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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2004
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________to_________
Commission File Number: 0-6511
O. I. CORPORATION
-----------------
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-0728053
---------------------- ------------------
State of Incorporation I.R.S. Employer
Identification No.
P.O. Box 9010
151 Graham Road
College Station, Texas 77842-9010
- --------------------------------------- ------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (979) 690-1711
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of June 30, 2004, there were 2,787,411 shares of the issuer's common stock,
$.10 par value, outstanding.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O.I. CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except par value)
JUNE 30, DEC. 31,
2004 2003
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,434 $ 2,869
Accounts receivable-trade, net of allowance for
doubtful accounts of $247 and $217, respectively 4,687 4,360
Investment in sales-type leases 294 235
Investments 6,175 6,135
Inventories 3,835 3,075
Deferred tax asset 709 727
Other current assets 519 172
-------- --------
Total Current Assets 19,653 17,573
Investment in unconsolidated investee 814 976
Property, plant, and equipment, net 3,438 3,434
Investment in sales-type leases, net of current 252 222
Deferred tax asset 299 296
Intangible assets, net 107 107
Other assets 44 99
-------- --------
Total Assets $ 24,607 $ 22,707
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 2,098 $ 1,306
Accrued liabilities 3,380 3,162
-------- --------
Total Current Liabilities 5,478 4,468
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,
2,787 and 2,748 outstanding, respectively 410 410
Additional paid-in capital 4,328 4,338
Treasury stock, 1,316 and 1,355 shares,
respectively, at cost (5,749) (5,930)
Retained earnings 20,195 19,254
Accumulated other comprehensive income (loss), net (55) 167
-------- --------
Total Stockholders' Equity 19,129 18,239
-------- --------
Total Liabilities and Stockholders' Equity $ 24,607 $ 22,707
======== ========
See notes to unaudited condensed consolidated financial statements
2
O.I. CORPORATION
Condensed Consolidated Statements of Income
and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2004 2003 2004 2003
---- ---- ---- ----
Net revenues:
Products $ 6,666 $ 5,002 $12,212 $10,555
Service 663 772 1,511 1,640
------- ------- ------- -------
7,329 5,774 13,723 12,195
Cost of revenues:
Products 3,320 2,573 5,986 5,365
Service 337 379 685 772
------- ------- ------- -------
3,657 2,952 6,671 6,137
Gross Profit 3,672 2,822 7,052 6,058
Selling, general & administrative expenses 2,161 1,894 4,214 3,950
Research and development expenses 731 619 1,465 1,299
------- ------- ------- -------
Operating income 780 309 1,373 809
Other income, net 87 126 213 198
Loss from unconsolidated investee (88) -- (162) --
------- ------- ------- -------
Income before income taxes 779 435 1,424 1,007
Provision for income taxes 264 165 483 379
------- ------- ------- -------
Net income $ 515 $ 270 $ 941 $ 628
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on
Investments, available-for-sale (291) 51 (222) 194
------- ------- ------- -------
Comprehensive income $ 224 $ 321 $ 719 $ 822
======= ======= ======= =======
Earnings per share:
Basic $ 0.19 $ 0.10 $ 0.34 $ 0.23
Diluted $ 0.18 $ 0.10 $ 0.33 $ 0.23
Shares used in computing earnings per share:
Basic 2,783 2,755 2,774 2,757
Diluted 2,861 2,772 2,854 2,770
See notes to unaudited condensed consolidated financial statements
3
O.I. CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 941 $ 628
Depreciation & amortization 260 220
Deferred income taxes 43 38
Gain on disposition of property (5) (5)
Loss from unconsolidated investee 162 --
Change in working capital (409) (620)
-------- --------
Net cash flows provided by operating activities 992 261
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (1,372) (2,656)
Maturity of investments 979 840
Proceeds from insurance policy 55 --
Purchase of property, plant & equipment (261) (173)
Proceeds from sales of assets 7 14
Change in other assets (7) --
-------- --------
Net cash flows (used in) investing activities (599) (1,975)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock pursuant to exercise of employee stock
options and employee stock purchase plan 172 6
Purchase of treasury stock -- (98)
-------- --------
Net cash flows provided by (used in) financing
activities 172 (92)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 565 (1,806)
Cash and cash equivalents, at beginning of period 2,869 3,915
-------- --------
Cash and cash equivalents, at end of period $ 3,434 $ 2,109
======== ========
See notes to unaudited condensed consolidated financial statements
4
O.I. CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
O.I. Corporation (the "Company"), an Oklahoma corporation, was organized in
1963. The Company designs, manufactures, markets, and services analytical,
monitoring and sample preparation products, components, and systems used to
detect, measure, and analyze chemical compounds.
The accompanying unaudited condensed consolidated financial statements have been
prepared by O.I. Corporation and include all adjustments that are, in the
opinion of management, necessary for a fair presentation of financial results
pursuant to the rules and regulations of the Securities and Exchange Commission.
All adjustments and provisions included in these statements are of a normal
recurring nature. All intercompany transactions and balances have been
eliminated in the financial statements. Certain prior-period amounts in the
condensed consolidated financial statements have been reclassified for
comparative purposes. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2003.
2. INVENTORIES.
Inventories are stated at the lower of first-in, first-out cost or market:
June 30, 2004 Dec. 31, 2003
------------- -------------
Raw Materials $ 2,825 $ 2,261
Work in Process 325 207
Finished Goods 685 607
-------- --------
$ 3,835 $ 3,075
======== ========
3. COMPREHENSIVE INCOME (LOSS).
Other comprehensive income (loss) refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are recorded as an element
of stockholders' equity and are excluded from net income. The Company's
components of comprehensive income (loss) are net income and unrealized gains
and losses on available-for-sale investments.
4. EARNINGS PER SHARE.
The Company reports both basic earnings per share, which is based on the
weighted average number of common shares outstanding, and diluted earnings per
share, which is based on the weighted average number of common shares
outstanding and all dilutive potential common shares outstanding. Stock options
are the only dilutive potential common shares the Company has outstanding. For
the six months ended June 30, 2004 and 2003, options to acquire 45 and 143
shares of common stock, respectively, at weighted average exercise prices of
$8.36 and $5.60 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 June 30, 2004, the Company has three stock-based employee compensation plans:
the 2003 Incentive Stock Option Plan from which stock options may be granted,
and two expired plans which have options outstanding but no further stock
options may be granted. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and
5
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation.
Three Months Ended Six Months Ended
June 30 June 30
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 515 $ 270 $ 941 $ 628
Deduct: Total stock-based compensation expense determined
under fair value based method for awards granted, modified,
or settled, net of related tax effects -- -- 46 31
------ ------ ------ -------
Pro forma net income 515 270 895 597
Earnings per share:
Basic--as reported $ 0.19 $ 0.10 $ 0.34 $ 0.23
Basic--pro forma $ 0.19 $ 0.10 $ 0.32 $ 0.22
Diluted--as reported $ 0.18 $ 0.10 $ 0.33 $ 0.23
Diluted--pro forma $ 0.18 $ 0.10 $ 0.31 $ 0.22
6. INTANGIBLE ASSETS, NET.
Intangible assets, net, consisted of patents relating to technology used in the
Company's products. Intangible assets, net, as of June 30, 2004 and December 31,
2003 were approximately $107 and $107, net of accumulated amortization of $134
and $129, respectively. Total amortization expense on intangible assets for the
three and six months ended June 30, 2004 and 2003 was approximately $2 and $2,
and $5 and $6, respectively. The estimated aggregate amortization expense for
each of the five succeeding fiscal years 2004 to 2008 is approximately $9.
7. PRODUCT WARRANTY LIABILITIES.
The changes in the Company's product warranty liability on June 30, 2004 were as
follows:
Liabilities, beginning of year $ 707
Warranty claims (4)
-----
Liabilities, June 30, 2003 $ 703
=====
8. INVESTMENT IN UNCONSOLIDATED INVESTEE
In December 2003, the Company entered into a strategic alliance with Intelligent
Ion, Inc. (III), a Washington corporation. The alliance included a commercial
agreement and an investment in Series A preferred stock, which is equal to 13.8%
ownership in III. The Company accounts its investment in III preferred shares
using the equity method of accounting. The Company's Investment in
unconsolidated investee as of December 31, 2003 was approximately $976,000, and
$814,000 as of June 30, 2004. During the three and six months ended June 30,
2004, the Company recorded losses amounting to $88,000 and $162,000,
respectively, in these condensed, consolidated financial statements to reflect
its share of the results of operations from its investment in III. Under the
commercial agreement, the Company may provide up to $1,350,000 for the
completion by III of certain product developments according to agreed upon
milestones. During the six months ended June 30, 2004, III achieved the first
three milestones. The Company made payments of $155,000 in the aggregate,
pursuant to the commercial agreement, $135,000 of which is included in other
current assets in the condensed consolidated balance sheet. The due date for the
fourth milestone was May 10, 2004, and as of the date of this report, such
milestone had not been achieved. Based on information known at the date of this
report, the Company believes it is reasonably possible that an impairment of the
investment in preferred stock of III may have been incurred, but at this time
the Company is unable to estimate the amount of possible impairment, if any.
9. RECENT PRONOUNCEMENTS.
In December, the FASB issued Interpretation No. 46 (revised December 2003) ("FIN
46R"), "Consolidation of Variable Interest Entities, an interpretation of ARB
51". The primary objectives of FIN 46R are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities" or "VIEs") and how to
determine if a business enterprise should consolidate the VIEs. This new model
for consolidation applies to an entity for which either: the equity investors
(if any) do not have a controlling financial interest; or the equity investment
at risk is insufficient to finance the entity's activities without receiving
additional subordinated financial support from other parties. In addition, FIN
46R requires that all enterprises with a significant variable interest in a VIE
make additional disclosures regarding their relationship with the VIE. The
interpretation requires public entities to apply FIN 46R to all entities that
are considered SPEs in practice and under the FASB literature that was applied
before the issuance of FIN 46R by the end of the first reporting period that
ends after December 15, 2003. Application of the accounting requirements of the
interpretation to all other entities is required by the end of the first
reporting period that ends after March 15, 2004. The adoption of FIN 46R had no
effect on the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
6
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Act of 1934, as amended, concerning, among other things, (i) possible or assumed
future results of operations, contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," (ii) prospects for the
Company's business or products; (iii) other matters that are not historical
facts. These forward-looking statements are identified by their use of terms and
phrases such as "believes," "expects," "anticipates," "intends," "estimates,"
"plans" and similar terms and phrases.
These statements are based on certain assumptions and analyses made by the
Company in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it believes
are appropriate in the circumstances. The Company's business and results of
operations are subject to a number of assumptions, risks and uncertainties, many
of which are beyond the Company's ability to control or predict. Because of
these risks and uncertainties, actual results may differ materially from those
expressed or implied by forward-looking statements, and investors are cautioned
not to place undue reliance on such statements, which are not guarantees of
future performance and which speak only as of the date thereof.
Factors that could cause actual results to differ materially include, but are
not limited to,
- The Company'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.
- 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.
- Economic slowdowns, 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, equity
investments in other companies, divestitures and organizational
structures.
- 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.
- Unexpected delays or failure to realize success in developing a
previously announced new product for homeland defense and security.
7
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, 2003.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto.
OPERATING RESULTS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30,2003
REVENUES. Total net revenues for the three months ended June 30, 2004 increased
$1,555,000 or 27% to $7,329,000, compared to $5,774,000 for the same period of
the prior year primarily due to strong sales of the Company's new Eclipse
Purge-and-Trap Sample Concentrator and sales of the MINICAMS air-monitoring
systems. Strong demand for the Eclipse Purge-and-Trap Sample Concentrator and
sales of related instruments, options and accessories continued in the three
months ended June 30, 2004, and outperformed sales of the previous
purge-and-trap sample model in the same period of the prior year. Demand for
MINICAMS air-monitoring systems also increased for the three months ended June
30, 2004 compared to the same period of the prior year. Also contributing to the
increase in sales for the three months ended June 30, 2004, compared to the same
period of the prior year of these and some other products, is an increase in the
rate of capital spending of our customers in the environmental testing market.
Both domestic revenues and international revenues increased for the quarter
ended June 30, 2004, compared to the same period of the prior year.
International revenues increased as a percentage of total revenues, as revenues
from sales of products into Europe and Asia increased for the three months ended
June 30, 2004, compared to the same period of the prior year. During the second
quarter of 2004, the Company increased its presence in Asia by opening a
representative office in China. We believe that China is a growing market and
opening this office will put the Company in a better position to compete for
that business.
Increases in revenues from products were partially offset by decreases in
revenues from services. Revenues from services decreased $109,000 or 14% to
$663,000, compared to $772,000 for the same period of the prior year. Revenues
from services decreased, compared to the same period of the prior year primarily
due to lower demand for in-house repair, factory repair and field repair
services.
Although we believe that there may have been an increase in the rate of capital
spending on the part of our customers in the environmental instrument market for
the three months ended June 30, 2004, compared to the same period of the prior
year, it is uncertain if this is a temporary situation or permanent. This
increase in capital spending by our customers may be a result of pent up demand,
or it may be due to an improving U.S. economy. Regardless, the environmental
instrument market in which we compete has been flat or declining over the past
several years, and we have not seen a fundamental improvement in the growth
prospects of these markets. We remain cautiously optimistic about future sales
and have identified a number of products and strategies we believe will allow us
to grow our business despite this decline, including the acquisition of
complementary businesses,
8
the development of new products, development of new applications for our
technologies, and the strengthening of our presence in selected geographic
markets. No assurance can be given that we 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 June 30, 2004 increased
$850,000, or 30% to $3,672,000, compared to $2,822,000 for the same period of
the prior year. Gross profit represented 50% of revenues for the three months
ended June 30, 2004, and 49% for the same period of the prior year. The increase
in gross profit for the three months ended June 30, 2004 compared to the same
period of the prior year, was primarily due to an increase in revenues and
improved product mix with more sales of direct manufactured products and less
sales of OEM gas chromatography equipment.
SELLING, GENERAL, AND ADMINISTRATIVE. SG&A expenses for the three months ended
June 30, 2004 increased $267,000, or 14% to $2,161,000, compared to $1,894,000
for the same period of the prior year, primarily due to increased costs for
employee benefits, insurance, and audits. SG&A expenses decreased as a
percentage of revenues for the three months ended June 30, 2004 to 29%, compared
to 33% of revenues for the same period of the prior year, primarily due to the
increase in revenues over the same periods.
RESEARCH AND DEVELOPMENT. R&D expenses for the three months ended June 30, 2004
increased $112,000, or 18% to $731,000, compared to expenses of $619,000 for the
same period of the prior year. R&D expenses represented 10% of revenues for the
three months ended June 30, 2004 and 11% of revenues for the same period of the
prior year. The increase in R&D expenses for the three months ended June 30,
2004 is due to a renewed plan to focus on product development. In the second
quarter of 2003, we announced our plan to intensify our R&D efforts to refresh
existing products and develop new products, and cautioned that R&D spending may
increase over historical levels as a dollar amount, and as a percentage of
revenues. We still believe that this may be the case, and that such increases in
R&D expenditures may create operating losses in future periods.
OPERATING INCOME. Operating income (loss) for the three months ended June 30,
2004 increased $471,000, or 152% to $780,000, compared to $309,000 for the same
period of the prior year. The increase in operating income for the three months
ended June 30, 2004 is primarily due to the increase in revenues from product
sales partially offset by an increase in R&D and SG&A expenditures.
OTHER INCOME, NET. Other income, net, which is comprised of interest and
dividend income from investments, interest income from customer leases, and
gain/loss from dispositions of Company property, decreased by $39,000, or 31% to
$87,000, compared to $126,000 for the same period of the prior year, primarily
due to realized losses on the sale of preferred stock investments, compared to
gains on similar sales in the same period of the prior year.
LOSS FROM UNCONSOLIDATED INVESTEE. We incurred a loss from an unconsolidated
investee, Intelligent Ion, Inc., which amounted to $88,000 for the three months
ended June 30, 2004. The loss from this unconsolidated investment, accounted for
on the equity method due to significant influence from board representation,
represents our share of the results of operations from our 13.8% investment in
December 2003 in the preferred shares of Intelligent Ion. Intelligent Ion, Inc.
is a development stage company whose operations have primarily consisted of
research and development and as such does not generate income from operations.
We expect to continue to incur losses from our investment in Intelligent Ion,
Inc. until it leaves the development stage. At this time, we cannot predict
when, or if, that will happen and we could in the future recognize losses in the
aggregate up to the amount of our investment in Intelligent Ion.
INCOME BEFORE INCOME TAXES. Income before income taxes for the three months
ended June 30, 2004 increased $344,000, or 79% to $779,000, compared to income
of $435,000 for the same period of the prior year. The increase in income before
income taxes for the three months ended June 30, 2004 was primarily due to an
increase in product revenues, partially offset by an increase in R&D and SG&A
expenses, realized losses on the sale of preferred stock investments
and losses from the investment in Intelligent Ion.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $99,000 for the
three
9
months ended June 30, 2004 to a provision of $264,000 compared to $165,000 for
the same period of the prior year. The effective tax rate was 34% for the three
months ended June 30, 2004, compared to 38% for the same period of the prior
year, primarily due to income tax credits for R&D expenditures and dividends
received deductions on income from investments.
NET INCOME. Net income for the three months ended June 30, 2004 increased
$245,000, or 91% to $515,000, compared to net income of $270,000 in the same
period of the prior year. Basic earnings per share was $0.19 and diluted
earnings per share was $0.18 for the three months ended June 30, 2004, compared
to basic and diluted earnings of $0.10 per share for the same period of the
prior year. The increase in net income for the three months ended June 30, 2004
was primarily due to an increase in revenues from sales of products compared to
the same period of the prior year, partially offset by an increase in R&D and
SG&A spending, realized losses on the sale of preferred stock
investments, and losses from the investment in Intelligent Ion.
FOR THE SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30,2003
Net revenues for the six months ended June 30, 2004 increased $1,528,000, or 13%
to $13,723,000, compared to $12,195,000 for the same period of the prior year.
The increase in year-to-date revenues is also primarily due to an increase in
sales during the three months ended June 30, 2004. Sales for the three months
ended March 31, 2004 were essentially flat, but sales during the three months
ended June 30, 2004 increased due to continued demand for the Eclipse
Purge-and-Trap Sample Concentrator, MINICAMS air-monitoring systems and an
increase in the rate of capital spending of our customers in the second
quarter. Increases in sales of the Eclipse Purge-and-Trap Sample Concentrator
and MINICAMS air-monitoring systems more than offset decreases in sales of other
products.
Domestic and international revenues for the six months ended June 30, 2004
increased compared to the same period of the prior year. Year-to-date
international revenues increased primarily due to an increase in sales to Asia.
GROSS PROFIT. Gross profit for the six months ended June 30, 2004 increased
$994,000, or 16% to $7,052,000, compared to $6,058,000 for the same period of
the prior year primarily due to an increase in revenues and to improved product
mix relating to sales of MINICAMS and the Eclipse. Gross profit represented 51%
for the six months ended June 30, 2004, compared to 50% of revenues for the same
period of the prior year and June 30, 2003, respectively.
SELLING, GENERAL, AND ADMINISTRATIVE. SG&A expenses for the six months ended
June 30, 2004, increased $264,000, or 7% to $4,214,000, compared to $3,950,000
for the same period of the prior year primarily due to employee benefits, costs
of insurance, and audits. SG&A expenses decreased as a percentage of revenues to
31% from 32% of revenues for the same period of the prior year, primarily due to
the increase in revenues over the same periods.
RESEARCH AND DEVELOPMENT. R&D expenses for the six months ended June 30, 2004
increased $166,000, or 13% to $1,465,000, compared to $1,299,000 for the same
period of the prior year. R&D expenses represented 11% of revenues for the six
months ended June 30, 2004 and June 30, 2003. The increase in R&D expenses for
the three months ended June 30, 2004 is due to a renewed plan to focus on
product development.
OPERATING INCOME. Operating income for the six months ended June 30, 2004
increased $564,000 to $1,373,000, compared to $809,000 for the same period of
the prior year. The
10
increase in operating income for the six months ended June 30, 2004 was
primarily due to an increase in revenues and gross profit from sales of
products, including MINICAMS and Eclipse, partially offset by an increase in R&D
and SG&A expenses.
OTHER INCOME, NET. Other income, net, which is comprised of interest and
dividend income from investments, interest income from customer leases, and
gain/loss from dispositions of Company property increased $15,000, or 8% to
$213,000, for the six months ended June 30, 2004, compared to $198,000 for the
same period of the prior year. The increase in other income, net is primarily
due to interest and dividend income from investments.
LOSS FROM UNCONSOLIDATED INVESTEE. We incurred a loss from an unconsolidated
investee, Intelligent Ion, Inc., which amounted to $162,000 for the six months
ended June 30, 2004. The loss from this unconsolidated investment represents our
share of the results of operations from our 13.8% investment in, December 2003
in the preferred shares of Intelligent Ion accounted for on the equity method.
INCOME BEFORE INCOME TAXES. Income before income taxes increased $417,000, or
41% to $1,424,000 for the six months ended June 30, 2004, compared to $1,007,000
for the same period of the prior year. The increase in income before income
taxes for the six months ended June 30, 2004 was primarily due to an increase in
product revenues, partially offset by an increase in R&D and SG&A expenses, and
losses from the investment in Intelligent Ion.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $104,000 for
the six months ended June 30, 2004 to a provision of $483,000, compared to
$379,000 for the same period of the prior year. The effective tax rate was 34%
for the six months ended 2004, compared to 38% for the six months ended June 30,
2003, primarily due to income tax credits for R&D expenditures and dividends
received deductions for income from investments.
NET INCOME. Net income for the six months ended June 30, 2004 increased
$313,000, or 50% to $941,000, compared to net income of $628,000 in the same
period of the prior year. Basic earnings per share was $0.34 per share, and
diluted earnings per share was $0.33 per share for the six months ended June 30,
2004, compared to basic and diluted earnings of $0.23 per share for the same
period of the prior year. The increase in net income for the six months ended
June 30, 2004 was primarily due to an increase in revenues from sales of
products compared to the same period of the prior year, partially offset by an
increase in R&D and SG&A spending, and losses from the investment in Intelligent
Ion.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3,434,000 as of June 30, 2004, compared to
$2,869,000 as of December 31, 2003. Working capital as of June 30, 2004,
increased to $14,175,000, compared to $13,105,000 as of December 31, 2003
primarily due to increases in inventory, cash and cash equivalents, and accounts
receivable. Working capital, as a percentage of total assets, was 58% as of June
30, 2004 and 58% at December 31, 2003. The current ratio was 3.59 at June 30,
2004 and 3.93 at December 31, 2003. Total liabilities-to-equity ratio increased
to 29% as of June 30, 2004, compared to 25% as of December 31, 2003.
Net cash flows provided by operating activities for the six months ended June
30, 2004 was $992,000, compared to $261,000 for the same period of the prior
year. The increase in cash flows provided by operating activities for the first
six months in 2004 was primarily due to an increase in net income, resulting
from an increase in sales. Net cash flows (used in) investing activities for the
six months ended June 30, 2004 was $(599,000), compared to $(1,975,000) for the
same period of the prior year. The decrease in cash flows (used in) investing
activities resulted from a decrease in purchase of investments. Net cash flows
provided by (used in) financing activities for the six months ended June 30,
2004 was $172,000, compared to $(92,000) for the same period of the prior year.
The increase in cash provided by financing activities was primarily due to the
issuance of stock to employees pursuant to an increase in the number of
employees exercising stock option awards.
11
We have historically been able to fund working capital and capital expenditures
from operations, and expect to be able to finance our 2004 working capital
requirements from cash on hand and funds generated from operations. However,
demand for our products is influenced by the overall condition of the economy in
which we sell our products, by the capital spending budgets of our customers and
by our ability to successfully meet our customers' expectations. The
environmental instrument market in which we compete has been flat or declining
over the past several years. 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.
Other matters that could affect the extent of funds required within the
short-term and long-term include future acquisitions of other businesses or
product lines, extensive investment in product R&D activities, or spending to
develop markets for the our products. We 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 current operations. Should the need arise, we
would attempt to obtain such funds from traditional institutional debt financing
or other third party financing.
In December 2003, the Company, in a private placement, purchased $1,000,000 of
Series A Preferred Stock of Intelligent Ion, Inc. (III). The investment was made
concurrently with the Company's entering into a Product Purchase Agreement with
III and is considered by the Company to be a part of that arrangement to develop
and gain access to technology for use in potential new products and not as an
income-earning asset, such as the Company's other investment grade preferred
stocks. III is a development stage company whose current operations primarily
consists of research & development activities in the field of mass spectrometry,
and as such, do not generate income from operations. Accordingly, the Company
has recorded losses amounting to $88,000 and $162,000 for the three and six
months ended June 30, 2004, respectively, in these condensed, consolidated
financial statements to reflect its share of the results of operations from its
13.8% investment in III preferred shares. In addition to the investment in III
preferred shares, the Company may provide, pursuant to the Product Purchase
Agreement, up to an additional $1,350,000 for the completion by III of certain
product developments according to agreed upon milestones. The Company is
entitled to recover such funding through product purchase or license fee credits
from III in the future if III begins production of a product. Furthermore, the
Company is not obligated to make any additional payments if III fails to meet a
milestone.
During the six months ended June 30, 2004, III achieved the first three
milestones. The Company made payments of $155,000 in the aggregate, pursuant to
the Product Purchase Agreement, $135,000, of which is included in other current
assets in the condensed consolidated balance sheet, which is recoverable in
future product purchases or license fee credits should the technology
development result in commercially viable products. The due date for the fourth
milestone was May 10, 2004, and as of the date of this report such milestone has
not been completed. The Company has not made any additional payments to III
pursuant to the Product Purchase Agreement. The Company is currently negotiating
revisions to the milestones in the Product Purchase Agreement with III, which
would allow for future payments under the Product Purchase Agreement. If the
Company and III are unable to agree upon new milestones and III is unable to
secure funding from other sources then the Company may incur losses up to the
total amount of its investment in III.
In the second quarter of 2003, we announced 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
(i) to position the Company to serve new markets, including homeland defense,
(ii) to increase our position in the beverage market, and (iii) to broaden our
product offering in the process analytical instruments market. Our plan to
increase research and development will increase R&D expenses in dollar terms and
as a percentage of revenues. Such expenses will include hiring additional
personnel, purchasing 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 by other third parties in which 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.
The Company invests excess funds generated from operations in money market funds
and investment grade securities rated by Moody's or Standard & Poor's. The
Company's investment portfolio is primarily invested in short-term securities
and preferred stocks
12
with at least an investment grade rating to minimize credit risk. These
investments are exposed to a variety of market risks, including changes in
interest rates. The fair value of the Company's investments in debt and equity
securities at December 31, 2003 was $6,135,000, and the fair value at June 30,
2004 was $6,175,000. Year-to-date unrealized losses in the fair value of those
investments are $222,000 primarily due to recent increases in interest rates.
The Company's investment policy is to manage its investment portfolio to
preserve principal and liquidity while maximizing the return on the investment
portfolio by investing in multiple types of investment grade securities.
Although changes in interest rates may affect the fair value of the investment
portfolio and cause unrealized gains or losses, such gains or losses would not
be realized unless the investments were sold. Approximately $18,000 was realized
as a loss on the sales of such investments during the second quarter.
Since 1995, the Company has repurchased an aggregate of 1,755,978 shares of
treasury stock at an average purchase price of $4.13 per share, pursuant to the
Company's stock repurchase program. No repurchases were made in the quarter
ended June 30, 2004, but the Company may purchase up to an additional 19,022
shares under the current stock repurchase program. The Company may seek an
expansion of 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. We have no immediate plans to declare a
dividend in the foreseeable future.
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 2004 are $97,000, $189,000 for 2005, and $171,000 for
2006.
Other than the items discussed above, we are not aware of other commitments or
contingent liabilities that would have a materially adverse effect on the
Company's financial condition, results of operations, or cash flows.
SEGMENT INFORMATION
The Company manages its businesses primarily on a product and services basis.
The Company aggregates its segments as one reportable segment based on the
similar characteristics of their operations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with 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
allowance for inventories and accounts receivable, estimates for future losses
on product warranties, and policies on accounting for stock-based compensation.
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 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.
13
Deferred revenue is included in accrued liabilities in the accompanying
unaudited 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 accrued liabilities in the accompanying unaudited condensed
consolidated balance sheets.
Accounts Receivable. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the failure of its customers to make required
payments and for estimated sales returns. Customers may not make payments or
return products due to a variety of reasons including deterioration of their
financial condition or dissatisfaction with the Company's products. Management
makes regular assessments of doubtful accounts and uses the best information
available including correspondence with customers and credit reports. If the
Company determines that there is impairment in the ability to collect payments
from customers, additional allowances may be required. 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 consideration
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.
Inventories. Inventories consist of electronic equipment and various components.
The Company operates in an industry where technological advances or new product
introductions are a frequent occurrence. Either one of these occurrences can
make obsolete or significantly impair customer demand for a portion of the
Company's inventory on hand. The Company regularly evaluates its inventory and
maintains a reserve for inventory obsolescence and excess inventory. As a
policy, the Company provides a reserve for products with no movement in six
months or more and which management determines, based on available market
information, are no longer saleable. The Company also applies subjective
judgment in the evaluation of the recoverability of the rest of its inventory
based upon known and expected market conditions and company plans. If the
Company's competitors were to introduce a new technology or product that renders
a product sold by the Company obsolete or unnecessary, it could have a
significant adverse effect on the Company's future operating results and
financial position.
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
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.
14
RECENT PRONOUNCEMENTS-SEE NOTE 9 OF ITEM 1
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of market risks, including changes in
interest rates and the market value of its investments. In the normal course of
business, the Company employs established policies and procedures to manage its
exposure to changes in the market value of its investments.
The fair value of the Company's investments in debt and equity securities at
December 31, 2003 and June 30, 2004 was $6,135,000 and $6,175,000, respectively.
Year-to-date unrealized losses in the fair value of those investments is
$222,000 primarily due to recent increases in interest rates. The Company's
investment policy is to manage its investment portfolio to preserve principal
and liquidity while maximizing the return on the investment portfolio by
investing in multiple types of investment grade securities. The Company's
investment portfolio is primarily invested in short-term securities, with at
least an investment grade rating to minimize credit risk, and preferred stocks.
Although changes in interest rates may affect the fair value of the investment
portfolio and cause unrealized gains or losses, such gains or losses would not
be realized unless the investments were sold. Approximately $18,000 was realized
as a loss on the sales of such investments during the second quarter.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to
ensure that information required to be disclosed by the Company in reports 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 June 30, 2004, 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. Subsequent to the date of their evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls.
The Company's management, including the chief executive officer and chief
financial officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all error and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs.
PART II- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders:
On May 10, 2004 the annual meeting of shareholders of the Company was held and
the following matters were approved:
Proposal No. 1 - Election of Directors For Withheld
- -------------------------------------- --- --------
Jack S. Anderson 2,095,673 266,273
William W. Botts 2,385,114 3,832
Richard W. K. Chapman 2,095,873 266,073
Edwin B. King 2,095,673 266,273
15
Craig R. Whited 2,095,873 266,073
Proposal No. 2 - Ratification of Auditors For Against Abstain
- ----------------------------------------- --- ------- -------
Grant Thornton LLP 2,351,802 7,765 2,379
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 June 30,
2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
O. I. CORPORATION
------------------------------
(Registrant)
Date: August 12, 2004 BY: /s/ William W. Botts
----------------------------
William W. Botts
President and
Chief Executive Officer
Date: August 12, 2004 BY: /s/ Juan M. Diaz
---------------------------------
Juan M. Diaz
Vice President-Corporate Controller
Principal Accounting Officer
16
Exhibit Index
Exhibit
Number Exhibit Title
- ------- -------------
31.1 Principal Executive Officer certification pursuant to
18. U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer certification pursuant to
18. U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Principal Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Principal Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002