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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, 2003
[ ] 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 11, 2003, there were 2,744,825 shares of the issuer's common
stock, $.10 par value, outstanding.
Page 1 of 24
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2003
(Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Earnings and
Comprehensive Income (Unaudited) - Three and Nine Months
Ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows
(Unaudited)- Nine Months Ended September 30, 2003
and 2002 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION 19
Page 2 of 24
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O.I. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
SEPT. 30, DEC. 31,
2003 2002
-------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 3,473 $ 3,915
Investments 6,078 3,733
Accounts receivable-trade, net of allowance for
doubtful accounts of $296 and $283, respectively 4,285 3,775
Investment in sales-type leases 211 278
Inventories 3,317 4,138
Current deferred tax asset 801 801
Other current assets 356 146
-------- --------
TOTAL CURRENT ASSETS 18,521 16,786
Property, plant and equipment, net 3,331 3,415
Investment in sales-type lease, net of current 221 271
Long-term deferred income tax assets 330 310
Other assets 210 201
-------- --------
TOTAL ASSETS $ 22,613 $ 20,983
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade 1,456 1,313
Accrued expenses 2,679 2,161
Unearned revenue 764 958
-------- --------
TOTAL LIABILITIES $ 4,899 $ 4,432
-------- --------
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, 2,744 shares and
2,758 shares outstanding, respectively 410 410
Additional paid in capital 4,334 4,331
Treasury stock, 1,359 shares and 1,345 shares at
respectively, at cost (5,946) (5,866)
Retained earnings 18,781 17,619
Accumulated other comprehensive income 135 57
-------- --------
TOTAL STOCKHOLDERS' EQUITY 17,714 16,551
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 22,613 $ 20,983
======== ========
See notes to unaudited condensed consolidated financial statements
Page 3 of 24
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
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net revenues:
Products $ 5,998 $ 5,893 $ 16,645 $ 14,630
Services 713 795 2,261 2,677
-------- -------- -------- --------
6,711 6,688 18,906 17,307
Cost of revenues:
Products 3,001 3,198 8,366 7,905
Services 470 538 1,243 1,674
-------- -------- -------- --------
3,471 3,736 9,609 9,579
Gross profit 3,240 2,952 9,297 7,728
Selling, general & administrative
expenses 1,870 2,173 5,820 5,924
Research and development expenses 661 614 1,960 1,652
-------- -------- -------- --------
Operating income 709 165 1,517 152
Other income, net 131 95 329 243
-------- -------- -------- --------
Income before income taxes 840 260 1,846 395
Provision for income taxes 305 88 684 135
-------- -------- -------- --------
Net income $ 535 $ 172 $ 1,162 $ 260
======== ======== ======== ========
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
investments, available-for-sale (116) (15) 78 (10)
-------- -------- -------- --------
Comprehensive income $ 419 $ 157 $ 1,240 $ 250
======== ======== ======== ========
Earnings per share:
Basic $ 0.19 $ 0.06 $ 0.42 $ 0.09
Diluted $ 0.19 $ 0.06 $ 0.42 $ 0.09
Shares used in computing earnings
per share:
Basic 2,758 2,757 2,757 2,765
Diluted 2,805 2,764 2,785 2,795
See notes to unaudited condensed consolidated financial statements
Page 4 of 24
O.I. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,162 $ 260
Depreciation & amortization 341 386
Impairment loss on intangible assets -- 346
Deferred income taxes (57) (208)
Gain on disposition of property (23) (26)
Change in working capital 666 1,747
------- -------
Net cash flows provided by operating activities 2,089 2,505
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (252) (358)
Proceeds from sales of assets 14 37
Purchase of investments (3,056) (2,284)
Proceeds from sales of investments 840 --
Change in other assets -- (7)
------- -------
Net cash flows (used in) investing activities (2,454) (2,612)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 65 26
Purchase of treasury stock (142) --
------- -------
Net cash flows provided by (used in) financing
activities (77) 26
------- -------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (442) (81)
Cash and cash equivalents at beginning of period 3,915 3,140
------- -------
Cash and cash equivalents at end of period $ 3,473 $ 3,059
======= =======
See notes to unaudited condensed consolidated financial statements
Page 5 of 24
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. 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, 2002.
2. INVENTORIES.
Inventories are stated at the lower of first-in, first-out cost or market:
Sept. 30, 2003 Dec. 31, 2002
-------------- -------------
Raw Materials $ 2,403 $ 3,216
Work in Process 320 220
Finished Goods 594 702
-------- --------
$ 3,317 $ 4,138
======== ========
3. 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 and are excluded from net income (loss). The Company's
components of comprehensive income are net income (loss) 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.
Weighted average shares for the three and nine months ended September 30, 2003
were 2,758 and 2,757, respectively. Weighted average shares for the three and
nine months ended September 30, 2002 were 2,757 and 2,765, respectively.
Incremental shares from assumed exercise of dilutive options for the three and
nine months ended September 30, 2003 of 47 and 28, respectively, were added to
the weighted average shares used to calculate diluted EPS. Incremental shares
from assumed exercise of dilutive options for the three and nine months ended
September 30, 2002 of 7 and 30, respectively, were added to the weighted average
shares used to calculate diluted EPS. There were no adjustments made to net
income as reported to calculate basic or diluted earnings per share.
For the nine months ended September 30, 2003 and 2002, options to acquire 133
Page 6 of 24
and 169 shares of common stock, respectively, at a weighted average exercise
price of $5.75 and $5.02 per share, respectively, were not included in the
computation of dilutive earnings per share as their effect would be
anti-dilutive.
5. STOCK-BASED COMPENSATION.
At September 30, 2003, the Company has three stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FAS Statement No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation.
Three Months Nine Months
Ended Ended
Sept 30 Sept 30
---------------- -----------------
2003 2002 2003 2002
------ ------- ------- -------
Net income, as reported $ 535 $ 172 $ 1,162 $ 260
Deduct: Total stock-based compensation expense determined
under fair value based method for awards granted, modified,
or settled, net of related tax effects 3 1 34 73
------ ------- ------- -------
Pro forma net income 532 171 1,128 187
Earnings per share:
Basic--as reported $ 0.19 $ 0.06 $ 0.42 $ 0.09
Basic--pro forma $ 0.19 $ 0.06 $ 0.41 $ 0.07
Diluted--as reported $ 0.19 $ 0.06 $ 0.42 $ 0.09
Diluted--pro forma $ 0.19 $ 0.06 $ 0.41 $ 0.07
6. INTANGIBLE ASSETS, NET.
Intangible assets, net, consisted of patents relating to technology used in the
Company's products. Intangible assets, net, as of September 30, 2003 and
December 31, 2002 were approximately $109 and $116, net of accumulated
amortization of $350 and $342, respectively. Total amortization expense on
intangible assets for the three and nine months ended September 30, 2003 and
2002 was approximately $2 and $8, and $13 and $26, respectively, excluding
intangible impairment charges of $346,000 in the third quarter of 2002. The
estimated aggregate amortization expense for each of the five succeeding fiscal
years 2003 to 2007 is approximately $9.
7. PRODUCT WARRANTY LIABILITIES.
The changes in the Company's product warranty liability on September 30, 2003
were as follows:
Liability, beginning of year $ 735
Warranty claims (68)
Additional reserves 12
------
Liability, September 30, 2003 $ 679
8. RECENT PRONOUNCEMENTS.
Page 7 of 24
In July 2002, the FASB issued FAS 146, "Accounting for Exit or Disposal
Activities." FAS 146 addresses the recognition, measurement, and reporting of
costs associated with exit and disposal activities, including restructuring
activities that were previously accounted for pursuant to the guidance set forth
in Emerging Issues Task Force issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in Restructuring)." The Scope of FAS 146 includes costs
related to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocate employees, and certain termination benefits
provided to employees who are involuntarily terminated. FAS 146 is effective for
exit or disposal activities initiated after December 31, 2002. The Company does
not expect the adoption of FAS 146 to have a significant impact on its financial
condition or results of operations.
In 2003, the FASB issued FAS 148, "Accounting for Stock-Based Compensation,
Transition and Disclosure," an amendment of FAS 123. The disclosure requirements
of FAS 123, "Accounting for Stock-Based Compensation," which apply to stock
compensation plans of all companies, are amended to require certain disclosures
about stock-based employee compensation plans in an entity's accounting policy
note. Those disclosures include a tabular format of pro forma net income and, if
applicable, earnings per share under the fair value method if the intrinsic
value method is used in any period presented. Pro forma information in a tabular
format is also required in the notes to interim financial information if the
intrinsic value method is used in any period presented. The amendments to the
disclosure and transition provisions of FAS 123 are effective for fiscal years
ending after December 15, 2002. The Company does not plan a change to the fair
value based method of accounting for stock-based employee compensation and has
included the disclosure requirements of FAS 148 in the accompanying financial
statements.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus
provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the arrangement should be allocated to the separate units of accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Entities may elect to report the change as a
cumulative effect adjustment in accordance with APB Opinion 20, "Accounting
Changes." The Company does not anticipate that the effect of adoption of EITF
00-21 on its financial statements will be significant.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 02-16, "Accounting by a Customer (including a reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 requires that cash payments,
credits, or equity instruments received as consideration by a customer from a
vendor should be presumed to be a reduction of cost of sales when recognized by
the customer in the income statement. In certain situations, the presumption
could be overcome and the consideration recognized as revenue or a reduction of
a specific cost incurred. The consensus should be applied prospectively to new
or modified arrangements entered into after December 31, 2002. The Company's
adoption of EITF 02-16 did not have an effect on its condensed consolidated
financial statements.
In November 2002, FASB Interpretation 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measure provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 applies prospectively to
Page 8 of 24
guarantees the Company issues or modifies subsequent to December 31, 2002, but
has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. The Company has historically issued guarantees
only in the form of product warranties and does not anticipate FIN 45 will have
a material effect on its 2003 financial statements. Disclosures required by FIN
45 are included in these financial statements.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), "Consolidation
of Variable Interest Entities," FIN 46 clarifies the application of Accounting
Research Bulletin 51, `Consolidated Financial Statements," for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties,
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both. FIN 46 applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The Company does not anticipate that the
adoption of the provisions of FIN 46 will have any impact upon its financial
condition or results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Act of 1934, as amended, concerning, among other things, (i) possible or assumed
future results of operations, contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," (ii) prospects for the
Company's business or products; 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.
Factors that could cause actual results to differ materially include, but are
not limited to,
- The Company's ability to retain existing customers and to attract and
retain new customers.
- The financial condition and spending practices of its customers.
- The Company's ability to provide products that meet the needs of the
Company's customers.
- Advancements or changes in technology that may render the Company's
products less valuable or obsolete.
- Conditions in the environmental instrument market.
- The Company's ability to obtain financing in the event it is needed.
Page 9 of 24
- The Company's ability to maintain products that meet customer
expectations in a rapidly changing competitive market.
- The Company's retention of an arrangement with Agilent or a suitable
similar supplier for the supply of gas chromatographs and mass
spectrometers to configure systems for the analysis of various air and
water matrices to determine the presence of volatile organic
compounds.
- Acts of war, terrorism, natural disasters and outbreaks of disease or
potentially fatal sicknesses.
- Underutilization of the Company's existing facilities possibly
resulting in inefficiencies.
- Delays in new product research, development, and engineering products
resulting in delays in the market introduction of such products.
- The increased cost of health insurance and subsequent increased cost
to the Company and employees.
- The current economic slowdown, or unforeseen price reductions in the
Company's global market segments, with adverse effects on profit
margins.
- The unanticipated expenses of assimilating newly acquired businesses
into the Company's business structure, as well as the impact of
unusual expenses from business strategies, asset valuations,
acquisitions, divestitures and organizational structures.
- Increased cost of inability to obtain property and liability insurance
due to uncertainty in worldwide insurance and reinsurance markets.
- Potential write off of existing or future goodwill and other
intangible Assets.
- Unpredictable delays or difficulties in the development of key new
product programs, and the risk of not recovering major research and
development expenses, and/or the risks of major technological shifts
away from the Company's technologies and core competencies.
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, 2002.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto.
OPERATING RESULTS
Revenues. Net revenues for the three months ended September 30, 2003 increased
$23,000, or 1% to $6,711,000 compared to $6,688,000 for the same period of the
prior year. Net revenues increased due to higher product sales partially offset
by lower revenues from services. Product revenues increased $105,000 or 2% to
$5,998,000, compared to $5,893,000 for the same period of the prior year,
primarily due to higher sales of MINICAMS(R) chemical agent monitoring
equipment, GC systems and components, Total Organic Carbon Analyzers (TOC),
microwave digestion systems, and beverage analyzers partially offset by
decreases in sales of continuous flow analyzers, gel permeation chromatography
equipment and refrigerant air monitors. Revenues for the quarter ended September
30, 2003 benefited from the recent introduction of two new products, the
Eclipse, a third-generation purge-and-trap sample concentrator, which we began
shipping in August 2003, and the LAN9000 beverage analyzer, which we began
shipping in July 2003. Sales of MINICAMS(R) chemical agent monitoring equipment
increased overall, compared to the quarter ended September 30, 2002, in which
deliveries of approximately $1,509,000 were made under the contract with Parsons
Infrastructure and Technology Group, Inc.
Page 10 of 24
Increases in revenues from products for the three months ended September 30,
2003, compared to the same period of the prior year, were partially offset by
decreases in revenues from services. Revenues from services decreased by
$82,000, or 10%, to $713,000 compared to $795,000 in the quarter ended September
30, 2002, primarily due to a decrease in installations and factory repair
services performed, partially offset by an increase in customer training and
on-site repair services performed.
Net revenues for the nine months ended September 30, 2003 increased $1,599,000,
or 9% to $18,906,000, compared to $17,307,000 for the same period of the prior
year. The year-to-date increase is primarily due to an increase in sales of
products, including MINICAMS(R) chemical agent monitoring equipment, GC systems
and components, TOC analyzers and refrigerant air monitors, partially offset by
decreases in revenues from continuous flow analyzer products, sample preparation
products, leasing activities, and services.
Domestic revenues decreased, while international revenues increased for the
quarter ended September 30, 2003, compared to the same period of the prior year.
Revenues from sales of products in Asia decreased, but sales of products in
Europe and Latin America increased for the three months ended September 30,
2003, compared to the same period of the prior year. While competition and
unpredictable local economic conditions continue to affect international sales,
the Company continues to invest in further developing distribution channels to
establish market positions in international markets. Domestic and international
revenues for the nine months ended September 30, 2003 increased, compared to the
same period of the prior year. Year-to-date international revenues increased
primarily due to higher sales in Europe and Asia.
Despite the increase in net revenues for the three and nine months ended
September 30, 2003, compared to the same period of the prior year, improvement
in the performance of some products is still offset by the below-expectations
performance of certain other products. The Company continues to encounter strong
competition and continues to seek improved distribution strategies for certain
products in some channels and markets. Furthermore, we have not seen or
experienced a fundamental improvement in the purchasing and capital spending
activity in many of the markets that the Company serves. Uncertainty about the
direction of the U.S. and other global economies has resulted in prolonged
purchasing decisions, and has suppressed purchasing and capital spending
activity in many of the markets that the Company serves, in particular,
industrial and government customers. In addition, the environmental instruments
market in which the Company competes has been flat or declining over the past
several years. The Company has identified a number of strategies it believes
will allow it to grow its business despite this decline, including the
acquisition of complementary businesses, developing new products, 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. Gross profit for the three months ended September 30, 2003
increased $288,000, or 10% to $3,240,000, compared to $2,952,000 for the same
period of the prior year. Gross profit represented 48% of revenues for the three
months ended September 30, 2003, compared to 44% for the same period of the
prior year. The increase in gross profit dollars and gross profit margin for the
three months ended September 30, 2003, compared to the three months ended
September 30, 2002, was primarily due to product mix and a decrease in
manufacturing costs and a decrease in warranty costs for the period as the
Company continues to make progress in its efforts to control manufacturing costs
and improve its manufacturing efficiency. Gross profit for the nine
Page 11 of 24
months ended September 30, 2003 increased $1,569,000, or 20% to $9,297,000,
compared to $7,728,000 for the same period of the prior year. Gross profit
represented 49% and 45% of revenues for the nine months ended September 30, 2003
and September 30, 2002, respectively. The increase in gross profit dollars and
gross profit margin for the nine months ended September 30, 2003, compared to
the nine months ended September 30, 2002, was primarily due to increases in
revenues combined with an improvement in sales mix for the period, and a
decrease in manufacturing and warranty costs.
Research and development. R&D expenses for the three months ended September 30,
2003 increased $47,000, or 8% to $661,000, compared to expenses of $614,000 for
the same period of the prior year. R&D expenses represented 10% and 9% of
revenues for the three months ended September 30, 2003 and September 30, 2002,
respectively. R&D expenses for the nine months ended September 30, 2003
increased $308,000, or 19% to $1,960,000, compared to $1,652,000 for the same
period of the prior year. R&D expenses represented 10% of revenues for both the
nine months ended September 30, 2003 and September 30, 2002. The increase in R&D
expenses for the three and nine months ended September 30, 2003 is due to a plan
to increase focus on product development. The Company's plan to increase product
development activities most likely will result in an increase in R&D expenses in
dollar terms and as a percentage of revenues during the next 24 months.
Increases in R&D efforts may include outsourcing and funding certain
developments outside the Company. We expect that such expenses will fluctuate
quarterly based on the specific activity during the quarter. We cannot be
certain that such fluctuating expenditures, together with fluctuating revenues,
will not result in a quarterly or annual operating loss.
Selling, general, and administrative. SG&A expenses for the three months ended
September 30, 2003 decreased $303,000, or 14% to $1,870,000, compared to
$2,173,000 for the same period of the prior year. SG&A expenses represented 28%
and 32% of revenues for the three months ended September 30, 2003 and September
30, 2002, respectively. SG&A expenses decreased for the three months ended
September 30, 2003, compared to the same quarter of 2002, primarily due to
$346,000 in impairment charges for certain intangible assets in the third
quarter of 2002. SG&A expenses for the three months ended September 30, 2003
also decreased due to decreases in direct selling expenses and decreases in
general marketing costs and activity. SG&A expenses for the nine months ended
September 30, 2003 decreased $104,000, or 2% to $5,820,000, compared to
$5,924,000 for the same period of the prior year. SG&A expenses represented 31%
and 34% of revenues for the nine months ended September 30, 2003 and September
30, 2002, respectively. Year-to-date SG&A expenses decreased primarily due to
the $346,000 impairment charge for intangible assets in the third quarter of
2002, partially offset by increases in employee benefit-related costs,
consulting and expenses for legal fees. The Company continues to incur increased
administrative expense, both for accounting and legal professional services to
assess and react to the changes in securities laws, including the Sarbanes-Oxley
Act and the corporate governance rules of the NASDAQ.
Operating Income. Operating income for the three months ended September 30, 2003
increased $544,000, to $709,000, compared to $165,000 for the same period of the
prior year. The increase in operating income for the three months ended
September 30, 2003 is primarily due to a decrease in impairment charges incurred
in the third quarter of 2002 plus a decrease in manufacturing and warranty
costs, partially offset by an increase in R&D expenses.
Operating income for the nine months ended September 30, 2003 increased
$1,365,000 to $1,517,000, compared to $152,000 for the same period of 2002. The
increase in operating income for the nine months ended September 30, 2003 was
primarily due to an increase in revenues from sales of products, a decrease in
impairment charges, and a decrease in manufacturing and warranty costs,
partially offset by an increase in R&D expenses.
Other Income, net. Other income, net, which is comprised of interest and
Page 12 of 24
dividend income from investments, interest income from customer leases and
gain/loss from dispositions of Company property, increased to $131,000 and
$329,000, respectively for the three and nine months ended September 30, 2003,
compared to $95,000 and $243,000, respectively, for the same period of the prior
year. The increase in other income for the three months and the nine months
ended September 30, 2003 was primarily due to an increase in dividends on
preferred stock investments due to a higher average invested balance.
Income Before Income Taxes. Income before income taxes for the three months
ended September 30, 2003 increased $580,000 to $840,000, compared to income of
$260,000 for the same period of the prior year. The increase in income before
income taxes for the three months ended September 30, 2003 was primarily due to
a decrease in impairment charges, a decrease in manufacturing and warranty costs
and an increase in income from investments, partially offset by an increase in
R&D expenses. Income before income taxes increased $1,451,000 to $1,846,000 for
the nine months ended September 30, 2003, compared to $395,000 for the same
period of the prior year. The increase in income before income taxes for the
nine months ended September 30, 2003 was primarily due to an increase in
revenues from sales of products, a decrease in impairment charges, a decrease in
manufacturing and warranty costs and an increase in dividends from preferred
stock investments, partially offset by an increase in R&D expenses.
The effective tax rate was 36% and 37% for the three and nine months ended 2003,
respectively, compared to 34% for the three and nine months ended 2002.
Net Income. Net income for the three months ended September 30, 2003 increased
$363,000 to $535,000, compared to net income of $172,000 in the same period of
the prior year. Basic and diluted earnings per share was $0.19 for the three
months ended September 30, 2003, compared to basic and diluted earnings of $0.06
per share for the same period of the prior year. The increase in net income for
the three months ended September 30, 2003 was primarily due to a decrease in
impairment charges, a decrease in manufacturing and warranty costs and an
increase in income from investments, partially offset by an increase in R&D
expenses. Net income for the nine months ended September 30, 2003 increased
$902,000 to $1,162,000, compared to net income of $260,000 in the same period of
the prior year. Basic and diluted earnings per share were $0.42, compared to
basic and diluted earnings per share of $0.09 per share for the same period of
the prior year. The increase in net income for the three and nine months ended
September 30, 2003 was primarily due to an increase in revenues from sales of
products, a decrease in impairment charges, a decrease in manufacturing and
warranty costs and an increase in dividends from preferred stock investments,
partially offset by an increase in R&D expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3,473,000 as of September 30, 2003, compared
to $3,915,000 as of December 31, 2002. Working capital as of September 30, 2003,
was $13,622,000, compared to $12,353,000 as of December 31, 2002. The increase
is primarily due to increases in investments and accounts receivable. Working
capital, as a percentage of total assets, was 60% as of September 30, 2003 and
59% at December 31, 2002. The current ratio was 3.8 at September 30, 2003 and
December 31, 2002, respectively. Total liabilities-to-equity ratio was 28% as of
September 30, 2003 and 27% as of December 31, 2002.
Net cash flows provided by operating activities for the nine months ended
September 30, 2003 was $2,089,000, compared to $2,505,000 for the same period
Page 13 of 24
of the prior year. The decrease in cash flows from operating activities for the
first nine months in 2003 was primarily due to a decrease in the change in
working capital. Net cash flows (used in) investing activities for the nine
months ended September 30, 2003 was $(2,454,000), compared to $(2,612,000) for
the same period of the prior year. The increase in cash flows from investing
activities resulted from investments of available cash reserves. Net cash flows
provided by (used in) financing activities for the nine months ended September
30, 2003 was $(77,000), compared to $26,000 for the same period of the prior
year. The decrease in cash flows from financing activities was due to purchases
of treasury stock in 2003.
The Company purchased, pursuant to the Company's stock repurchase program, 7,700
shares of the Company's Common Stock during the third quarter of 2003. As of
September 30, 2003, the Company held 1,359,378 shares in treasury and is
authorized to purchase 19,222 additional shares.
The Company conducts some operations in leased facilities under an operating
lease expiring on November 30, 2006. Future minimum rental payments under this
lease for the remainder of 2003 are $48,000, $193,000 for 2004, $189,000 for
2005, and $171,000 for 2006.
Since 1988, the Company has funded its working capital and capital expenditure
needs from operations, and expects to continue funding its 2003 working capital
requirements from operations. Any further decline in our customers' markets or
in general economic conditions would likely result in a further reduction in
demand for our products and services and could harm our results of operations
and, therefore, harm the primary source of our cash flows.
The Company invests excess funds generated from operations in money market funds
and investment grade securities rated by Moody's or Standard & Poor's. Excess
funds generated from operations may be used to acquire other businesses or new
products, invest in product R&D activities, or 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 require additional funds from sources
other than the Company's current operations to complete them. The Company
believes that such funds would come from traditional institutional debt
financing or other third party financing.
The Company has developed a plan to undertake a more extensive research,
development, and engineering effort with the intent of developing products with
innovative technologies, which we believe will stimulate demand in a market
demonstrating slow or no growth. The major goals in our efforts are to position
the Company to serve new markets, including homeland defense, increase our
position in the beverage market, and broaden our product offering in the process
analytical instruments market. The Company's plan to increase research and
development will increase R&D expenses in dollar terms and as a percentage of
revenues during the next 24 months. Such expenses will include hiring additional
personnel, purchase of supplies and component products for experimental use,
outsourcing certain work, and using consulting services. We expect that such
expenses will fluctuate quarterly based on the specific activity during the
quarter. Increases in R&D efforts may also result in investments in the external
development of other third parties in which whose funding the Company may
participate. Such fluctuating expenditures, together with fluctuating revenues,
may result in a quarterly or annual operating loss. We believe we have
sufficient cash on hand and funds from operations to maintain our commitment to
this plan.
Since 1995, the Company has repurchased an aggregate of 1,755,778 shares at an
Page 14 of 24
average purchase price of $4.07 per share, pursuant to the Company's stock
repurchase program. Repurchases in the amount of 7,700 shares were made in the
quarter ended September 30, 2003, and the Company may purchase up to an
additional 19,222 shares under the current stock repurchase program. Management
may seek approval from the Company's Board of Directors to expand this program
in the future if it believes repurchases continue to be in the best interests of
the Company. Expansion of this program would also be funded from cash from
operations. The Company does not expect to declare a dividend in the foreseeable
future.
AGGREGATE CONTRACTUAL OBLIGATIONS
The Company conducts some of its operations in leased facilities under an
operating lease expiring on November 30, 2006. Future minimum rental payments
under this lease, for the remainder of 2003, are summarized in the table below.
Payments Due by Period
(In thousands)
-----------------------------------------------------
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 years
----- --------- --------- --------- ---------
Operating leases $ 601 $ 48 $ 382 $ 171 $ -0-
Other than the items discussed above, management is not aware of other
commitments or contingent liabilities, which would have a material 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 operates its business as a single segment.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements, in accordance with generally accepted
accounting principles, requires management to implement critical accounting
policies and to make estimates that could significantly influence the results of
operations and financial position. The accounting policies and estimates, which
significantly influence the results of the Company's operations and its
financial position, include revenue recognition policies, the valuation of
inventories and accounts receivable, evaluation of the impairment of and
estimated useful lives of intangible assets, estimates for future losses on
product warranties, stock-based compensation, and the necessity for a deferred
income tax asset valuation reserve.
Revenue Recognition. The Company derives revenues from three sources: system
sales, part sales, and services. For system sales and parts sales, revenue is
generally recognized when persuasive evidence of an arrangement exists, delivery
has occurred, the contract price is fixed or determinable, title and risk of
loss has passed to the customer and collection is reasonably assured. The
Company's sales are typically not subject to rights of return and, historically,
sales returns have not been significant. System sales that do not involve unique
customer acceptance terms or new specifications or technology with customer
acceptance provisions, and that involve installation services, are accounted for
as multiple-element arrangements, where the larger of the contractual billing
hold back or the fair value of the installation service is deferred when the
product is delivered and recognized when the installation is complete. In all
cases, the fair value of undelivered elements, such as accessories ordered by
customers, is deferred until the related items are delivered to the customer.
For certain other system sales
Page 15 of 24
that do involve unique customer acceptance terms or new specifications or
technology with customer acceptance provisions, all revenue is generally
deferred until customer acceptance. Revenue related to part sales is recognized
when the parts have been shipped and title and risk of loss have passed to the
customer. Deferred revenue, net of related deferred cost of sales, is presented
as unearned revenues in the accompanying condensed consolidated balance sheets.
Products generally carry one year of warranty. Once the warranty period has
expired, the customer may purchase an extended product warranty typically
covering an additional period of one year. Extended warranty billings are
generally invoiced to the customer at the beginning of the contract term.
Revenue from extended warranties is deferred and recognized ratably over the
duration of the contracts. Unearned maintenance and extended warranty revenue is
included in unearned revenues in the accompanying consolidated balance sheets.
Revenues from bill and hold sales are recognized in accordance with the criteria
specified in SAB 101. In addition to the criteria above, the customer must
request that the transaction be on a bill and hold basis and have a substantial
business purpose for ordering the goods on that basis; there must be a
reasonable, fixed schedule for delivery consistent with the business purpose;
the Company must no longer retain any performance obligations; the earnings
process must be substantially complete; the items sold must be segregated from
the rest of the Company's inventory and must be ready for final shipment to the
customer.
Inventories. Inventories consist of electronic equipment, sensors, pumps,
valves, and various components. The Company operates in an industry where
technological advances or new product introductions are a frequent occurrence.
Either of these occurrences can make obsolete or significantly impair customer
demand for a portion of the Company's inventory on hand. The Company regularly
evaluates its inventory and maintains a reserve for inventory obsolescence and
excess inventory. As a policy, the Company provides a reserve for products with
no movement in six months or more and which management determines, based on
available market information, are no longer saleable. The Company also applies
subjective judgment in the evaluation of the recoverability of the rest of its
inventory based upon known and expected market conditions and company plans. If
the Company's competitors were to introduce a new technology or product that
renders a product sold by the Company obsolete or unnecessary, it could have a
significant adverse effect on the Company's future operating results and
financial position.
Accounts Receivable. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the failure of its customers to make required
payments and for estimated sales returns. Customers may not make payments due to
a variety of reasons including deterioration of their financial condition or
dissatisfaction with the Company's products. Management makes regular
assessments of doubtful accounts and uses the best information available
including correspondence with customers and credit reports. If the Company
determines that there is impairment in the ability to collect payments from
customers, additional allowances may be required. However, the Company does not
believe that there is significant likelihood of this risk from a single
customer, since the Company does not have a significant credit concentration
risk with any one single customer. Historically, the Company has not experienced
significant bad debt losses, but the Company could experience increased losses
if general economic conditions were to deteriorate, resulting in the impairment
of a number of its customers' ability to meet their obligations, or if
management made different judgments or utilized different estimates for sales
returns and allowances for doubtful accounts.
Intangible Assets. The Company's intangible assets primarily include product
patents. The Company adopted FAS No. 142, on January 1, 2002, as required.
Accordingly, the Company reviews the recoverability and estimated useful lives
Page 16 of 24
of other intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. The determination of related estimated useful lives and whether
these assets are impaired involves significant judgments based upon short and
long-term projections of future performance. Certain of these forecasts reflect
assumptions regarding our ability to successfully develop and ultimately
commercialize technology. Changes in strategy and/or market conditions may
result in adjustments to recorded asset balances. Due to uncertain market
conditions and potential changes in our strategy and product portfolio, it is
possible that forecasts used to support our intangible assets may change in the
future, which could result in additional non-cash charges that would adversely
affect our results of operations and financial condition.
Product Warranties. Products are sold with warranties ranging from 90 days to
one year, and extended warranties may be purchased for some products. Estimated
expenses associated with these warranties are provided for in the accompanying
condensed, consolidated financial statements at the time of revenue recognition.
The Company makes estimates of these costs based on historical experience and on
various other assumptions including historical and expected product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from estimates, revisions to the estimated warranty
liability would be required.
Stock-based Compensation. The Company elected to account for fixed award stock
options and non-employee directors' options under the provisions of APB Opinion
No. 25 "Accounting for Stock Issued to Employees." As such, no compensation cost
has been recorded in the financial statements relative to these options. The
Company utilizes the Black-Scholes option pricing model to estimate the fair
value of these options for disclosure purposes.
Stock granted to non-employee directors is accounted for in accordance with FAS
No. 123 Accounting for Stock-Based Compensation. Accordingly, directors' stock
is recorded as compensation expense at estimated fair value on the date the
stock is earned by the director.
Income Taxes. The Company provides for deferred taxes in accordance with FAS No.
109 (FAS 109) Accounting for Income Taxes, which requires the Company to use the
asset and liability approach to account for income taxes. This approach requires
the recognition of deferred income tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. The primary sources of the
Company's income tax differences are deferred tax assets created by differences
between the depreciable and amortizable lives for book and tax purposes of the
Company's fixed and intangible assets and other deductions that must be deferred
into the future in accordance with the Code. Pursuant to FAS 109, the Company
may record a valuation allowance to reduce its deferred tax assets to the amount
that is more likely than not to be realized. To make such a determination, the
Company considers historical and future taxable income. In the event the
Company's financial position deteriorates, the Company may determine that it
would not be able to realize its deferred tax assets in the future. Likewise,
the Company may determine that it would be able to realize its entire net
deferred tax asset in the future. Such determinations may significantly affect
the Company's results of operations and financial position in the period such
determination is made.
RECENT PRONOUNCEMENTS-SEE NOTE 8 OF ITEM 1
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of 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
Page 17 of 24
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, 2003 was
$1,500,000 and $4,578,000, respectively.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. As of September 30, 2003, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the chief executive officer and chief
financial officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the chief executive and financial officers
have concluded that the Company's disclosure controls and procedures are
effective. There have been no changes in the Company's internal control over
financial reporting that occurred during the period covered by this report that
has materially affected, or is reasonably likely to materially affect the
Company's internal control over financial reporting.
The Company's management, including the CEO and CFO, does not expect that our
disclosure controls and procedures or our internal controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
Page 18 of 24
PART II- OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: NONE
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
31.1 Principal Executive Officer certification pursuant to 18.
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer certification pursuant to 18.
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Principal Executive Officer certification pursuant to 18.
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Principal Financial Officer certification pursuant to 18.
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 2003.
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 12, 2003 BY: /s/ William W. Botts
-------------------------------------
William W. Botts
President and
Chief Executive Officer
Authorized Officer
Date: November 12, 2003 BY: /s/ Juan M. Diaz
-------------------------------------
Juan M. Diaz
Vice President-Corporate Controller
Principal Accounting Officer
Page 19 of 24
Exhibit Index
Exhibit
Number Exhibit Title
- ------- -------------
31.1 Principal Executive Officer certification pursuant to 18.
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer certification pursuant to 18.
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002