O. I. 10-Q 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended June 30, 2010
For the transition period from _________to_________
Commission File Number: 0-6511
O. I. CORPORATION
(Exact name of registrant as specified in its charter)
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of August 12, 2010, there were 2,361,628 shares of the issuer’s common stock, $.10 par value, outstanding.
Caution Regarding Forward-Looking Information; Risk Factors
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of United States securities laws, including the United States Private Securities Litigation Reform Act of 1995. From time to time, our public filings, press releases and other communications will contain forward-looking statements. Forward-looking information is often, but not always, identified by the use of words such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “forecast”, “target”, “project”, “may”, “will”, “should”, “could”, “estimate”, “predict” or similar words suggesting future outcomes or language suggesting an outlook. Forward-looking statements in this quarterly report on Form 10-Q include, but are not limited to, statements with respect to expectations of our prospects, future revenues, earnings, activities and technical results.
Forward-looking statements and information are based on current beliefs as well as assumptions made by, and information currently available to, us concerning anticipated financial performance, business prospects, strategies and regulatory developments. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. The forward-looking statements in this quarterly report on Form 10-Q are made as of the date it was issued and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that outcomes implied by forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements. These risks and uncertainties may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. When relying on our forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events.
Our public filings are available at www.oico.com and on EDGAR at www.sec.gov.
Please see “Part I, Item 1A—Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2009, as well as Part II, Item IA—“Risk Factors” of this quarterly report on Form 10-Q, for further discussion regarding our exposure to risks. Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such factors nor to assess the impact such factors might have on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(In Thousands, Except Par Value)
See Notes to Unaudited Condensed Consoldiated Financial Statements.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(In Thousands, Except Per $ Share Amounts)
See Notes to Unaudited Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows
See Notes to Unaudited Condensed Consolidated Financial Statements.
O.I. CORPORATION and SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
O.I. Corporation (the “Company”, “we”, or “our”), 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 consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and include all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation. These financial statements have not been audited by an independent accountant. The consolidated financial statements include the accounts of the Company and its subsidiary. All inter-company transactions and balances have been eliminated in the financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations for interim reporting.
The Company believes that the disclosures are adequate to prevent the information from being misleading. However, these financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2009. The financial data for the interim periods presented may not necessarily reflect the results to be anticipated for the complete year.
Inventories, net, which include material, labor, and manufacturing overhead, are stated at the lower of first-in, first-out cost or market (in thousands):
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. The Company's components of comprehensive income (loss) are net income (loss) and unrealized gains and losses on available-for-sale investments.
The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share data):
For the three and six months ended June 30, 2010, 81,000 shares were not in-the-money and were thus anti-dilutive. These shares were not used in the calculation of diluted earnings per share for 2010. For the three and six months ended June 30, 2009, there were 107,550 anti-dilutive shares.
On January 1, 2006, we adopted the provisions of ASC 718 Compensation-Stock Compensation. In accordance with ASC 718, our financial statements recognize expense related to our stock-based compensation awards that were granted after January 1, 2006, or that were unvested as of January 1, 2006, based on their grant-date fair value.
Our compensation cost for stock-based compensation for the three months ended June 30, 2010 and 2009 was $23,000 and $29,000, respectively. Our compensation cost for stock-based compensation was $46,000 and $60,000, respectively for the six months ended June 30, 2010 and 2009.
ASC 718 requires that cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) be classified as financing cash flows. There was no excess tax benefit for the six months ended June 30, 2010 or 2009.
No options were granted during the six months ended June 30, 2010 or 2009.
As of June 30, 2010, we had $81,000 of total unrecognized compensation cost related to non-vested awards granted under our various share-based plans, which we expect to recognize over a 0.8 year period.
We received cash from options exercised during the first six months of fiscal years 2010 and 2009 of $1,000 and $14,000, respectively. The impact of these cash receipts is included in financing activities in the accompanying consolidated statements of cash flows.
The Company’s practice has been to issue shares for option exercises out of treasury stock as provided under the terms of the 2003 Incentive Compensation Plan. We believe that our treasury stock holdings are sufficient to satisfy any exercises in 2010.
The Company categorizes its operations into two business segments: Laboratory Products and Air-Monitoring Systems. Operations in these segments include designing, manufacturing, marketing and selling analytical instruments. In the Laboratory Products segment, the Company provides products generally used to ensure regulatory compliance with environmental requirements for water. Analytical instruments sold in the Air-Monitoring Systems segment are used for trace-level detection of airborne gaseous chemical-warfare agents.
Following is the Company’s business segment information for June 30, 2010 and 2009:
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2009. This discussion also contains forward-looking statements. Please see the “Caution Regarding Forward-Looking Information; Risk Factors” above.
O. I. Corporation, referred to as “the Company,” “OI,” “we,” “our” or “us”, was organized in 1963 in accordance with the Business Corporation Act of the State of Oklahoma as Clinical Development Corporation, a builder of medical and research laboratories. In 1969, we moved from Oklahoma City, Oklahoma to College Station, Texas and changed our name to Oceanography International Corporation. To better reflect current business operations, we again changed our name to O.I. Corporation in July 1980, and in January 1989 we began doing business as OI Analytical.
At OI, we provide innovative products for chemical monitoring and analysis. Our products perform chemical detection, analysis, measurement and monitoring applications in a wide variety of industries including food, beverage, pharmaceutical, semiconductor, power generation, chemical, petrochemical and security. Headquartered in College Station, Texas, we sell our products throughout the world utilizing a direct sales force as well as a network of independent sales representatives and distributors.
During the second quarter of 2010, we continued to experience improved performance with sales up significantly in both operating segments. Increased sales combined with our lower cost structure after last year’s cost savings measures enabled us to generate operating earnings of $766,000 for the quarter and net income of $456,000, or $0.19 per share.
This represents our fifth sequential quarter of steadily improving operating results.
After a decline in cash during the first quarter due to increased working capital requirements, our cash and short-term investments were up $457,000 as of June 30, 2010 compared to the previous year-end. We continue to anticipate positive cash flow over the balance of the year. Cash and short-term investments totaled $5,071,000 at the end of the second quarter with no bank debt outstanding.
Results of Operations
Total revenue increased $1,568,000, or 32.2%, for the three months ended June 30, 2010 compared to the same period in 2009, with sales substantially higher in both of our operating segments.
In the Laboratory Products segment, the bulk of our revenue increase was attributable to improved domestic product sales, which were up 77% compared to the second quarter of 2009. Last year’s second quarter results were substantially impacted by the global economic downturn that also impacted most capital equipment providers. Our domestic sales growth resulted from the continued trend of slowly improving domestic demand, with roughly half our domestic sales increase resulting from shipments of water testing products to the Gulf of Mexico region due to the oil spill in that area. International product sales increased 5% during the second quarter, due primarily to higher shipments to China, Taiwan and the Asia Pacific region. Service revenues were largely unchanged from last year.
In the Air-Monitoring Systems segment our sales increased 60% during the second quarter of 2010 compared to the same period of 2009 primarily due to the second of six quarterly shipments under our previously announced contract with Bechtel National, Inc. for the purchase of MINICAMS®. We expect quarterly shipments to Bechtel to continue through the second quarter of 2011.
On a year to date basis, our overall revenue increased $2,479,000, or 26.1%, compared to the six months ended June 30, 2009. Our Laboratory Products segment sales increased 21.2% and the Air-Monitoring Systems segment sales increased 39.1% during this period. Domestic product sales provided the majority of growth in the Laboratory Products segment, up 50% compared to the first six months of 2009, while international sales increased 10% during that same period. International sales increased in all geographic regions except Latin America. Air-Monitoring sales growth was attributable to shipments to Bechtel National as noted above.
Overall gross profit for the three months ended June 30, 2010 increased $879,000, or 37.1%, compared to the second quarter of 2009 because of higher sales volume. Margins in our Laboratory Products segment were up 3% on a percentage of sales basis because of improved manufacturing variances associated with our increased production levels. Margins in our Air-Monitoring Systems segment decreased 4.4% in 2010 due in large part to last year’s above average margin which resulted from a favorable mix of service revenues.
On a year to date basis, gross profit increased $1,640,000, or 36.1%, in 2010 compared to last year because of higher sales volume. As a percentage of sales, gross profit margins increased 3.8% from last year with margins up in both segments.
Total selling, general and administrative ("SG&A") expenses for the three months ended June 30, 2010 increased $239,000, or 14.7%, compared to the same period of the prior year. In the Laboratory Products segment, SG&A expenses increased primarily due to increased commissions and selling expenses related to higher sales.
For the six months ended June 30, 2010, SG&A expenses increased $90,000, or 2.5%, compared to the same period of the prior year. SG&A expenses in the Laboratory Products segment increased 1.2% due to increased sales commissions and product support expenses. SG&A expenses in the Air-Monitoring Systems segment increased because of higher service and product support expenses.
During the second quarter of 2010, research and development ("R&D") expenses decreased by $129,000, or 17.3%, compared to the same period of last year. The decline in Laboratory Products related R&D expenses during the second quarter was attributable to lower expenses related to compensation, contract labor, consulting and supplies. R&D expenses in the Air-Monitoring Systems segment were down because of lower wage-related and supplies expenses attributable to certain R&D related resources being allocated to the Bechtel contract and the implementation of cost control measures last year.
R&D expenses for the six months ended June 30, 2010 decreased by $401,000, or 23.7%, compared to the same period of the prior year. The decline in Laboratory Products related R&D expenses during the first half of 2010 was due primarily to decreased wage related expenses, consulting, travel and project materials. R&D expenses in the Air-Monitoring Systems segment for the year to date declined due to reduced wages and wage-related expenses, as well as a reduction in consulting, travel and project materials expenses.
Operating Income (Loss)>
For the three months ended June 30, 2010, we generated total operating income of $766,000, or 11.9% compared to an operating loss of $3,000, or (0.1%) in the same period of the prior year. On a year to date basis, we generated total operating income of $1,197,000, or 10.0% compared to an operating loss of $754,000, or (7.9%) during the first six months of 2009. This increase in earnings was primarily attributable to increased sales in both segments and decreased R&D expense.
Provision (Benefit) for Income Taxes
Our provision for income taxes totaled $316,000 and $456,000 for the three and six months ended June 30, 2010, respectively, which resulted in an effective tax rate of 40.9% and 37.5%, respectively based on our estimated tax rate. For the three months ended June 30, 2009, no provision for income taxes was recognized. For the six months ended June 30, 2009, we recorded a tax benefit of $244,000 due to the net operating loss incurred in the first six months of last year. Our effective tax rate increased from prior periods primarily due to the current period's lack of research tax credit. The research tax credit expired on December 31, 2009. This benefit will not be incorporated into our 2010 results unless it is extended by Congress.
Liquidity and Capital Resources
Net cash flow provided by operating activities for the six months ended June 30, 2010 totaled $871,000 compared to $603,000 during the comparable period of 2009. Our 2010 operating cash flow was favorably impacted by an increase in net income to $761,000 compared to a loss of $483,000 in 2009. The favorable impact of our improved profitability was partially offset by increased working capital attributable to higher accounts receivable resulting from increased sales in 2010.
Net cash flow used in investing activities totaled $657,000 through the first six months of 2010, compared to cash provided by investing activities of $109,000 for the same period in 2009. The primary use of cash was the purchase of $494,000 of 3rd party preferred stock acquired in an effort to improve the return on our funds. Purchases of property, plant and equipment increased to $130,000 in 2010, up $93,000 from last year due in large part to the purchase of a specialized instrument that will be used for application support related to the combined TOC and WS-CRDS technology we recently developed in conjunction with Picarro, Inc. We have no material commitments for capital expenditures as of June 30, 2010.
Net cash flow used in financing activities for the six months ended June 30, 2010, totaled $246,000, compared to $192,000 for the same period of the prior year. Dividend payments constituted the primary component of cash used in financing activities during both periods presented. During 2010, we began repurchasing shares of our common stock and have authority to purchase approximately 131,000 additional shares under our current plan.
Cash, cash equivalents and short-term investments totaled $5,071,000 as of June 30, 2010, compared to $4,614,000 as of December 31, 2009. We continue to believe that our liquid assets are sufficient to fund working capital, R&D, and capital expenditures for the near term. As the economy continues to improve, we anticipate that cash flows from operations will generate sufficient cash flow to meet our long-term liquidity needs.
Pursuant to a resolution of our Board of Directors, all investment and other capital allocation decisions are made for the Company by an investment committee consisting of two independent directors and our CEO/CFO. We may pursue investments in the form of acquisitions (including product lines) where we believe attractive returns can be obtained. Further, we may determine under certain market conditions that available capital is best utilized to fund investments we believe offer the Company attractive return opportunities whether or not related to our ongoing business activities. These investments may include significant and highly concentrated direct investments with respect to the equity securities of public companies. Any such investments will involve risk, and stockholders should recognize that our balance sheet may change depending on the performance of investments. Furthermore, such investments could be subject to volatility that may affect both the recorded value of the investments as well as our periodic earnings.
Our Board of Directors declared a cash dividend on April 28, 2010 of $0.05 per common share payable on June 1, 2010 to shareholders of record at the close of business on May 14, 2010. The quarterly dividend was declared in connection with the Board's decision in 2006 to establish an annual cash dividend of $0.20 per share, payable at $0.05 per quarter. The payment of future cash dividends under the policy is subject to the approval of our Board of Directors.
Off-Balance Sheet Arrangements
As of June 30, 2010 we had no off-balance sheet arrangements.
Critical Accounting Policies
Please reference Part II-Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that the information we are required to disclose in reports filed or submitted 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. During the period from April 1, 2010 to June 30, 2010, an evaluation under the supervision and with the participation of management, including the Chief Executive Officer/CFO (our principal executive officer and principal financial officer), of the effectiveness of our disclosure controls and procedures was conducted. Based on that evaluation, the Chief Executive Officer/CFO has concluded that, as of June 30, 2010, our disclosure controls and procedures are effective.
Subsequent to the date of his evaluation, there have been no changes in our internal controls that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Our management, including the Chief Executive Officer/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 1. Legal Proceedings
In the normal course of our business, we are subject to legal proceedings brought against us. There have been no material developments to the legal proceedings described in Part I, Item 3, "Legal Proceedings" in our Annual Report on Form 10-K for the year-ended December 31, 2009, and there are no new reportable legal proceedings for the quarter ended June 30, 2010.
Item 1A. Risk Factors
There have been no material changes in the risk factors described in Part I, Item 1A, “Risk Factors”, of our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Removed and Reserved
Item 5. Other Information
In the Company’s 2010 Proxy Statement, it was stated that all proposals of shareholders, including the nomination of persons to stand for election to the Company’s Board of Directors, intended for inclusion in the Company’s 2011 Proxy Statement shall be presented no later than one hundred and twenty (120) days prior to the one year anniversary of the mailing of the preceding year’s proxy statement, or December 17, 2010.
In accordance with Section 11(a)(ii) of Article II of the Company’s Bylaws, the Proxy Statement should have stated that all proposals of shareholders, including the nomination of persons to stand for election to the Company’s Board of Directors, intended for inclusion in the Company’s 2011 Proxy Statement shall be presented no more than ninety nor less than sixty days prior to the first anniversary of the preceding year’s annual meeting, or between February 17, 2011 and March 19, 2011. All proposals submitted for inclusion in the Proxy Statement must comply with all requirements of the Securities and Exchange Commission as well as the Company’s Bylaws.
Item 6. Exhibits
* Filed herewith
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.
* Filed herewith