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 September 30, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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.)
151 Graham Road
P. O. Box 9010
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]
As of September 30, 2006, there were 2,893,783 shares of the issuer's common
stock, $.10 par value, outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
O.I. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,785 $ 1,727
Accounts receivable-trade, net of allowance for
doubtful accounts of $299 and $326, respectively 6,027 6,324
Investment in sales-type leases, current portion 232 307
Investments, at market 9,395 9,841
Inventories, net 5,174 4,617
Current deferred income tax assets 1,015 904
Other current assets 253 179
------- -------
TOTAL CURRENT ASSETS 24,881 23,899
Property, plant and equipment, net 3,290 3,229
Investment in sales-type leases, net of current 164 190
Long-term deferred income tax assets 614 539
Intangible assets, net 316 276
Other assets 28 26
------- -------
TOTAL ASSETS $29,293 $28,159
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,564 $ 1,428
Accrued liabilities 3,762 3,963
------- -------
TOTAL CURRENT LIABILITIES 5,326 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, 2,894 shares
and 2,853 shares outstanding, respectively 410 410
Additional paid-in capital 4,513 4,374
Treasury stock, 1,209 shares and 1,250 shares,
respectively, at cost (5,410) (5,456)
Retained earnings 24,469 23,502
Accumulated other comprehensive (loss), net (15) (62)
------- -------
TOTAL STOCKHOLDERS' EQUITY 23,967 22,768
------- -------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $29,293 $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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
------ ------ ------- -------
Net revenues:
Products $6,243 $6,413 $18,014 $19,427
Services 1,313 826 3,966 2,536
------ ------ ------- -------
7,556 7,239 21,980 21,963
Cost of revenues:
Products 3,076 3,380 9,020 9,751
Services 674 309 2,032 1,048
------ ------ ------- -------
3,750 3,689 11,052 10,799
Gross profit 3,806 3,550 10,928 11,164
Selling, general & administrative
expenses 2,417 2,181 7,142 6,615
Research and development expenses 786 875 2,214 2,780
------ ------ ------- -------
Operating income 603 494 1,572 1,769
Other income, net 152 128 446 364
------ ------ ------- -------
Income before income taxes 755 622 2,018 2,133
Provision for income taxes 174 159 618 608
------ ------ ------- -------
Net income $ 581 $ 463 $ 1,400 $ 1,525
====== ====== ======= =======
Other comprehensive income/(loss), net of tax:
Unrealized gains/(losses) on Investments 127 (41) 48 (96)
------ ------ ------- -------
Comprehensive income $ 708 $ 422 $ 1,448 $ 1,429
====== ====== ======= =======
Earnings per share:
Basic $ 0.20 $ 0.16 $ 0.49 $ 0.54
Diluted $ 0.20 $ 0.16 $ 0.48 $ 0.53
Shares used in computing earnings per share:
Basic 2,884 2,844 2,874 2,822
Diluted 2,947 2,924 2,945 2,904
Cash dividends declared per share of common
stock $ 0.10 -- $ 0.15 --
See notes to unaudited condensed consolidated financial statements
3
O. I. CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Common Stock Accum Other Total
--------------- Treasury Retained Comprehensive Stockholders'
Shares Amount APIC Stock Earnings Income Equity
------ ------ ----- -------- -------- ------------- -------------
Balance at December 31, 2005 4,103 410 4,374 (5,456) 23,502 (62) 22,768
Purchase of treasury stock (116) (116)
Employee stock option exercise 13 156 169
Employee stock purchase plan 11 6 17
FAS 123R expense 88 88
Dividends Declared (433) (433)
Benefit of Disqualifying
employee stock option
dispositions 27 27
Comprehensive income (loss):
Unrealized gain (loss) on
investments, net of
deferred tax expense of $24 47 47
Net income 1,400 1,400
----- --- ----- ------ ------ --- ------
Balance at September 30, 2006 4,103 410 4,513 (5,410) 24,469 (15) 23,967
===== === ===== ====== ====== === ======
See notes to unaudited condensed consolidated financial statements
4
O.I. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2006 2005
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,400 $ 1,525
Depreciation & amortization 439 421
Deferred income taxes (211) (51)
Stock Compensation Expense 88 --
Change in working capital (753) (374)
------- -------
Net cash flows provided by operating activities 963 1,521
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (7,734) (5,601)
Maturity of investments 8,313 4,303
Purchase of property, plant & equipment (511) (292)
Proceeds from sales of assets 12 12
Change in other assets (55) (55)
------- -------
Net cash flows provided by (used in) investing activities 25 (1,633)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock pursuant to exercise of
employee stock options and employee stock purchase plan 176 170
Excess tax benefits from stock-based compensation 10 --
Purchase of Treasury Stock (116) --
------- -------
Net cash flows provided by financing activities 70 170
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,058 58
Cash and cash equivalents at beginning of period 1,727 1,541
------- -------
Cash and cash equivalents at end of period $ 2,785 $ 1,599
======= =======
See notes to unaudited condensed consolidated financial statements
5
O.I. CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
O.I. Corporation (the "Company"), 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.
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, NET.
Inventories, net, which include material, labor and manufacturing overhead, are
stated at the lower of first-in, first-out cost or market (in thousands):
September 30, December 31,
2006 2005
------------- ------------
Raw Materials $4,375 $4,203
Work-in-Process 960 651
Finished Goods 766 669
Reserves (927) (906)
------ ------
$5,174 $4,617
====== ======
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 $30,000 and $94,000 for the
three and nine months ending September 30, 2006, respectively, and the Company
incurred net inventory charges of approximately $19,000 and $51,000 for the same
periods of the prior year, respectively.
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
nine months ended September 30, 2006 of 63,000 and 71,000, 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 80,000 and 82,000, respectively, were added to the
weighted average shares used to calculate diluted earnings per share. There were
no adjustments made to net income as
6
reported to calculate basic or diluted earnings per share. For the three months
ended September 30, 2006, there were 16,000 anti-dilutive shares. There were no
anti-dilutive shares for the nine months ended September 30, 2006. For the three
and nine months ended September 30, 2005 there were no anti-dilutive shares.
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. 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 were 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 compensation was $42,000 and
$87,000($25,000 and $52,000 after tax effects) for the three and nine months
ended September 30, 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 Nine Months
Ended Ended
September 30, 2006 September 30, 2006
-------------------- --------------------
(in 000s, except per (in 000s, except per
share amounts) share amounts)
Income before income taxes $ 42 $ 87
Net income $ 25 $ 52
Basic earnings per share $0.01 $0.02
Diluted earnings per share $0.01 $0.02
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 and
nine months ended September 30, 2006 the excess tax (provision) benefit was
$(6,000) and $10,000.
7
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 and nine
months ended September 30, 2005:
Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2005
-------------- --------------
(in 000s, (in 000s,
except per except per
share amounts) share amounts)
Net income:
Net income, as reported $ 463 $1,525
Deduct: Stock-based compensation
expense determined under fair
value-based method for all
awards, net of related tax effects 20 61
Pro forma net income 443 1,464
Basic earnings per common share:
As reported $0.16 $ 0.54
Pro forma $0.16 $ 0.52
Diluted earnings per common share:
As reported $0.16 $ 0.53
Pro forma $0.15 $ 0.50
No options were granted during the first and third quarters of 2006; however,
8,000 non-qualified stock options were granted to members of the board of
directors under the 2003 Incentive Compensation Plan during the second quarter
of 2006. The weighted average fair values of these options were calculated using
the following assumptions:
Non-employee director options
Risk free interest rate 5.00%
Expected dividend 0.05
Expected life 3.00 years
Expected volatility 37.00%
Stock option plans
We have three stock option plans, two of which have expired and one with shares
available for grant at September 30, 2006 as follows:
2003 Incentive
Plan Compensation Plan
---- -----------------
Minimum exercise price as a
percentage of fair market
value at date of grant 100%
Plan termination date December 31, 2012
8
Shares available for grant
at September 30, 2006 267,000
Option grants under all three plans have a contractual life of ten years, except
grants 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 that vest
100% after six months. We recognize compensation cost 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 nine
months ended September 30, 2006:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Shares Exercise Contractual Value
(000) Price Life (000)
------ -------- ----------- ---------
Outstanding at beginning of period 235 $ 5.60 4.3 years
Granted 8 $11.90 2.6 years
Exercised (38) $ 5.03 --
Forfeited (6) -- --
Expired (--) -- --
Outstanding at end of period 199 $ 5.97 4.3 years $799
Vested or expected to vest at end of period 19 $ 6.92 6.7 years $ 58
Exercisable at end of period 174 $ 5.95 4.0 years $707
During the nine months ended September 30, 2006 and 2005, 8,000 non-qualified
stock options were granted to members of the board of directors under the 2003
Incentive Compensation Plan. The total intrinsic value of share options
exercised for the nine months ended September 30, 2006 was $191,000. The
weighted average grant date fair value of options granted during the nine months
ended September 30, 2006 was $3.30 per share.
Other information
As of September 30, 2006, we have $181,000 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 5.0 years.
We received cash from options exercised for the nine months ended September 30,
2006 of $169,000. 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. Under the terms of the 2003 Incentive Compensation Plan, we may
issue treasury shares or purchase shares on the open market to fulfill the
9
requirements of option exercises. We believe that we have sufficient shares in
our treasury to satisfy any further exercises in 2006.
6. INTANGIBLE ASSETS, NET.
Intangible assets, net, consisted of patents relating to technology used in the
Company's products. Intangible assets as of September 30, 2006 and December 31,
2005 were approximately $316,000 and $276,000, net of accumulated amortization
of $179,000 and $166,000, respectively. Total amortization expense on intangible
assets for the three and nine months ended September 30, 2006 was approximately
$4,000 and $12,000, respectively. Total amortization expense on intangible
assets for the same periods of the prior year was $4,000 and $11,000
respectively. The estimated aggregate amortization expense for the remainder of
2006 and each of the four succeeding fiscal years 2007 to 2010 is approximately
$4,000, $15,000, $14,000, $14,000 and $13,000, respectively.
7. PRODUCT WARRANTY LIABILITIES.
The changes in the Company's product warranty liabilities for the nine months
ended September 30, 2006 were as follows (in thousands):
Liabilities, beginning of year $ 636
Expense for new warranties issued 512
Warranty claims (486)
-----
Liabilities, September 30, 2006 $ 662
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.
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. On July 12, 2006 the plaintiff amended the
complaint to omit the claims of infringement and contributory infringement. The
Company has answered the amended complaint and discovery is proceeding. The
Company plans to vigorously oppose the plaintiff's claim. 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 are breaching conditions of the license, would have a material adverse
impact on the Company's results of operations. The Company has incurred
significant legal expense in defending this matter and expects that it will
continue to do so in defending its position.
10
9. RECENT PRONOUNCEMENTS.
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 September 30,
2006, many EU-member countries had not yet adopted the Directive and the Company
is still evaluating the impact, if any, of FSP SFAS 143-1 on its financial
position, cash flow, or results of operations.
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.
In July 2006, the FASB issued FASB Interpretation 48, "Accounting for Income Tax
Uncertainties" ("FIN 48"). FIN 48 defines the threshold for recognizing the
benefits of tax return positions in the financial statements as
"more-likely-than-not" to be sustained by the taxing authority. The recently
issued literature also provides guidance on the recognition, measurement and
classification of income tax uncertainties, along with any related interest and
penalties. FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The
differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after adoption
will be accounted for as a cumulative-effect adjustment recorded to the
beginning balance of retained earnings. Because the guidance was recently
issued, we have not yet determined the impact, if any, of adopting the
provisions of FIN 48 on our financial position, results of operations and
liquidity.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 was
11
issued to provide consistency between how registrants quantify financial
statement misstatements.
Historically, there have been two widely used methods for quantifying the
effects of financial statement misstatements. These methods are referred to as
the "roll-over" and "iron curtain" method. The roll-over method quantifies the
amount by which the current year income statement is misstated. Exclusive
reliance on an income statement approach can result in the accumulation of
errors on the balance sheet that may not have been material to any individual
income statement, but which may misstate one or more balance sheet accounts. The
iron curtain method quantifies the error as the cumulative amount by which the
current year balance sheet is misstated. Exclusive reliance on a balance sheet
approach can result in disregarding the effects of errors in the current year
income statement that results from the correction of an error existing in
previously issued financial statements. We currently use the roll-over method
for quantifying identified financial statement misstatements.
SAB 108 established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatement on each of the
company's financial statements and the related financial statement disclosures.
This approach is commonly referred to as the "dual approach" because it requires
quantification of errors under both the roll-over and iron curtain methods.
SAB 108 allows registrants to initially apply the dual approach either by (1)
retroactively adjusting prior financial statements as if the dual approach had
always been used or by (2) recording the cumulative effect of initially applying
the dual approach as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting adjustment recorded to the
opening balance of retained earnings. Use of this "cumulative effect" transition
method requires detailed disclosure of the nature and amount of each individual
error being corrected through the cumulative adjustment and how and when it
arose.
We have evaluated the potential impact of this statement and we do not expect to
record any adjustment to our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" which is effective for fiscal years beginning
after November 15, 2007 and for interim periods within those years. This
statement defines fair value, establishes a framework for measuring fair value
and expands the related disclosure requirements. We are currently evaluating the
potential impact of this statement, if any, on our financial position, cash
flow, or results of operations.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1, "Accounting
for Planned Major Maintenance Activities" which is effective for fiscal years
beginning after December 15, 2006. This position statement eliminates the
accrue-in-advance method of accounting for planned major maintenance activities.
We do not expect this pronouncement to have a significant impact on the
determination or reporting of our financial results.
12
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; and (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.
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.
O.I. Corporation (referred to as "the Company," "we," "our" or "us") was
organized in 1963, in accordance with the Business Corporation Act of the State
of Oklahoma, as Clinical Development Corporation, a builder of medical and
research laboratories. In 1969, the Company moved from Oklahoma City, Oklahoma
to College Station, Texas, and the Company's name was changed to Oceanography
International Corporation. The Company's name was changed to O.I. Corporation in
July 1980; and in January 1989, the Company began doing business as OI
Analytical to better align the company name with the products offered and
markets served.
O.I. Corporation provides innovative products for chemical analysis. The
Company's products perform detection, analysis, measurement, and monitoring
applications in food, beverage, pharmaceutical, semiconductor, power generation,
chemical, petrochemical, and chemical treatment and security industries.
Headquartered in College Station, Texas, the Company's products are sold
worldwide by a direct sales force, independent sales representatives, and
distributors. The Company's principal business strategy is to direct its product
development capabilities, manufacturing processes, and marketing skills toward
market niches that it believes it can successfully penetrate and then assume a
leading position in such markets. Management continually emphasizes
13
product innovation, improvement in quality and product performance, on-time
delivery, cost reductions, and other value-added activities. The Company seeks
growth opportunities through technological and product improvement, the
development of new applications for existing products, and by acquiring and
developing new products for new markets, and new competencies.
RECENT DEVELOPMENTS
On September 7, 2006, we received a grant from the National Institute of Health,
or NIH, for work relating to a GC sample introduction device. Work began on the
project during September and will be completed by the end of March 2007. The
maximum billable amount for the project is approximately $90,000 and will be
invoiced on a time and materials basis. We are currently pursuing opportunities
for other government projects as well.
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 assisted 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, or TOCA, for use on the International Space Station. On July 27, 2006
the Company entered into a Definitive Agreement that superceded the Letter
Contract. As of September 30, 2006, we have billed Wyle $1,329,000 for services
rendered under this Agreement. The agreement with Wyle provided for an option
for on-going service and support of the TOCA unit that was delivered under the
initial contract for up to 2 additional years. Wyle has exercised the first
option for fiscal 2007 which has a potential total value of approximately
$475,000. Wyle also has an option for fiscal 2008 that could add an additional
$122,000 of billing. Our work on the project began in the first quarter of 2006
and is being conducted in our facilities in College Station, Texas.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO SEPTEMBER 30, 2005
REVENUES. Total net revenues for the three months ended September 30, 2006
increased $317,000, or 4.4%, to $7,556,000, compared to $7,239,000 for the same
period of the prior year.
Product revenues decreased $170,000, or 2.7%, to $6,243,000, compared to
$6,413,000 for the same period of the prior year. Sales for the quarter were
lower in gas chromatography systems (GC Systems), Automated Chemistry Analyzers
(ACA), microwave digestion products, and GPC products, partially offset by
increased sales of MINICAMS(Registered Trademark) products and Total Organic
Carbon (TOC) analyzers. Beverage monitor sales were below expectations, and we
will continue to evolve our strategy in an effort to penetrate the market for
on-line quality control measurements and monitoring more effectively the
beverage production process. Sales of MINICAMS air-monitoring systems increased
compared to the same period of the prior year, due to shipments partially
fulfilling requirements under a contract with the U.S. Army announced on May 17,
2006. Also contributing to the decrease in product revenues is intensified
competition for prospective sales from competitors, and customers deciding to
withhold capital spending after an announcement of the consolidation of two of
the industry's largest customers, Severn Trent and Test America, both of whom
are customers of the Company. Previous
14
consolidation cycles in the industry have resulted in closing of some facilities
involved in the consolidation and accordingly excess equipment.
Domestic revenues decreased for the three months ended September 30, 2006,
compared to the same period of the prior year. International revenues increased
for the three months ended September 30, 2006, compared to the same period of
the prior year. Sales were up in Europe, the Middle East, and the Asia Pacific
region, partially offset by lower sales to Latin America. The Company as well as
its competitors have benefited from the growing demand in China for products to
perform air and water testing. In order to capture more of this growing market,
a number of the Company's competitors have begun establishing local
manufacturing operations in China to provide locally manufactured, low cost
products to the market. We are considering alternative strategies and associated
risks to respond to competition in China.
Increased revenues from services more than offset the decreases in revenues from
products. Revenues from services increased $487,000, or 59.0%, to $1,313,000,
compared to $826,000 for the same period of the prior year. The increase was
primarily due to billings of approximately $444,000 under the Agreement with
Wyle.
Our focus on developing new products with a goal of improving performance, speed
of operation, and increasing value to the customer should position us well to
serve the environmental testing laboratory markets which are experiencing a new
round of consolidation in the United States but are expanding in certain
international markets. However, growth in revenues will be dependent in part on
improved capital spending in developed global markets including the domestic
market, continued spending on environmental instruments in emerging markets, and
successful market penetration of our new products. Our success in market
penetration with newly introduced products has resulted in aggressive actions by
competitors, including lower prices for products and bundling after-sale service
products into bid packages at no cost to the buyer or at highly discounted
prices.
As we view market conditions including demand for our products, competitor
actions, and prior year quarterly sales levels, no assurance can be given that
sales will meet prior year levels or that product sales will not decline further
than experienced in the quarter ending September 30, 2006.
GROSS PROFIT. Gross profit for the three months ended September 30, 2006
increased $256,000, or 7.2%, to $3,806,000, compared to $3,550,000 for the same
period of the prior year. Gross profit represented 50.4% of revenues for the
three months ended September 30, 2006, and 49.0% for the same period of the
prior year. The increase in gross profit for the three months ended September
30, 2006, compared to the same period of the prior year, was primarily due to an
increase in revenues. Product Cost of sales decreased in proportion to sales due
to product mix, and a decrease in other costs of sales, such as demonstration
model depreciation and warranty expenses. Service Cost of sales increased in
proportion to sales compared to the same period of the prior year primarily due
to the addition of non-commercial services and costs that have a lower profit
margin than our traditional commercial services. Non-commercial services are
those that relate to work performed for government contracts and/or grants and
do not fall within the scope of our standard manufactured products or services.
SELLING, GENERAL, AND ADMINISTRATIVE. SG&A expenses for the three months ended
September 30, 2006 increased $236,000 to $2,417,000, compared to
15
$2,181,000 for the same period of the prior year. SG&A expense increased as a
percentage of revenues for the three months ended September 30, 2006 to 32.0%,
compared to 30.1% for the same period of the prior year. The increase is
primarily due to increased legal fees, expenses related to an increase in the
size of the board of directors, and the implementation of SFAS 123(R) in the
current fiscal year, which requires the expensing of stock options. We would
expect the legal fees to decrease upon final resolution of current litigation,
but we have no specific time frame as to when that will be. It was announced in
March that two members of our board of directors will retire by the end of May
2007. Therefore, expenses related to the size of the board of directors should
decrease.
RESEARCH AND DEVELOPMENT. R&D expenses for the three months ended September 30,
2006 decreased $89,000, or 10.2%, to $786,000, compared to $875,000 for the same
period of the prior year. R&D expenses represented 10.4% of revenues for the
three months ended September 30, 2006 and 12.1% of revenues for the same period
of the prior year. The decreased R&D expenditures were primarily due to certain
R&D personnel resources being assigned to perform work under the agreement with
Wyle. Expenses relating to such work are accounted for as service cost of sales.
We anticipate that most of the R&D resources that were assigned to this project
will return to internal R&D projects by the beginning of fiscal 2007. Should
such reassignment be made, R&D expenses would return to previous year levels or
higher as we continue development of potential new products. We continue our
commitment to the previously announced plan to increase research and development
in an effort to bring new and innovative products to market, including a mass
spectrometer product. Execution of this strategy has taken longer than expected
because we are conducting research in an attempt to develop an entirely new
detector for use in the field of MS. We continue to believe the technology we
are developing will be successful, but we know significant challenges and risks
remain. Because the risks are high in attempting to enter such markets, we
understand the potential payoff should also be high. We believe the technology
we are pursuing represents a significant revenue opportunity for us if it
performs as we anticipate.
OPERATING INCOME. Operating income for the three months ended September 30, 2006
increased $109,000, or 22.1%, to $603,000, compared to $494,000 for the same
period of the prior year. The increase in operating income for the three months
ended September 30, 2006 is primarily due to the increase in revenues and gross
profit and a decrease in R&D expenditures, partially offset by an increase in
selling, general and administrative expenses.
OTHER INCOME, NET. 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 $24,000, or 18.8%, to
$152,000 for the three months ended September 30, 2006 compared to $128,000 for
the same period of the prior year. The increase is primarily due to higher
yields on money market accounts, cash equivalents, short-term and fixed income
investments and a higher average invested balance.
INCOME BEFORE INCOME TAXES. Income before income taxes for the three months
ended September 30, 2006 increased $133,000, or 21.4%, to $755,000, compared to
income of $622,000 for the same period of the prior year. The increase in income
before income taxes for the three months ended September 30, 2006 was primarily
due to higher sales, the increase in operating income, and higher
16
other income.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $15,000 for the
three months ended September 30, 2006 to a provision of $174,000, compared to
$159,000 for the same period of the prior year primarily due to the increase in
income before income taxes. The effective tax rate was 23.1% for the three
months ended September 30, 2006. Our effective tax rate differs from the
statutory rate primarily due to the Domestic Production Activity Deduction, and
adjustments recorded for the differences between the 2005 Federal income tax
return and the amount of income tax accrual recorded at the close of business
December 31, 2005. The effective tax rate for the same period of the prior year
was 25.6%. It differed from the statutory rate primarily due to certain
permanent differences between our book income and taxable income that lowers our
tax bill, such as the dividends received deduction, the extraterritorial income
exclusion, and R&D credits. The R&D tax credit contained in the Internal Revenue
Code section 41 expired on December 31, 2005. While it is possible that the
credit might be reenacted by Congress, we will not take the credit until it is
actually reenacted.
During the second quarter of 2006, the State of Texas adopted an amendment to
its franchise tax law to be effective January 1, 2007. The amended Texas tax,
which is based on taxable gross margin, is considered an income tax under FASB
SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Because of the
amendment to the tax law, the Company recognized an immaterial one-time,
non-cash income tax benefit during the second quarter of 2006, primarily as a
result of recording deferred taxes for research and development credits
permitted under the new legislation.
NET INCOME. Net income for the three months ended September 30, 2006 increased
$118,000, or 25.5% to $581,000, compared to net income of $463,000 in the same
period of the prior year. Basic earnings per share were $0.20 and diluted
earnings per share were $0.20 for the three months ended September 30, 2006,
compared to basic and diluted earnings of $0.16 and $0.16 per share respectively
for the same periods of the prior year. The increase in net income for the three
months ending September 30, 2006 is primarily due to an increase in revenues and
operating income, partially offset by an increase in SG&A expenses and provision
for income taxes.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO SEPTEMBER 30, 2005
REVENUES. Net revenues for the nine months ended September 30, 2006 increased
$17,000, to $21,980,000, compared to $21,963,000 for the same period of the
prior year. Product revenues decreased $1,413,000, or 7.3%, to $18,014,000,
compared to $19,427,000 for the same period of the prior year. The year-to-date
decrease in product revenues was primarily due to lower shipments of MINICAMS
products, GC Systems, and microwave digestion products, partially offset by
increased sales of TOC products.
Increased revenues from services more than offset the decreases in revenues from
products. Revenues from services increased $1,430,000, or 56.4%, to $3,966,000,
compared to $2,536,000 for the same period of the prior year. The increase is
primarily due to billings in the amount of approximately $1,329,000 for
non-commercial service in 2006.
Domestic revenues decreased for the nine months ended September 30, 2006,
primarily due to customer delays in capital expenditure decisions and
intensified competition. International revenues increased for the nine
17
months ended September 30, 2006 compared to the same period of the prior year.
In particular, sales to Latin America, Europe, the Middle East, Africa, and the
Asia Pacific region all increased, while sales to China and Taiwan decreased.
GROSS PROFIT. Gross profit for the nine months ended September 30, 2006
decreased $236,000, or 2.1%, to $10,928,000, compared to $11,164,000 for the
same period of the prior year, primarily due to an increase in warranty costs
and higher cost of sales related to the services performed in fulfillment of the
agreement with Wyle. Gross profit represented 49.7% of revenues for the nine
months ended September 30, 2006, and 50.8% of revenues for the same period of
the prior year. Gross profit as a percentage of revenues decreased despite the
slight increase in revenue, primarily due to the addition of non-commercial
services and costs associated with the Wyle contract that typically have a lower
profit margin than our traditional commercial services.
SELLING, GENERAL, AND ADMINISTRATIVE. SG&A expenses for the nine months ended
September 30, 2006, increased $527,000, or 8.0%, to $7,142,000, compared to
$6,615,000 for the same period of the prior year. SG&A expense increased as a
percentage of revenues for the nine months ended September 30, 2006 to 32.5%,
compared to 30.1% for the same period of the prior year. The increase is
primarily due to increased legal fees, expenses related to an increase in the
size of the board of directors, and the implementation of SFAS 123(R) in the
current fiscal year, which requires the expensing of stock options.
RESEARCH AND DEVELOPMENT. R&D expenses for the nine months ended September 30,
2006 decreased $566,000, or 20.4%, to $2,214,000, compared to $2,780,000 for the
same period of the prior year. R&D expenses represented 10.1% of revenues for
the nine months ended September 30, 2006 compared to 12.7% for the same period
of the prior year. The decreased R&D expenditures were primarily due to certain
R&D personnel resources being assigned to perform work under the agreement with
Wyle. Expenses relating to such work were accounted for as service cost of
sales. We anticipate that most of the R&D resources that were assigned to this
project will return to internal R&D projects by the beginning of fiscal 2007.
Should such reassignment be made, accordingly R&D expenses would return to
previous year levels or higher as we continue development of potential new
products. We continue our commitment to the previously announced plan to
increase research and development in an effort to bring new and innovative
products to the market, including a mass spectrometer product. Execution of this
strategy has taken longer than expected because we are conducting research in an
attempt to develop an entirely new detector for use in the field of MS. We
continue to believe the technology we are developing will be successful, but we
know significant challenges and risks remain. Because the risks are high in
attempting to enter such markets, we understand the potential payoff should also
be high. We believe the technology we are pursuing represents a significant
revenue opportunity for us if it performs as we anticipate.
Our efforts continue on this project, although significant technical challenges
remain and the project is taking longer than anticipated. We plan to remain
focused on our goal as stated at the outset of the project.
OPERATING INCOME. Operating income for the nine months ended September 30, 2006
decreased $197,000 to $1,572,000, compared to $1,769,000 for the same period of
the prior year. The decrease in operating income for the nine months ended
September 30, 2006 was primarily due to an increase in cost of
18
revenues, and SG&A expenses, partially offset by a decrease in R&D expenses.
OTHER INCOME, NET. Other income, net, which is composed of interest and dividend
income from investments, interest income from customer leases, and gain/loss
from dispositions of Company property, increased $82,000, or 22.5%, to $446,000,
for the nine months ended September 30, 2006, compared to $364,000 for the same
period of the prior year. The increase is primarily due to higher yields on
money market accounts, cash equivalents, short-term and fixed income investments
and a higher average invested balance.
INCOME BEFORE INCOME TAXES. Income before income taxes decreased $115,000, or
5.4%, to $2,018,000 for the nine months ended September 30, 2006, compared to
$2,133,000 for the same period of the prior year. The decrease in income before
income taxes for the nine months ended September 30, 2006 was primarily due to a
decrease in operating income partially offset by an increase in other income,
net.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $10,000 for the
nine months ended September 30, 2006 to a provision of $618,000, compared to
$608,000 for the same period of the prior year. The effective tax rate was 30.6%
for the nine months ended September 30, 2006. Our effective tax rate differs
from the statutory rate primarily due to the loss of the R&D tax credit which
expired December 31, 2005, partially offset by the Domestic Production
Activities Deduction and the adjustments recorded for the differences between
the 2005 Federal income tax return and the amount of income tax accrual recorded
at December 31, 2005. The effective tax rate for the same period of the prior
year was 28.5%. It differed from the statutory rate primarily due to certain
permanent differences between our book income and taxable income that lowers our
tax bill, such as the dividends received deduction, the extraterritorial income
exclusion, and R&D credits. The R&D tax credit contained in the Internal Revenue
Code section 41 expired on December 31, 2005. While it is possible that the
credit might be reenacted by Congress, we will not take the credit until it is
actually reenacted.
During the second quarter of 2006, the State of Texas adopted an amendment to
its franchise tax law to be effective January 1, 2007. The amended Texas tax,
which is based on taxable gross margin, is considered an income tax under FASB
SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Because of the
amendment to the tax law, the Company recognized an immaterial one-time,
non-cash income tax benefit during the second quarter of 2006, primarily as a
result of recording deferred taxes for research and development credits
permitted under the new legislation.
NET INCOME. Net income for the nine months ended September 30, 2006 decreased
$125,000, or 8.2% to $1,400,000, compared to net income of $1,525,000 in the
same period of the prior year. Basic earnings per share were $0.49 per share,
and diluted earnings per share were $0.48 per share for the nine months ended
September 30, 2006, compared to basic earnings per share of $0.54 per share and
diluted earnings per share of $0.53 per share, respectively, for the same period
of the prior year. The decrease in net income for the nine months ending
September 30, 2006 is primarily due to a decrease in gross profit and an
increase in SG&A expenses, partially offset by a decrease in R&D expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $2,785,000 as of September 30, 2006
19
compared to $1,727,000 as of December 31, 2005. Working capital as of September
30, 2006 increased to $19,555,000, compared to $18,508,000 as of December 31,
2005, primarily due to increases in cash and equivalents and inventory, and
decreases in accrued compensation and unearned revenue. Working capital, as a
percentage of total assets, was 67% as of September 30, 2006 and 66% at December
31, 2005. The current ratio was 4.7 at September 30, 2006 and 4.4 at December
31, 2005. Total liabilities-to-equity ratio was 22% as of September 30, 2006,
compared to 24% as of December 31, 2005.
Net cash flow provided by operating activities for the nine months ended
September 30, 2006 was $963,000 compared to $1,521,000 for the same period of
the prior year. The decrease in cash flow from operating activities in the nine
months ended September 30, 2006 was primarily due to lower net income and
changes to working capital resulting from an increase in inventory and the
payment of dividends. Inventory increased due to lower than expected product
sales, general price increases by our suppliers, and preparations to roll out
new products.
Net cash flow provided by (used in) investing activities was $25,000 for the
nine months ended September 30, 2006, compared to $(1,633,000) for the same
period of the prior year. The increase in cash flow 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 and property,
plant and equipment.
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 possible uses of cash could include future acquisitions of
businesses or product lines that fit with our strategy for growth. We may engage
in discussions with third parties to acquire new products or businesses or to
form joint ventures. We may also use our capital resources to enhance the
Company's competitiveness in the marketplace by providing favorable credit terms
to more customers, to finance equipment for leasing and or renting to our
customers, and increase inventory stock levels of certain products to take
advantage of market opportunities.
Net cash flow provided by financing activities for the nine months ended
September 30, 2006 was $70,000 compared to $170,000 for the same period of the
prior year. The decrease in cash flow provided by financing activities was
primarily due to stock repurchases.
Stock Repurchases
Since 1995, we have repurchased an aggregate of 1,766,095 shares of our common
stock at an average purchase price of $4.01 per share, pursuant to the Company's
stock repurchase program. No repurchases were made during 2005, however in the
third quarter of 2006 we repurchased 4,696 shares at an average price of $10.44.
For the nine months ended September 30, 2006, we have repurchased a total of
10,117 shares at an average price of $11.50. In August of 2006, our Board of
Directors approved an authorization to buy back an additional 100,000 shares.
Such authorization together with previously unfulfilled authorizations represent
108,905 shares remaining to be repurchased as of September 30, 2006. We may seek
approval from the Company's Board of Directors to expand this program in the
future if we believe repurchases continue to be in the best interests of the
Company.
20
Expansion of this program would also be funded from cash on hand and cash from
operations.
We have historically been able to fund working capital and capital expenditures
from operations, and we expect to be able to finance the remainder of our 2006
working capital requirements from cash on hand and funds generated from
operations.
The Company's Board of Directors declared a cash dividend on August 17, 2006 of
$0.05 per common share payable on September 12, 2006 to shareholders of record
at the close of business on August 28, 2006. The dividend was declared in
connection with the Board of Directors' decision to establish an annual cash
dividend of $0.20 per share, payable at $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 $33,000 for 2006. This lease
agreement allows the Company to extend the lease for one year upon expiration.
The Company plans to exercise this clause before the lease expires.
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
Please reference Part I-Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2005.
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
September 30, 2006 and December 31, 2005 was $9,395,000 and $9,841,000,
respectively. The year-to-date unrealized gain in the fair value of those
investments is $48,000, primarily due to recent increases in the value of
various preferred stock holdings. 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
21
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. We believe that our
investment policy is conservative, both in terms of the average maturity of
investments that we allow and in terms of the credit quality of the investments
we hold. Although changes in interest rates may affect the fair value of the
investment portfolio and cause unrealized gains or losses, such gains or losses
would not be realized unless the investments were sold. There were no realized
gains or losses on sales of such investments during the third quarter of 2006 or
2005.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. We performed an
evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer (CEO) and our principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d
-15(f) under the Securities Exchange Act of 1934. Based on their
evaluation, our management, including our CEO and principal financial
officer, concluded that our disclosure controls and procedures were
effective as of September 30, 2006, (the end of the period covered by this
Quarterly Report on Form 10-Q) to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in internal control over financial reporting. Effective June 8,
2006, our Vice President-Corporate Controller and principal accounting
officer, Juan M. Diaz, voluntarily resigned from his position. We are
interviewing candidates to replace him, however we have not yet hired a
replacement. Our principal executive officer will serve in the capacity of
principal financial officer until we hire a replacement for Mr. Diaz.
Members of our existing accounting and finance staff have assisted and will
continue to assist in performing the duties of our principal accounting
officer until we hire a replacement.
Other than the aforementioned, there was no change in our internal control over
financial reporting that occurred during the three months ended September 30,
2006 that has materially affected, or that we believe is reasonably likely to
materially affect, our internal control over financial reporting.
PART II- OTHER INFORMATION
ITEM 1A RISK FACTORS
An investment in our common stock involves various risks. When considering an
investment in our company, you should consider carefully all of the risk factors
described in our 2005 Annual Report on Form 10-K and the 2006 Filings. These
risks and uncertainties are not the only ones facing us and there may be
additional matters that we are unaware of or that we currently consider
immaterial. All of these could adversely affect our business, financial
condition, results of operations and cash flows and, thus, the
22
value of an investment in our company. In addition to the risk factors in our
Annual Report on Form 10-K for the year ended December 31, 2005, we have
determined that the following risk factors should be added:
OUR UPCOMING IMPLEMENTATION OF A NEW ERP SYSTEM COULD HAVE A MATERIAL ADVERSE
AFFECT ON OUR INTERNAL CONTROLS
During the second quarter of 2006, we began the implementation of an enterprise
resource planning ("ERP") system. Our plans are to close the fiscal year 2006 on
our existing system and begin using the new ERP system at the beginning of 2007.
Implementation of a new ERP will be a material change in our internal control
over financial reporting. Pre-implementation testing and post-implementation
reviews will be conducted by management to ensure that internal controls
surrounding the system implementation process, the applications, and closing
process were properly designed to prevent material financial statement errors.
Operating effectiveness of related controls will be evaluated during the
implementation. Regardless of planning and exhaustive efforts to ensure internal
controls are maintained, no assurance can be made that we will be successful in
maintaining adequate internal controls. Should adequate internal controls not be
maintained, such condition would put at risk our ability to accurately report
our operating results, financial position and cash flows.
OUR BUSINESS MAY BE AFFECTED BY GOVERNMENT CONTRACTING RISKS
We are actively pursuing government contracts and grants, and as government
contracting becomes a larger part of our business, we are consequently exposed
to greater risks. U.S. government contracts are subject to termination by the
government, either for the convenience of the government or for default as a
result of our failure to perform under the applicable contract. If terminated by
the government as a result of our default, we could be liable for additional
costs the government incurs in acquiring undelivered goods or services from
another source and any other damages it suffers. If we or one of our business
units were charged with wrongdoing as a result of any U.S. government
investigations (including violation of certain environmental or export laws),
the U.S. government could suspend us from bidding on or receiving awards of new
U.S. government contracts pending the completion of legal proceedings. If
convicted or found liable, the U.S. government could subject us to fines,
penalties, repayments and treble and other damages. The U.S. government could
void any contracts found to be tainted by fraud. The U.S. government also
reserves the right to debar a contractor from receiving new government contracts
for fraudulent, criminal or other seriously improper conduct. Independently,
failure to comply with U.S. laws and regulations related to the export of goods
and technology outside the U.S. could result in civil or criminal penalties and
suspension or termination of our export privileges.
ITEM 6. EXHIBITS
31.1 Certification pursuant to
18. U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to
18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
23
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: November 9, 2006 BY: /s/ William W. Botts
------------------------------------
William W. Botts
President, Chief Executive Officer
(Principal Executive Officer), and
Acting Vice President-Corporate
Controller
(Principal Financial Officer and
Accounting Officer)
24
Exhibit Index
Exhibit
Number Exhibit Title
- ------- ----------------------------------------------------------------------
31.1 Certification pursuant to
18. U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
25