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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, 2002
[ ] 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.
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
Not Applicable
---------------------------------------------------------------
Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report
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
------- --------
Number of shares outstanding of each of the issuer's classes of common stock, as
of November 11, 2002:
2,756,992 shares
Page 1 of 18
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)-
September 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Earnings and
Comprehensive Income (Unaudited) - Three and Nine Months
Ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
(Unaudited)- Nine Months Ended September 30, 2002
and 2001 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4. Controls and Procedures 15
PART II - OTHER INFORMATION 16
Page 2 of 18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O.I. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
SEPT. 30, DEC. 31
2002 2001
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 3,059 $ 3,140
Short-term investments, held-to-maturity 500 --
Investments, available-for-sale 3,196 1,927
Accounts receivable-trade, net of allowance for
doubtful accounts of $231 and $153, respectively 4,635 4,418
Income tax receivable -- 254
Investment in sales-type leases 242 260
Inventories 4,434 4,573
Current deferred tax asset 554 554
Other current assets 220 148
-------- ---------
TOTAL CURRENT ASSETS 16,840 15,274
Property, plant and equipment, net 3,393 3,394
Investment in sales-type lease, net of current 169 169
Long-term investments, held-to-maturity 500 --
Long-term deferred income tax assets 450 237
Other assets 188 570
-------- ---------
TOTAL ASSETS $ 21,540 $ 19,644
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,754 $ 1,330
Accrued compensation and other related expenses 917 834
Income tax payable 87 --
Unearned revenue 1,536 561
Other liabilities and accrued expenses 405 387
Accrued warranties 717 684
-------- ---------
TOTAL LIABILITIES 5,416 3,796
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, 2,757 shares and
2,686 shares outstanding at September 30, 2002
and December 31, 2001, respectively 410 410
Additional paid in capital 4,332 4,329
Treasury stock, 1,346 shares and 1,417 shares at
September 30, 2002 and December 31, 2001,
respectively, at cost (5,871) (5,894)
Retained earnings 17,221 16,961
Accumulated other comprehensive income 32 42
-------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 16,124 $ 15,848
-------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 21,540 $ 19,644
======== ========
See notes to unaudited condensed consolidated financial statements
Page 3 of 18
O.I. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT 30 SEPT 30
----------------------- -----------------------
2002 2001 2002 2001
------ ------- ------- --------
Net revenues:
Products $ 5,893 $ 5,110 $14,630 $ 16,732
Services 795 762 2,677 2,645
------- ------- ------- --------
6,688 5,872 17,307 19,377
Cost of revenues:
Cost of goods sold 3,198 2,370 7,905 8,138
Cost of services 538 678 1,674 2,149
------- ------- ------- --------
3,736 3,048 9,579 10,287
Gross profit 2,952 2,824 7,728 9,090
Selling, general & administrative expenses 2,173 1,801 5,924 5,543
Research and development expenses 614 517 1,652 1,530
------- ------- ------- --------
Operating income 165 506 152 2,017
Other income, net 95 103 243 271
------- ------- ------- --------
Income before income taxes 260 609 395 2,288
Provision for income taxes 88 214 135 841
------- ------- ------- --------
Net income $ 172 $ 395 $ 260 $ 1,447
======= ======= ======= ========
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on
available-for-sale investments (15) 18 (10) 18
------- ------- ------- --------
Comprehensive income $ 157 $ 413 $ 250 $ 1,465
Earnings per share:
Basic $ 0.06 $ 0.15 $ 0.09 $ 0.54
Diluted $ 0.06 $ 0.15 $ 0.09 $ 0.54
Shares used in computing earnings per share:
Basic 2,757 2,655 2,765 2,659
Diluted 2,764 2,674 2,795 2,671
See notes to unaudited condensed consolidated financial statements
Page 4 of 18
O.I. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2002 2001
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 260 $ 1,447
Depreciation & amortization 386 431
Impairment loss on intangible assets 346 --
Deferred income taxes (208) (20)
Gain on disposition of property (26) (43)
Change in operating working capital 1,747 1,030
-------- --------
Net cash flows provided by operating activities 2,505 2,845
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (358) (61)
Proceeds from sales of assets 37 60
Purchase of investments (2,284) (976)
Maturity of investments -- 550
Change in other assets (7) 12
-------- --------
Net cash flows used in investing activities (2,612) (415)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 26 16
Purchase of treasury stock -- (177)
-------- --------
Net cash flows provided by (used in) financing
activities 26 (161)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (81) 2,269
Cash and cash equivalents at beginning of period 3,140 1,444
-------- --------
Cash and cash equivalents at end of period $ 3,059 $ 3,713
======== --======
See notes to unaudited condensed consolidated financial statements
Page 5 of 18
O.I. CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share data)
1. GENERAL.
O.I. Corporation (the "Company"), an Oklahoma corporation, was organized
in 1969. 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. Certain
prior period amounts in the condensed consolidated financial statements
have been reclassified for comparative purposes. Such reclassifications
had no effect on the net income or the overall financial condition of the
Company. 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, 2001.
2. NEWLY ISSUED ACCOUNTING STANDARDS.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 141, "Business
Combinations." This Statement requires that business combinations
completed after June 30, 2001, be accounted for under the purchase method
and further clarifies the criteria for recognition of intangible assets
separately from goodwill. The adoption of FAS 141 did not have a material
impact on the financial position and results of operations of the Company,
but will impact the Company in the event of future acquisitions.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of this Statement. The Company adopted the Statement
on January 1, 2002.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company
will be required to adopt this Statement beginning on January 1, 2003. Due
to the nature of our business, this new accounting pronouncement is not
expected to have a significant impact on our reported results of
operations and financial condition.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which establishes one
accounting model to be used for long-lived assets to be disposed of by
sale and broadens the presentation of discontinued operations to include
more disposal transactions. SFAS No. 144 supersedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and the accounting and reporting provisions of APB Opinion
No. 30. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. During the third quarter ended September 30, 2002, the
Company performed an evaluation of future prospects of certain products
and their related intangible assets. As a result of this evaluation, the
Page 6 of 18
Company recorded an impairment loss for those intangible assets totaling
approximately $346,000 (See Note 6).
In May 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No.
4,44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections
as of April 2002", rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", FASB Statement No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds FASB Statement No. 44, "Accounting for Intangible
Assets of Motor Carriers" and amends FASB Statement No. 13, "Accounting
for Leases", to eliminate an inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. This Statement eliminates the treatment of early
extinguishments of debt as extraordinary items. The provisions of this
Statement related to the rescission of Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. The provisions of this
Statement related to Statement 13 shall be effective for transactions
occurring after May 15, 2002. All other provisions of this Statement shall
be effective for financial statements issued on or after May 15, 2002. The
Company does not believe that adoption of this Statement will have a
material affect on its financial statements.
In July 2002, the FASB issued SFAS 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred rather than at the date of an entity's commitment as
provided under Issue 94-3. This Statement also establishes that fair value
is the objective for initial measurement of the liability.
The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does
not believe adoption of the provisions of this Statement will have a
material impact on its financial statements.
3. INVENTORIES.
Inventories, which include material, labor and overhead, on September 30,
2002 and December 31, 2001, consisted of the following:
Sept. 30, 2002 Dec. 31, 2001
-------------- -------------
Raw Materials $ 3,270 $ 3,766
Work in Process 744 567
Finished Goods 420 240
-------- --------
$ 4,434 $ 4,573
======== ========
4. COMPREHENSIVE INCOME (LOSS).
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 are net income and unrealized gains and losses on
available-for-sale investments.
Page 7 of 18
5. 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. At September 30, 2002 and 2001, options to acquire 168,600
and 258,000 shares of common stock at a weighted average exercise price of
$5.52 and $5.40 per share, respectively, were not included in the
computation of earnings per share as the options' exercise price is
greater than the average market price of the common shares.
6. IMPAIRMENT OF INTANGIBLE ASSETS AND OBSOLETE INVENTORY.
Consistent with the Company's accounting policies, during the three months
ended September 30, 2002, the Company performed an annual evaluation of
the future prospects of certain products and their related inventory and
intangible assets. As a result of this evaluation, the Company decided to
discontinue manufacturing, sales, service, and support for certain sample
preparation, gas chromatography, and flow analyzer products. The Company
came to these decisions because purchase components are no longer
available for support of certain products, and the Company's current or
anticipated sales volume for certain other products no longer represent a
viable business opportunity for the Company.
As a result of the determination to discontinue these products, the
Company recorded an impairment loss for intangible assets and a loss for
obsolete inventory related to those products. The impaired intangible
assets consisted of acquired trade names and trademarks that are no longer
used to market the Company's products, application notes for products that
are no longer produced or sold, and patents on technology that is no
longer used in the Company's products. To determine if any impairment
existed, the Company compared the carrying amount of each intangible
asset, separately, to the undiscounted cash flow stream over the remaining
life of each intangible asset. To value the indicated impairment, the
Company compared the carrying amount of each intangible asset, separately,
to the fair value of those intangible assets. The Company determined the
fair value of each intangible asset by estimating the future cash flows
from the use and disposition of those intangible assets. The aggregate
fair value of those intangible assets was less than the aggregate carrying
value and resulted in an impairment loss totaling approximately $346,000,
which is included in SG&A expense in the Consolidated Statement of
Earnings and Comprehensive Income for the three and nine months ended
September 30, 2002.
The loss for obsolete inventory was determined by taking the total of the
inventory related to these discontinued products and consistent with the
Company's policy relating to obsolete inventory, the total of other
inventory with no movement in six months, which the Company determined is
no longer saleable based on available market information. The loss for
obsolete inventory totaled approximately $200,000, and is included in Cost
of Goods Sold in the Consolidated Statement of Earnings and Comprehensive
Income for the three and nine months ended September 30, 2002.
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
Exchange 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
Page 8 of 18
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 "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,
o the Company's ability to attract and retain new customers,
o the financial condition and spending practices of the Company's
customers,
o the Company's ability to provide products that meet the needs of its
customers,
o advancements or changes in technology that may render the Company's
products less valuable or obsolete,
o conditions in the environmental instrument market, and
o the Company's ability to obtain financing in the event it is needed.
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, 2001.
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and the notes thereto.
RECENT DEVELOPMENTS
Parsons Infrastructure & Technology Group, Inc. granted a series of purchase
orders totaling approximately $3,200,000 for MINICAMS(R) from the Company. Due
to changes in the scope of the equipment needed, approximately $820,000 of this
purchase order is on hold at the date of this filing. During the third quarter,
shipments and revenue recognized under the Parson's purchase orders were
$1,413,350 and $1,508,557, respectively. At the end of the third quarter,
shipments amounting to $679,620 were deferred for revenue recognition purposes.
During the third quarter, the Company officially introduced for sale the LAN
9000 Beverage On-Line Analyzer, which is used to assist in maintaining beverage
product quality control in the soft drink bottling industry. The LAN 9000 is
used to monitor brix/diet and carbon dioxide content in beverage products and
provide warnings when production conditions vary from quality standards.
The Company is continuing final testing of its Continuous Air Sampling System,
which is used in combination with the MINICAMS(R) product to eliminate sampling
blind spots and to reduce cycle time for air monitoring. There can be no
Page 9 of 18
assurance that these new products will be well received by customers, and future
sales from these products may not meet the Company's expectations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUES
Total net revenues for the three months ended September 30, 2002 increased
$816,000, or 14% to $6,688,000, compared to $5,872,000 for the same period of
2001. The increase in net revenues was primarily due to higher sales of
products, which increased $783,000, or 16% to $5,893,000, compared to $5,110,000
for the same period of 2001. The increase in revenues from products was
primarily due to higher sales of MINICAMS(R) chemical agent monitoring equipment
and gas chromatography (GC) systems and components. Sales of the MINICAMS(R)
product, a device used to detect, measure, and monitor chemical warfare agents,
increased due to deliveries under the contract with Parsons Infrastructure and
Technology Group, Inc. Sales of flow analyzers, microwave digestion products,
and beverage analyzer parts and components also increased. Increases in sales of
these products were partially offset by decreases in sales of total organic
carbon (TOC) analyzers, sample preparation products, and refrigerant
air-monitoring equipment. Sales of TOC analyzers and sample preparation products
decreased in part due to increased competition. Sales of SAM MAX, a redesigned
refrigerant air monitor introduced in the second quarter of 2001, decreased as
the Company continues its efforts to establish the product in the marketplace.
The current economic downturn and reduced capital spending by customers also
continued to negatively affect sales across all of the Company's product
offerings.
Net revenues from providing customer services, including rentals of the
Company's products, for the three months ended September 30, 2002 increased
$33,000, or 4% to $795,000, compared to $762,000 for the same period of 2001.
The increase is primarily attributable to a decrease in demand for customer
services during the same period of the prior year following the September 11,
2001 terrorist attacks. Revenues from rentals of the Company's products
decreased due to a customer choosing to make early payment on several operating
leases and effectively negotiating the purchase of a significant portion of the
Company's rental inventory. The Company still maintains a rental inventory and
offers it for rent to customers who need substitute equipment while their
equipment is being serviced or who wish to temporarily use the Company's
equipment.
Both domestic and international sales for the third quarter of 2002 increased
compared to the same quarter in the prior year. Sales to Europe, Asia, and the
Middle East/Africa regions increased due to continued requirement for volatiles
analysis and inorganic nutrient monitoring within the industrial and
environmental market sectors, although competition and unpredictable local
economic conditions continue to affect sales in those regions. Sales to Latin
America decreased due to continuing adverse local economic conditions and
incomplete sales coverage in that region. The Company continues to actively
invest in training foreign sales personnel and developing distribution channels
in the hopes of positioning the Company for long-term success internationally.
The current economic downturn has resulted in reduced purchasing and capital
spending in many of the markets that the Company serves, in particular,
industrial and government customers. In addition, the environmental instrument
market in which the Company competes has been flat or declining over the past
several years. The Company remains cautiously optimistic about future sales and
has identified a number of strategies it believes will allow it to grow its
business despite this decline, including the acquisition of
Page 10 of 18
complementary businesses, developing new applications for its technologies and
strengthening its presence in selected geographic markets. No assurance can be
given that the Company will be able to successfully implement these strategies,
or if successfully implemented, that these strategies will result in growth of
the Company's business.
GROSS PROFIT
Total gross profit for the three months ended September 30, 2002, measured as a
percent of revenues, decreased to 44% compared to 48% for the same period of the
prior year. Contributing to the decrease in gross profit was an increase in
manufacturing overhead costs, consisting primarily of the Company's
determination to write off obsolete inventory amounting to approximately
$200,000. A decrease in gross profit on product sales for the three months ended
September 30, 2002 compared to same period of 2001 was partially offset by an
increase in the profitability of providing services to customers. Gross profit
on product sales decreased primarily due to lower sales of higher margin
products. Gross profit from customer services increased due to increased
efficiency in providing customer services combined with a reduction in costs.
OPERATING COSTS AND EXPENSES
Selling, general, and administrative (SG&A) expenses for the three months ended
September 30, 2002 increased $572,000, or 21% to $2,173,000, or 32% of revenues,
compared to $1,801,000, or 31% of revenues, for the same period of 2001. SG&A
expenses for the third quarter of 2002 were higher than 2001 primarily due to an
impairment loss of approximately $346,000 on certain intangible assets. Also
contributing to the increase in SG&A expenses were increased costs for salaries
and benefits, selling expenses and customer support.
During the three months ended September 30, 2002, the Company performed an
annual evaluation of the future prospects of certain products and their related
inventory and intangible assets. As a result of this evaluation, the Company
decided to discontinue the manufacture, sale, service, and support for certain
sample preparation, gas chromatography, and flow analyzer products. The Company
came to these decisions because purchase components are no longer available for
support of certain products, and sales volume for other products no longer
represent a viable business opportunity for the Company. As a result of the
determination to discontinue these products, the Company recorded an impairment
loss for intangible assets totaling approximately $346,000, which is included in
SG&A expense and a loss for obsolete inventory related to those products
totaling approximately $200,000, which is included in Cost of Goods Sold in the
Consolidated Statement of Earnings and Comprehensive Income for the three months
ended September 30, 2002. The impaired intangible assets consisted of acquired
trade names and trademarks that will no longer be used to market the Company's
products, application notes for products that are no longer produced or sold,
and patents that are no longer used in the Company's operations or that the
Company allowed to expire. The loss for obsolete inventory was provided for the
total of the inventory related to these discontinued products and the total of
other inventory with no movement in six months, which the Company determined is
no longer saleable based on available market information. The Company believes
the discontinuation of these products will help streamline manufacturing
operations, improve customer support, and increase sales effectiveness.
Research and development (R&D) expenses for the third quarter of 2002
increased $97,000 or 19% to $614,000, or 9% of revenues, compared to $517,000,
or 9% of revenues for the same period of 2001. The increase in R&D expense for
the three months ended September 30, 2002, compared to the same period of 2001,
was primarily due to efforts to develop and introduce potential new products,
maintenance and support of existing products, including the purchase of
supplies, use of contract services, and purchases of research supplies and
equipment.
Page 11 of 18
OPERATING INCOME
Operating income for the three months ended September 30, 2002 decreased
$341,000, or 67% to $165,000, compared to $506,000 for the same period of 2001.
The decrease was primarily due to increases in operating expenses and losses
from the impairment of intangible assets of $346,000 and from obsolete inventory
of $200,000.
INCOME BEFORE INCOME TAXES
Income before income taxes decreased $349,000 or 57% to $260,000 for the three
months ended September 30, 2002, compared to $609,000 for the same period of
2001. The decrease was primarily due to increases in operating expenses and
losses from the impairment of intangible assets of $346,000 and from obsolete
inventory of $200,000 and a decrease in other income from lower interest income
on invested cash and other investments due to lower interest rates compared to
the same period of the prior year.
PROVISION FOR INCOME TAXES
The effective tax rates for the three months ended September 30, 2002 and 2001
were 34% and 35%, respectively.
NET INCOME
Net income for the three months ended September 30, 2002 decreased $223,000 or
56% to $172,000, or $0.06 per share diluted, compared to $395,000, or $0.15 per
share diluted, in the same period of 2001 primarily due to increases in
operating expenses and losses from the impairment of intangible assets of
$346,000 and from obsolete inventory of $200,000, and a decrease in other
income.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001
REVENUES
Year-to-date net revenues through September 30, 2002 decreased $2,070,000 or 11%
to $17,307,000, compared to $19,377,000 for 2001, primarily due to a decrease in
product sales. The decrease in net revenues was primarily due to lower sales of
products, which decreased $2,102,000, or 13% to $14,630,000, compared to
$16,732,000 for the same period of 2001. The decrease in revenues from products
was primarily due to lower sales of MINICAMS(R) chemical agent monitoring
equipment, TOC analyzers, and flow analyzers. Sales of MINICAMS(R) decreased
compared to the same period of the prior year as the Company had more product
deliveries attributable to a contract with Bechtel National, Inc. Except for an
increase in sales of GC systems and components, which increased in part due to
the sale of a portion of the Company's rental equipment to a customer, sales
also decreased across other product offerings, including sample preparation
products, beverage analyzers, refrigerant air monitors, and microwave digestion
analyzers. Sales of TOC analyzers, flow analyzers, sample preparation products,
microwave digestion analyzers decreased in part due to competition and a weak
economy causing a slowdown in capital spending in the markets the Company
serves. Revenues from SAM MAX decreased as the Company continues its efforts to
establish the product in the marketplace.
Net revenues from providing customer services, including rentals of the
Company's products, for the nine months ended September 30, 2002 increased
$32,000 or 1% to $2,677,000, compared to $2,645,000 for the same period of 2001.
The increase is primarily attributable to improvements in the management of the
Company's service resources and efforts to increase the Company's service
coverage area. Revenues derived from rentals decreased due to a customer
choosing to make early payment on operating leases and to negotiate the purchase
of the equipment, effectively negotiating the purchase of a significant portion
of the Company's rental inventory. The Company still
Page 12 of 18
maintains a rental inventory and offers it for rent to customers who need
substitute equipment while their equipment is being serviced or who wish to
temporarily use the Company's equipment.
International sales for the nine months ended September 30, 2002 increased
compared to the same period of the prior year, while domestic sales decreased.
Sales to Europe, Asia, and the Middle East/Africa region increased due to
continued demand for organic volatile and inorganic nutrient monitoring
solutions within the environmental and industrial client base, although
difficult local economic conditions and competition continue to affect sales in
those regions. Sales to Latin America decreased due to continuing adverse local
economic conditions and incomplete sales coverage in that region. The Company
continues to actively seek investment in foreign sales personnel and
distribution channels in hopes of positioning the Company for long-term success
internationally.
GROSS PROFIT
Total gross profit for the nine months ended September 30, 2002, measured as a
percent of revenues, decreased to 45% compared to 47% for the same period of the
prior year. Contributing to the decrease in gross profit was an increase in
manufacturing overhead costs, consisting primarily of the Company's
determination of write off obsolete inventory amounting to approximately
$200,000. A decrease in gross profit on product sales for the nine months ended
September 30, 2002 compared to the same period of 2001 was partially offset by
an increase in the profitability of providing services to customers. Gross
profit on product sales decreased primarily due to lower sales of higher margin
products. Gross profit from customer services increased due to increased
efficiency in providing customer services combined with a reduction in costs.
OPERATING COSTS AND EXPENSES
Year-to-date SG&A expenses for the nine months ended September 30, 2002,
increased $381,000 or 7% to $5,924,000, or 34% of revenues, compared to
$5,543,000, or 29% of revenues, for the same period of 2001. SG&A expenses for
the third quarter of 2002 were higher than 2001 primarily due to an impairment
loss on certain intangible assets totaling approximately $346,000. Also
contributing to the increase in SG&A expenses were increased costs for salaries
and benefits, selling expenses and customer support.
Year-to-date R&D expenses through September 30, 2002 increased $122,000 or
8% to $1,652,000, or 10% of revenues, compared to $1,530,000, or 8% of revenues,
for the same period of 2001. The increase in R&D expense for the nine months
ended September 30, 2002, compared to the same period of 2001, was primarily due
to efforts to develop and introduce potential new products, maintain and support
existing products, including the purchase of supplies, use of contract services,
and purchases of research supplies and equipment.
OPERATING INCOME
Operating income for the nine months ended September 30, 2002 decreased
$1,865,000 or 92% to $152,000, compared to $2,017,000 for the same period of
2001. The decrease in operating income was primarily due to lower gross profit
resulting from a decrease in revenues from product sales due to a weak economy
and due to increases in operating expenses and losses from the impairment of
intangible assets of $346,000 and from obsolete inventory of $200,000.
INCOME BEFORE INCOME TAXES
Income before income taxes for the nine months ended September 30, 2002
decreased $1,893,000 or 83% to $395,000, compared to $2,288,000 for the same
period of 2001. The decrease in income before income taxes was primarily due to
lower operating income resulting from a decrease in revenues from product
Page 13 of 18
sales, due to increases in operating expenses and losses from the impairment of
intangible assets of $346,000 and from obsolete inventory of $200,000, and a
decrease in other income from lower interest income on invested cash and other
investments due to lower interest rates compared to the same period last year.
PROVISION FOR INCOME TAXES
The effective tax rates for the nine months ended September 30, 2002 were 34%
and 37%, respectively.
NET INCOME
Net income for the nine months ended September 30, 2002 decreased $1,187,000 or
82% to $260,000, or $0.09 per share diluted, from $1,447,000, or $0.54 per share
diluted, for the same period of 2001 primarily due to lower sales of products
due to a continuing weak economy, increases in operating expenses and losses
from the impairment of intangible assets of $346,000 and from obsolete inventory
of $200,000, and a decrease in other income.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3,059,000 as of September 30, 2002, compared
to $3,140,000 as of December 31, 2001. Working capital as of September 30, 2002,
was $11,424,000, compared to $11,478,000 as of December 31, 2001. Working
capital, as a percentage of total assets, was 53% as of September 30, 2002,
compared to 58% as of December 31, 2001. The current ratio was 3.11 to 1 at
September 30, 2002, as compared to 4.02 to 1 at December 31, 2001. Total
liabilities-to-equity was 34% as of September 30, 2002, compared to 24% at
December 31, 2001.
Net cash flow provided by operating activities for the nine months ended
September 30, 2002, was $2,505,000, compared to $2,845,000 for the same period
of 2001. The decrease in cash flow provided by operating activities for the
first nine months of 2002 was primarily due to the decrease in net income. Net
cash flow used in investing activities for the nine months ended September 30,
2002 was $(2,612,000), compared to $(415,000) for the same period of 2001. The
decrease in cash flow from investing activities is primarily due to an increase
in the purchase of investments for excess cash and improvements in certain
manufacturing facilities and the replacement of some of the vehicles used in the
Company's business. The Company invests its excess cash in low-risk investments
that maximize after-tax return consisting of tax-advantage preferred stocks and
shares in money market funds. Net cash flow provided by (used in) financing
activities for the nine months ended September 30, 2002 was $26,000, compared to
$(161,000) for the same period of 2001. The increase in cash flow from financing
activities was due to a decrease in the repurchase of the Company's stock. The
Company purchased 61,394 shares of the Company's common stock during the first
nine months of 2001 under its stock repurchase program, but has not purchased
any in 2002. As of September 30, 2002, the Company was still authorized to
purchase up to 47,622 additional shares. The Company may, from time-to-time,
repurchase its own shares when they are trading at a value that the Company
finds is attractive. The Company may also seek expansion of this program in the
future if it decides that is in its best interests.
The Company has historically been able to fund working capital and capital
expenditures from operations, and expects to be able to finance its 2002 working
capital requirements from cash on hand and funds generated from operations.
However, demand for the Company's products is influenced by the overall
condition of the economy in which the Company sells its products, by the capital
spending budgets of its customers, and by the Company's ability to successfully
meet, through its product offerings, the needs of its customers. The
environmental instrument markets, in which the Company competes, have been flat
or declining over the past several years, and the current economic downturn has
resulted in reduced purchasing and capital spending in many of
Page 14 of 18
the markets that the Company serves worldwide. In particular, industrial and
government customers are currently in a downward cycle characterized by
diminished product demand, excess manufacturing capacity, and the erosion of
average selling prices. The Company is uncertain how long the current downturn
will last. Any further decline in its customers' markets or in general economic
conditions would likely result in a further reduction in demand for its products
and services and could harm its results of operations and, therefore, harm the
primary source of its cash flows.
Other matters that could affect the extent of funds required within the
short-term and long-term include future acquisitions of other businesses,
extensive investments in product R&D activities, or spending to develop markets
for the Company's products. The Company may engage in discussions with third
parties to acquire new products or businesses or to form strategic alliances and
joint ventures. These types of transactions may create a need for increased cash
flow from sources other than the Company's current operating activities to
complete these transactions. In addition, the Company may engage in significant
R&D spending or market developing activities above current operating levels in
order to respond to perceived market opportunities. These activities may require
the Company to seek additional funds from sources other than its current
operating activities. The Company believes that if the need arises in the future
for funding of acquisitions, R&D, or marketing activities, it would attempt to
attain such funding on terms that are favorable to the Company.
The Company conducts operations in leased facilities under an operating lease
expiring on November 30, 2006. Future minimum rental payments under this lease
for the remainder of 2002 are $46,650, $186,600 for each year of 2003 through
2005 and $171,050 for 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to a variety of 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. To date, the Company has not
experienced any material effects to its financial position or results of
operations due to market risks. The fair market value of the Company's
investments in debt securities and preferred stock at September 30, 2002 was
$1,000,000 and $3,196,000, respectively.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports that we are
required to file under the Securities Exchange Act of 1934 are recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our principal executive officer and our principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applies its judgment in assessing the costs
and benefits of such controls and procedures, which by their nature, can provide
only reasonable assurance regarding management's control objectives.
On November 13, 2002, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chairman of the
Board/Chief Executive Officer and our Corporate Controller, of our disclosure
controls and procedures. Our CEO and Controller concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to O.I. Corporation (and its consolidated subsidiary)
required to be included in our Exchange Act reports.
Page 15 of 18
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out the evaluation referred to above.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
99.1 Written Certification of the Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Written Certification of the Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
Form 8-K, Change in Registrant's Certifying Accountants was filed
November 1, 2002.
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 14, 2002 BY: /s/ William W. Botts
------------------------
William W. Botts
President
CERTIFICATIONS
I, William W. Botts, President/CEO of O.I. Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of O.I. Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
Page 16 of 18
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ William W. Botts
-----------------------------------------
William W. Botts
Chairman of the Board, President &
Chief Executive Officer
(Principal Executive Officer)
I, Juan M. Diaz, Corporate Controller of O.I. Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of O.I. Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
Page 17 of 18
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors
and the audit committee of Registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Juan M. Diaz
-----------------------------------------
Juan M. Diaz
Corporate Controller
(Principal Financial Officer)
Page 18 of 18
Exhibit Index
Exhibit
Number Exhibit Title
- ------- -------------
99.1 Written Certification of the Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Written Certification of the Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002