Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 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.
151 Graham Road
P. O. Box 9010
College Station, Texas 77842-9010
--------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (979) 690-1711
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of November 5, 2004, there were 2,801,009 shares of the issuer's common
stock, $.10 par value, outstanding.
Page 1
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2004
(Unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Earnings and
Comprehensive Income (Unaudited) - Three and Nine Months
Ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended September 30, 2004 and 2003 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 18
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION 18
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O.I. CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
SEPT. 30,
2004 DEC. 31, 2003
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,883 $ 2,869
Accounts receivable-trade, net of allowance for doubtful accounts of $310
and $217, respectively 4,975 4,360
Investment in sales-type leases 280 235
Investments 7,612 6,135
Inventories 4,111 3,075
Current deferred income tax assets 745 727
Other current assets 551 172
------------- -------------
TOTAL CURRENT ASSETS 21,157 17,573
Investment in unconsolidated investee (Note 8) - 976
Property, plant and equipment, net 3,391 3,434
Investment in sales-type leases, net of current 267 222
Long-term deferred income tax assets 647 296
Intangible assets, net 95 107
Other assets 43 99
------------- -------------
TOTAL ASSETS $ 25,600 $ 22,707
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,902 $ 1,306
Accrued liabilities 4,039 3,162
------------- -------------
Total current liabilities 5,941 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, 2,797 shares and 2,748 shares outstanding, respectively 410 410
Additional paid in capital 4,327 4,338
Treasury stock, 1,307 shares and 1,355 shares respectively, at cost (5,707) (5,930)
Retained earnings 20,550 19,254
Accumulated other comprehensive income 79 167
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 19,659 18,239
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 25,600 $ 22,707
============= =============
See notes to unaudited condensed consolidated financial statements
Page 3
O.I. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT 30 SEPT 30
--------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net revenues:
Products $ 7,091 $ 5,998 $ 19,326 $ 16,645
Services 665 713 2,153 2,261
------------ ------------ ------------ ------------
7,756 6,711 21,479 18,906
Cost of revenues:
Products 3,420 3,001 9,403 8,366
Services 264 470 949 1,243
------------ ------------ ------------ ------------
3,684 3,471 10,352 9,609
Gross profit 4,072 3,240 11,127 9,297
Research and development expenses 735 661 2,201 1,960
Selling, general & administrative expenses 2,231 1,870 6,444 5,820
------------ ------------ ------------ ------------
Operating income 1,106 709 2,482 1,517
Other income, net 105 131 318 329
Loss from unconsolidated investee 46 --- 208 ---
Impairment of investment in unconsolidated investee
(Note 8) 768 --- 768 ---
------------ ------------ ------------ ------------
Income before income taxes 397 840 1,824 1,846
Provision for income taxes 46 305 528 684
------------ ------------ ------------ ------------
Net income $ 351 $ 535 $ 1,296 $ 1,162
============ ============ ============ ============
Other comprehensive income, net of tax:
Unrealized gains (losses) on investments,
available-for-sale 134 (116) (87) 78
------------ ------------ ------------ ------------
Comprehensive income $ 482 $ 419 $ 1,209 $ 1,240
============ ============ ============ ============
Earnings per share:
Basic $ 0.13 $ 0.19 $ 0.47 $ 0.42
Diluted $ 0.12 $ 0.19 $ 0.45 $ 0.42
Shares used in computing earnings per share:
Basic 2,793 2,758 2,780 2,757
Diluted 2,872 2,805 2,859 2,785
See notes to unaudited condensed consolidated financial statements
Page 4
O.I. CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,296 $ 1,162
Depreciation & amortization 401 341
Impairment of investment in unconsolidated investee 768 --
Loss from unconsolidated investee 208 --
Deferred income taxes 420 (57)
Loss on disposition of property (8) (23)
Change in working capital (1,370) 666
------------ ------------
Net cash flows provided by operating activities 1,715 2,089
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (2,605) (3,056)
Maturities of investments 977 840
Purchase of property, plant and equipment (353) (252)
Proceeds from sales of assets 10 14
Change in other assets 58 --
------------ ------------
Net cash flows (used in) investing activities (1,913) (2,454)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock pursuant to exercise
of employee stock options and employee stock purchase plan 212 65
Purchase of treasury stock -- (142)
------------ ------------
Net cash flows provided by (used in) financing activities 212 (77)
------------ ------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 14 (442)
Cash and cash equivalents at beginning of period 2,869 3,915
------------ ------------
Cash and cash equivalents at end of period $ 2,883 $ 3,473
============ ============
See notes to unaudited condensed consolidated financial statements
Page 5
O.I. CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
O.I. Corporation (the "Company"), an Oklahoma corporation, was organized in
1963. The Company designs, manufactures, markets, and services analytical,
monitoring and sample preparation products, components, and systems used to
detect, measure, and analyze chemical compounds.
The accompanying unaudited condensed consolidated financial statements have been
prepared by O.I. Corporation and include all adjustments that are, in the
opinion of management, necessary for a fair presentation of financial results
pursuant to the rules and regulations of the Securities and Exchange Commission.
All adjustments and provisions included in these statements are of a normal
recurring nature. All intercompany transactions and balances have been
eliminated in the financial statements. These unaudited condensed consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
2. INVENTORIES.
Inventories are stated at the lower of first-in, first-out cost or market (in
thousands):
Sept. 30, 2004 Dec. 31, 2003
-------------- --------------
Raw Materials $ 3,194 $ 2,261
Work in Process 389 207
Finished Goods 529 607
-------------- --------------
$ 4,112 $ 3,075
============== ==============
3. COMPREHENSIVE INCOME.
Comprehensive income refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are recorded as an element of
stockholders' equity. The Company's components of comprehensive income are net
income and unrealized gains and losses on available-for-sale investments.
4. EARNINGS PER SHARE.
The Company reports both basic earnings per share, which is based on the
weighted average number of common shares outstanding, and diluted earnings per
share, which is based on the weighted average number of common shares
outstanding and all dilutive potential common shares outstanding. Stock options
are the only dilutive potential common shares the Company has outstanding.
Weighted average shares for the three and nine months ended September 30, 2004
were 2,793,000 and 2,780,000, respectively. Weighted average shares for the
three and nine months ended September 30, 2003 were 2,758,000 and 2,757,000,
respectively.
Incremental shares from assumed exercise of dilutive options for the three and
nine months ended September 30, 2004 of 79,000 and 80,000, 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, 2003 of 47,000 and 28,000, 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, options to acquire 133,000 shares
of common stock, at a weighted average exercise price of $5.75 per share, were
not included in the computation of dilutive earnings per share as
Page 6
their effect would be anti-dilutive. There were no anti-dilutive options
outstanding for the three and nine months ending September 30, 2004.
5. STOCK-BASED COMPENSATION.
At September 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 under which 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 have 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 Sept 30 Ended Sept 30
------------------------ ------------------------
(in thousands)
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income, as reported $ 351 $ 535 $ 1,296 $ 1,162
Deduct: Total stock-based compensation expense determined
under fair value based method for awards granted,
modified, or settled, net of related tax effects 4 3 50 34
---------- ---------- ---------- ----------
Pro forma net income $ 347 $ 532 $ 1,246 $ 1,128
Earnings per share:
Basic -- as reported $ 0.13 $ 0.19 $ 0.47 $ 0.42
Basic -- pro forma $ 0.12 $ 0.19 $ 0.45 $ 0.41
Diluted -- as reported $ 0.12 $ 0.19 $ 0.45 $ 0.42
Diluted -- pro forma $ 0.12 $ 0.19 $ 0.44 $ 0.41
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, 2004 and
December 31, 2003 were approximately $95,000 and $107,000, net of accumulated
amortization of $149,000 and $129,000, respectively. Total amortization expense
on intangible assets for the three and nine months ended September 30, 2004 and
2003 was approximately $14,000, including $12,000 expense due to abandonment of
two patents, and $2,000, and $7,000 and $13,000, respectively. The estimated
aggregate amortization expense for the remainder of 2004 and each of the five
succeeding fiscal years 2005 to 2008 is approximately $1,000, $5,000, $5,000,
$4,000, and $4,000, respectively.
7. PRODUCT WARRANTY LIABILITIES.
The changes in the Company's product warranty liability on September 30, 2004
were as follows:
Liabilities, beginning of year $707
Warranty claims (4)
----
Liabilities, September 30, 2004 $703
8. INVESTMENT IN UNCONSOLIDATED INVESTEE
On October 26, 2004, the Company signed a Letter of Intent to acquire
substantially all of the assets of Intelligent Ion, Inc. ("III"), its
unconsolidated investee. The acquisition is contingent on satisfactory
Page 7
completion of due diligence by the Company and the negotiation, execution and
delivery of a definitive agreement approved by the independent members of the
boards of the respective parties and the shareholders of III. The purchase price
payment will be reduced by the amount III owes the Company under secured
promissory notes. The amount due under such notes as of September 30, 2004 is
approximately $280,000.
The acquisition would end the Company's strategic alliance with III to develop
and supply products for the Company. Under the contemplated transaction, the
Company would acquire the assets, assume development of the product which III
was to develop under the strategic alliance, and III would cease its development
operations. There can be no assurance that the Company will consummate the
acquisition of III assets.
The Company owns 24% of the Series A Preferred Stock of III, which it purchased
on December 11, 2003. The original investment in III preferred stock was
$1,000,000 and equaled 13.8% ownership of III common shares on a fully diluted
basis. The Company accounts for its investment in III using the equity method of
accounting. During the nine months ended September 30, 2004, the Company
recorded approximately $208,000 in losses from its share of the results of
operations of III.
The Company decided to write off the remaining book value of its investment in
III, totaling $768,000 as of September 30, 2004 in recognition of an other than
temporary decline in its fair value. The Company based its conclusion primarily
on III's inability to meet development milestones in a timely manner, and its
inability to raise funds necessary for working capital. These conditions along
with the potential sale of III's assets to the Company were sufficient to
convince the Company that it would not recover any of its remaining equity
investment in III.
Other than promissory notes for the $280,500 in prepaid product advances, no
other amounts remain on the Company's consolidated balance sheet related to III,
as of September 30, 2004. The write-off is a non-cash charge.
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 Special Purpose Entities 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.
Page 8
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 and Intelligent Ion, Inc. (III) may not reach agreement on the
announced purchase and sale of III assets.
- - The Company's purchase of III assets, if consumated, may not result in
anticipated new products.
- - The Company's ability to execute new product development plans and realize
expected returns on the cost of such developments.
- - 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,
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.
Page 9
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 SEPTEMBER 30, 2004 COMPARED TO SEPTEMBER 30,2003
Revenues. Total net revenues for the three months ended September 30, 2004
increased $1,045,000 or 16% to $7,756,000, compared to $6,711,000 for the same
period of the prior year. Net revenues increased due to strong sales of the
Company's new Eclipse Purge-and-Trap Sample Concentrator, sales of the MINICAMS
air-monitoring systems, continuous flow analyzers, the LAN 9000 beverage
analyzer, and total organic carbon analyzers (TOC). We believe some portion of
these increased sales can be attributed to 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 September 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
September 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 better position to the Company to compete for business
in China.
Increases in revenues from products were partially offset by decreases in
revenues from services. Revenues from services decreased $48,000 or 7% to
$665,000, compared to $713,000 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 field repair and installation services and the
use of third party service providers.
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 September 30, 2004, compared to the same period of the
prior year, it is likely that this is a temporary change rather than a
fundamental change in direction of a market that has been flat or declining over
the past several years. 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, 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 September 30, 2004
increased $832,000, or 26% to $4,072,000, compared to $3,240,000 for the same
period of the prior year. Gross profit represented 53% of revenues for the three
months ended September 30, 2004, and 48% for the same period of the prior year.
The increase in gross profit for the three months ended September 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 higher
Page 10
margin products manufactured by the Company and less sales of gas chromatography
equipment purchased under an original equipment manufacturers supply agreement.
Research and development. R&D expenses for the three months ended September 30,
2004 increased $74,000, or 11% to $735,000, compared to expenses of $661,000 for
the same period of the prior year. R&D expenses represented 9% of revenues for
the three months ended September 30, 2004 and 10% of revenues for the same
period of the prior year. The increase in R&D expenses for the three months
ended September 30, 2004 is due to a plan to focus on product development which
was announced in the second quarter of 2003. The plan stated our intention to
intensify our R&D efforts on updating existing products and to develop new
products to serve markets with growth potential greater than the environmental
testing market. As stated previously R&D spending will likely increase over
historical levels as a dollar amount, and as a percentage of revenues, however,
at this time we plan to remain committed to this plan even at the risk of
incurring an operating loss on a quarterly or annual basis.
Selling, general, and administrative. SG&A expenses for the three months ended
September 30, 2004 increased $361,000, or 19% to $2,231,000, compared to
$1,870,000 for the same period of the prior year, primarily due to increases in
commissions and sales-related activities, general repairs and maintenance, legal
fees related to our investment in III, and advertising activities. Despite the
increase in SG&A expense in dollars, SG&A expense remains unchanged as a
percentage of revenues for the three months ended September 30, 2004 and 2003 at
28%.
Operating Income. Operating income for the three months ended September 30, 2004
increased $397,000, or 56% to $1,106,000, compared to $709,000 for the same
period of the prior year. The increase in operating income for the three months
ended September 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 $26,000, or 20% to
$105,000, compared to $131,000 for the same period of the prior year, primarily
due to fewer asset sales in the current period.
Loss From Unconsolidated Investee. We incurred a loss from an unconsolidated
investee, III, which amounted to $46,000 for the three months ended September
30, 2004. The loss from this unconsolidated investment, accounted for on the
equity method, represents our share of the results of operations from our
investment in the Series A Preferred Shares of III.
The Company also wrote off the remaining book value of its $1,000,000 investment
in III Series A Preferred Stock, resulting in a $768,000 impairment charge to
the investment in unconsolidated investee during the three months ended
September 30, 2004, due to an other than temporary decline in its fair value.
(See Note 8 to Unaudited Condensed Consolidated Financial Statements). The
Company has offered, pursuant to a non-binding letter of intent, to buy the
assets of III and assume development. Should the contemplated transaction be
completed, development work relating to the completion of a product would be
classified under R&D expenses, in the company's consolidated income statement.
Upon completion of the contemplated transaction the Company plans to offer
employment to certain III employees, assume certain consultant contracts, and
purchase sublicense rights to certain intellectual property of III; however,
this research and development involves experimental technology in the field of
mass spectrometry and there is substantial risk that R&D efforts might not
result in a commercially viable product. Furthermore, there can be no assurance
that the Company will be able to complete the acquisition of III's assets.
Page 11
Income Before Income Taxes. Income before income taxes for the three months
ended September 30, 2004 decreased $443,000, or 53% to $397,000, compared to
income of $840,000 for the same period of the prior year. The decrease in income
before income taxes for the three months ended September 30, 2004 was primarily
due to losses from expense relating to the Company's investment in III
offsetting the increase in operating income.
Provision For Income Taxes. Provision for income taxes decreased $259,000 for
the three months ended September 30, 2004 to a provision of $46,000 compared to
$305,000 for the same period of the prior year. The effective tax rate was 12%
for the three months ended September 30, 2004, compared to 36% for the same
period of the prior year, primarily due to a decrease in taxable income from an
increase in income tax credits for R&D expenditures, foreign sales, and
dividends received deductions on income from investments.
Net Income. Net income for the three months ended September 30, 2004 decreased
$154,000, or 34% to $351,000, compared to net income of $535,000 in the same
period of the prior year. Basic earnings per share was $0.13 and diluted
earnings per share was $0.12 for the three months ended September 30, 2004,
compared to basic and diluted earnings of $0.19 per share for the same period of
the prior year. The decrease in net income for the three months ended September
30, 2004 was primarily due to losses from the investment in III offsetting the
increase in operating income.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO SEPTEMBER 30,2003
Revenues. Net revenues for the nine months ended September 30, 2004 increased
$2,573,000, or 14% to $21,479,000, compared to $18,906,000 for the same period
of the prior year. Sales for the three months ended March 31, 2004 were
essentially flat, but sales during the three months ended June 30, 2004 and
September 30, 2004 increased due to continued demand for the Eclipse
Purge-and-Trap Sample Concentrator, MINICAMS air-monitoring systems, continuous
flow analyzers, LAN9000 beverage analyzers and TOC analyzers, attributable, in
part we believe, to an increase in the rate of capital spending of our
customers.
Domestic and international revenues for the nine months ended September 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 nine months ended September 30, 2004
increased $1,830,000, or 20% to $11,127,000, compared to $9,297,000 for the same
period of the prior year primarily due to an increase in revenues and to
improved product mix relating to sales of the higher margin products
manufactured by the Company, such as MINICAMS and the Eclipse and less sales of
gas chromatography equipment purchased under an original equipment manufacturers
supply agreement. Gross profit represented 52% for the nine months ended
September 30, 2004, compared to 49% of revenues for the same period of the prior
year and September 30, 2003, respectively.
Research and Development. R&D expenses for the nine months ended September 30,
2004 increased $241,000, or 12% to $2,201,000, compared to $1,960,000 for the
same period of the prior year. R&D expenses represented 10% of revenues for the
nine months ended September 30, 2004 and September 30, 2003. The increase in R&D
expenses for the nine months ended September 30, 2004 is due to a plan to focus
on product development.
Selling, General, and Administrative. SG&A expenses for the nine months ended
September 30, 2004, increased $624,000, or 11% to $6,444,000, compared to
$5,820,000 for the same period of the prior year primarily due to increases in
commissions and sales-related activities, general repairs and maintenance, legal
fees related to our investment in III and advertising activities. Despite the
increase in SG&A expense in dollars, SG&A expenses decreased as a percentage of
revenues to 30% from 31% of revenues for the same period of the
Page 12
prior year, primarily due to the increase in revenues over the same periods.
Operating Income. Operating income for the nine months ended September 30, 2004
increased $965,000 to $2,482,000, compared to $1,517,000 for the same period
of the prior year. The increase in operating income for the nine months ended
September 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 decreased $11,000, or 3% to
$318,000, for the nine months ended September 30, 2004, compared to $329,000 for
the same period of the prior year.
Loss From Unconsolidated Investee. We incurred a loss from an unconsolidated
investee, III, which amounted to $208,000 for the nine months ended September
30, 2004. The loss from this unconsolidated investment represents our share of
the results of operations from our investment in the Series A Preferred Shares
of III accounted for on the equity method. In addition, an impairment of
$768,000 was incurred due to an other than temporary decline in fair value of
the investment in III preferred stock (See Note 8 to Unaudited Condensed
Consolidated Financial Statements).
Income Before Income Taxes. Income before income taxes decreased $22,000, or 1%
to $1,824,000 for the nine months ended September 30, 2004, compared to
$1,846,000 for the same period of the prior year. The increase in income before
income taxes for the nine months ended September 30, 2004 was primarily due to
an increase in product revenues, partially offset by losses from the investment
in III.
Provision For Income Taxes. Provision for income taxes decreased $156,000 for
the nine months ended September 30, 2004 to a provision of $528,000, compared to
$684,000 for the same period of the prior year. The effective tax rate was 29%
for the nine months ended 2004, compared to 37% for the nine months ended
September 30, 2003, primarily due to income tax credits for R&D expenditures,
foreign sales and dividends received deductions for income from investments.
Net Income. Net income for the nine months ended September 30, 2004 increased
$134,000, or 12% to $1,296,000, compared to net income of $1,162,000 in the same
period of the prior year. Basic earnings per share was $0.47 per share, and
diluted earnings per share was $0.45 per share for the nine months ended
September 30, 2004, compared to basic and diluted earnings of $0.42 per share
for the same period of the prior year. The increase in net income for the nine
months ended September 30, 2004 was primarily due to an increase in revenues
from sales of products compared to the same period of the prior year, offset by
losses from the investment in III.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $2,883,000 as of September 30, 2004, compared
to $2,869,000 as of December 31, 2003. Working capital as of September 30, 2004,
increased to $15,216,000, 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 59% as of
September 30, 2004 and 58% at December 31, 2003. The current ratio was 3.56 at
September 30, 2004 and 3.93 at December 31, 2003. Total liabilities-to-equity
ratio increased to 30% as of September 30, 2004, compared to 25% as of December
31, 2003.
Net cash flows provided by operating activities for the nine months ended
September 30, 2004 was $1,715,000, compared to $2,089,000 for the same period of
the prior year. The decrease in cash flows provided by operating activities for
the first nine months in 2004 was primarily due to an increase in accounts
receivable and inventory, resulting from an increase in sales volumes. Net
Page 13
cash flows (used in) investing activities for the nine months ended September
30, 2004 was $(1,145,000), compared to $(2,454,000) 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 and impairment of investment in III.
Net cash flows provided by (used in) financing activities for the nine months
ended September 30, 2004 was $212,000, compared to $(77,000) 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.
We have historically been able to fund working capital and capital expenditures
from operations, and expect to be able to finance our 2004 and 2005 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 III. The investment was made concurrently with the
Company's entering into a Product Purchase Agreement with III which was entered
into to 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. The Company has recorded losses amounting to $208,000 for the nine
months ended September 30, 2004 in these condensed, consolidated financial
statements to reflect its share of the results of operations from its investment
in III preferred shares. As of September 30, 2004 this investment has been
written off as III has ceased its development activities and the Company does
not expect to recover any of its original investment. (See Note 8 to Unaudited
Condensed Consolidated Financial Statements).
In addition to the investment in III preferred shares, the Company was to
provide, pursuant to the Product Purchase Agreement, $1,350,000 for the
completion by III of certain product developments according to agreed upon
milestones. III met the first three milestones, and the Company paid $280,000 in
prepaid product advances, which is included in other current assets in the
condensed consolidated balance sheet. As noted, the Company has entered into a
non-binding letter of intent to acquire the assets of III. Should this
acquisition be consummated, the Company anticipates that prepaid product
advances will be credited against the purchase price. If successful in the
acquisition, the Company anticipates spending at $1,350,000 the amount
anticipated in the product development agreement with III to complete the
development of III's product through its own efforts. If the contemplated
transaction is completed, the Company will offer employment to certain III
employees and attempt to complete the product development originally intended.
Such research efforts are experimental and may cost more than planned.
Nevertheless, we believe that we have the working capital to maintain our
commitment to this development effort.
In the second quarter of 2003, we announced a plan to undertake a more
Page 14
extensive research, development, and engineering effort with the intent of
developing products with innovative technologies. The major goals in our efforts
are (i) to position the Company to serve new markets, (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. 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, treasury bills 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 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 September 30, 2004 was $7,612,000.
Year-to-date unrealized losses in the fair value of some of those investments
are primarily due to recent increases in interest rates. The Company's
investment policy is to manage its investment portfolio to preserve principal
and liquidity while maximizing the return on the investment portfolio by
investing in multiple types of investment grade securities. 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 have been made in 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 $48,000, $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
Page 15
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 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.
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.
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
Page 16
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
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.
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 September 30, 2004 was $7,612,000 and $6,175,000,
respectively. Year-to-date unrealized losses in the fair value of some of those
investments are primarily due to recent increases in interest rates. The
Company's investment policy is to manage its investment portfolio to preserve
principal and liquidity while maximizing the return on the investment portfolio
by investing in multiple types of investment grade securities. The Company's
investment portfolio is primarily invested in short-term securities, with at
least an investment grade rating to minimize credit risk, and preferred stocks.
Although changes in interest rates may affect the fair value of the investment
portfolio and cause unrealized gains or losses, such gains or losses would not
be realized unless the investments were sold. 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 September 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
Page 17
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.
PART II- OTHER INFORMATION
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
Form 8-K dated October 26, 2004, regarding material impairment
of Intelligent Ion, Inc. Series A Preferred Stock and press release regarding
its signing a non-binding Letter of Intent to acquire substantially all the
assets of Intelligent Ion, Inc.
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, 2004 BY: /s/ William W. Botts
-----------------------------
William W. Botts
President and
Chief Executive Officer
Authorized Officer
Date: November, 2004 BY: /s/ Juan M. Diaz
--------------------------
Juan M. Diaz
Vice President-Corporate Controller
Principal Accounting Officer
Page 18
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