These
delays, combined with increased competitive pressures and our commitment to a
previously announced R&D strategy, could increase the likelihood that our
operating income will be negatively impacted in the future. We could incur an
operating loss in future quarters.
Gross profit for the three months ended March 31, 2006 decreased to $3,963,000
or 51% of revenues, compared to $4,055,000, or 53% of revenues, for the same
period of the prior year. The decrease in gross profit was primarily due to
changes in our product mix as a result of lower sales of the Minicams product,
increased warranty expenses and costs incurred in resolving technical issues
with newly released products.
Selling, general, and administrative ("SG&A") expenses for the three months
ended March 31, 2006 increased to $2,455,000 or 31% of revenues, compared to
$2,313,000, or 30% of revenues, for the same period of the prior year. SG&A
expenses for the three months ended March 31, 2006 increased compared to the
same period of the prior year due to wages and related expenses, legal costs due
to the continued increasing need for the Company to seek the advice of legal
counsel related to securities law compliance matters and costs incurred in
connection with a patent infringement claim filed against the Company in January
2006, and higher accounting and insurance costs.
Research and development ("R&D") expenses for the three months ended March 31,
2006 decreased $196,000 to $742,000, or 10% of sales, compared to $938,000, or
12% of sales, for the same period of the prior year. R&D expenses expressed as a
percentage of revenues, decreased to 10% compared to 12% for the same period of
the prior year. The decrease in R&D expenses for the three months ended March
31, 2006 was primarily due to certain R&D personnel resources being assigned to
work on the Letter Contract with Wyle; consequently, their expenses were
classified as service cost of sales. Upon completion of the Wyle Letter
Contract, we anticipate our R&D expenditures to be consistent with or higher
than the rate of spending in 2005.
Operating income for the three months ended March 31, 2006 decreased $38,000, or
5% to $766,000, compared to $804,000 for the same period of the prior year. The
decrease in operating income for the three months ended March 31, 2006 is
primarily due to the decrease in gross profit and increase in SG&A expenditures,
partially offset by a decrease in R&D expenditures relating to certain R&D
expenses being treated as cost of sales under the Wyle Letter Contract.
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, increased to $122,000 for the three months
ended March 31, 2006, compared to $111,000 for the same period of the prior year
primarily due to increased interest income from investments as a result of
higher interest rates.
Income before income taxes decreased $27,000 or 3% to $888,000 compared to
$915,000 for the same period of the prior year primarily due to decreased
operating income partially offset by an increase in other income.
Provision for income taxes decreased $29,000 for the three months ended March
31, 2006 to a provision of $266,000 compared to $295,000 for the same period of
the prior year. The effective tax rate was 30% for the quarter ended March 31,
2006 compared to 32% for the same period of the prior year.
Net income for the quarter ended March 31, 2006 increased $2,000 or less than 1%
to $622,000 compared to $620,000 for the same period of the prior year, despite
higher revenues primarily due to an increase in costs of sales and SG&A
expenses. Basic and diluted earnings per share for the quarter ended March 31,
2006 were $0.22 and $0.21 per share, respectively, computed based on basic and
diluted weighted average shares outstanding of 2,859,000 and 2,940,000,
respectively, compared to basic and diluted earnings per share of $0.22 and
$0.21 per share, respectively, for the same period of the prior year computed
based on basic and diluted weighted average shares outstanding of 2,817,000 and
2,904,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $2,854,000 as of March 31, 2006, compared to
$1,727,000 as of December 31, 2005. Working capital as of March 31, 2006
increased to $19,011,000, compared to $18,508,000 as of December 31, 2005
primarily due to increases in cash and equivalents, and inventory. Working
capital, as a percentage of total assets, was 65% as of March 31, 2006 and 66%
at December 31, 2005. The current ratio was 4.3 at March 31, 2006 and 4.4 at
December 31, 2005. Total liabilities-to-equity ratio was 25% as of March 31,
2006, compared to 24% as of December 31, 2005.
Net cash flow provided by operating activities for the quarter ended March 31,
2006 was $564,000, compared to $477,000 for the same period of the prior year.
The increase in cash flow from operating activities in the three months ended
March 31, 2006 was primarily due to changes to working capital resulting from
net income and an increase in accounts payable.
Net cash flow provided by (used in) investing activities was $459,000 for the
three months ended March 31, 2006, compared to $(798,000) for the same period of
the prior year. The increase in cash provided by investing activities was
primarily due to an increase in the maturity of investments partially offset by
an increase in the purchase of investments. Net cash flow
11
provided by financing activities for the three months ended March 31, 2006 was
$104,000 compared to $78,000 for the same period of the prior year. The increase
in cash provided by financing activities was primarily due to an increase 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 2006 working capital
requirements from cash on hand and funds generated from operations.
The Company's Board of Directors declared a quarterly cash dividend of $0.05 per
common share payable on April 21, 2006 to shareholders of record at the close of
business on April 7, 2006. The quarterly dividend was declared in connection
with the Board of Directors' decision to establish an annual cash dividend of
$0.20 per share, payable $0.05 per quarter. The payment of future cash dividends
under the policy are subject to the continuing determination by the Board of
Directors that the policy remains in the best interests of the Company's
shareholders and complies with the law and any agreements the Company may enter
into applicable to the declaration and payment of cash dividends.
The Company conducts some operations in leased facilities in Birmingham, Alabama
under an operating lease expiring on November 30, 2006. Future minimum rental
payments under the lease in Birmingham are $124,000 for 2006. This lease
agreement allows the Company to renew the lease for one year prior to each
expiration. The Company plans to exercise this clause before the lease expires.
From time to time, the Company has disputes that arise in the ordinary course of
its business. The Company and its wholly-owned subsidiary CMS Research Corp.
("CMS Research") have been sued by Aviv Amirav ("Amirav") in a Complaint filed
in the United States District Court for the Southern District of New York on
January 26, 2006 styled Amirav v. CMS Research Corp. and O.I. Corporation, Case
No. 06-Civ-00659. The Complaint alleges (i) infringement and contributory
infringement of United States patent no. 5,153,673, issued to Amirav, and (ii)
breach of a license agreement between Amirav and CMS Research. Amirav's
Complaint seeks (i) preliminary and permanent injunctive relief, (ii) actual
damages in an unspecified amount, treble damages, and punitive damages, and
(iii) attorneys' fees, interest, and other relief. The Company is currently
preparing its answer to the complaint, and plans to vigorously oppose the
plaintiff's claims. It is not possible at this stage of the case to determine
what liability exposure, if any, is faced by the Company; however, an
unfavorable outcome, including a determination that the Company is not entitled
to the license and/or a determination that the Company's sales under the license
are infringing transactions, would have a material adverse impact on the
Company's results of operations.
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
12
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 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 $18,000 for the first quarter of
2006 and $16,000 for the first quarter of 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
March 31, 2006 and December 31, 2005 was $9,263,000 and $9,841,000,
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 realized losses on
sales of such investments of $13,000 during the first quarter of 2006.
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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, 2006, 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.
PART II- OTHER INFORMATION
Item 1. Legal Proceedings:
PENDING MATTERS
From time to time, the Company has disputes that arise in the ordinary course of
its business. One such incident is the following: The Company and its
wholly-owned subsidiary CMS Research Corp. ("CMS Research") have been sued by
Aviv Amirav ("Amirav") in a Complaint filed in the United States District Court
for the Southern District of New York on January 26, 2006 styled Amirav v. CMS
Research Corp. and O.I. Corporation, Case No. 06-Civ-00659. The Complaint
alleges (i) infringement and contributory infringement of United States patent
no. 5,153,673, issued to Amirav, and (ii) breach of a license agreement between
Amirav and CMS Research. Amirav's Complaint seeks (i) preliminary and permanent
injunctive relief, (ii) actual damages in an unspecified amount, treble damages,
and punitive damages, and (iii) attorneys' fees, interest, and other relief. The
Company is currently preparing its answer to the complaint, and plans to
vigorously oppose the plaintiff's. It is not possible at this stage of the case
to determine what liability exposure, if any, is faced by the Company; however,
an unfavorable outcome, including a determination that the Company is not
entitled to the license and/or a determination that the Company's sales under
the license are infringing transactions, would have a material adverse impact on
the Company's results of operations.
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.
99.1 Letter Contract between Wyle Laboratories and O I Corporation
dated January 31, 2006.
(b) Reports on Form 8-K
Form 8-K dated February 3, 2006, regarding entry into a Material
Definitive Agreement relating to a letter contract with Wyle Laboratories,
Inc. Life Sciences, Systems and Services.
Form 8-K dated March 8, 2006, regarding entry into a Material
Definitive Agreement relating to base salary increases and fiscal 2005
performance related bonuses for O.I. Corporation's named executive
officers.
Form 8-K dated March 8, 2006, regarding the Departure of
Directors or Principal Officers; Election of Directors; and Appointment of
Principal Officers.
14
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 5, 2006 BY: /s/ William W. Botts
------------------------------------
William W. Botts
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 5, 2006 BY: /s/ Juan M. Diaz
------------------------------------
Juan M. Diaz
Vice President- Corporate Controller
(Principal Accounting Officer)
15
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.
99.1 Letter Contract between Wyle Laboratories and O I Corporation dated
January 31, 2006.
16