-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SHOAyL5ghWYyLkpYA0hKiH8o3gPjpGgSXWlr3rhZn1EFP4FlDdPHRpEsNNo1pKOf Eq8H+2z6ykosiKJBBi1KUA== 0000052466-99-000006.txt : 19990517 0000052466-99-000006.hdr.sgml : 19990517 ACCESSION NUMBER: 0000052466-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IONICS INC CENTRAL INDEX KEY: 0000052466 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 042068530 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07211 FILM NUMBER: 99623990 BUSINESS ADDRESS: STREET 1: 65 GROVE ST CITY: WATERTOWN STATE: MA ZIP: 02172 BUSINESS PHONE: 6179262500 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] 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 1-7211 IONICS, INCORPORATED (exact name of registrant as specified in its charter) MASSACHUSETTS 04-2068530 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 65 Grove Street, Watertown, Massachusetts 02472 (Address of principal executive offices) (Zip Code) (617) 926-2500 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at March 31, 1999 Common Stock, Par Value $1 16,130,150 Shares /1 IONICS, INCORPORATED FORM 10-Q FOR QUARTER ENDED MARCH 31, 1999 INDEX Page No. Part I - Financial Information Consolidated Statements of Operations 2 Consolidated Balance Sheets 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Management's Discussion and Analysis of Results of Operations and Financial Condition 7 Part II - Other Information 12 Signatures 13 Exhibit Index 14 Exhibit 27 - Financial Data Schedule 15 (for electronic purposes only) - 1 - /2 PART I - FINANCIAL INFORMATION IONICS, INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except per share amounts)
Three Months Ended March 31, 1999 1998 Net revenue: Equipment Business Group $34,439 $33,758 Ultrapure Water Group 24,533 18,782 Consumer Water Group 21,859 18,496 Instrument Business Group 6,585 7,938 87,416 78,974 Costs and expenses: Cost of sales of Equipment Business Group 24,715 23,431 Cost of sales of Ultrapure Water Group 18,238 14,006 Cost of sales of Consumer Water Group 12,283 10,298 Cost of sales of Instrument Business Group 3,016 2,954 Research and development 1,868 1,644 Selling, general and administrative 20,109 17,877 80,229 70,210 Income from operations 7,187 8,764 Interest income 108 151 Interest expense (130) (119) Equity income 163 111 Income before income taxes and minority interest 7,328 8,907 Provision for income taxes 2,382 2,896 Income before minority interest 4,946 6,011 Minority interest expense 274 3 Net income $ 4,672 $ 6,008 Basic earnings per share $ .29 $ .37 Diluted earnings per share $ .29 $ .37 Shares used in basic earnings per share calculations 16,127 16,027 Shares used in diluted earnings per share calculations 16,288 16,411 The accompanying notes are an integral part of these financial statements.
-2- /3 IONICS, INCORPORATED CONSOLIDATED BALANCE SHEETS (Unaudited) (Amounts in thousands, except share amounts)
March 31, December 31, 1999 1998 ASSETS Current assets: Cash and cash equivalents $ 15,485 $ 28,770 Short-term investments 405 359 Notes receivable, current 3,881 4,144 Accounts receivable 110,239 111,844 Receivables from affiliated companies 2,388 2,329 Inventories: Raw materials 18,689 19,164 Work in process 6,915 8,523 Finished goods 5,355 3,862 30,959 31,549 Other current assets 8,056 8,098 Total current assets 171,413 187,093 Notes receivable, long-term 8,520 8,824 Investments in affiliated companies 7,911 7,057 Property, plant and equipment: Land 8,388 8,194 Buildings 43,463 41,594 Machinery and equipment 262,801 259,885 Other, including furniture, fixtures and vehicles 45,216 44,267 359,868 353,940 Less accumulated depreciation (162,714) (158,257) 197,154 195,683 Other assets 62,009 53,466 Total assets $ 447,007 $ 452,123 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ 8,673 $ 6,873 Accounts payable 26,896 37,361 Customer deposits 3,689 3,965 Accrued commissions 2,528 2,203 Accrued expenses 33,593 31,884 Taxes on income 4,858 3,648 Total current liabilities 80,237 85,934 Long-term debt and notes payable 1,695 1,519 Deferred income taxes 15,216 17,036 Other liabilities 2,192 2,036 Stockholders' equity: Common stock, par value $1, 55,000,000 authorized shares; issued: 16,130,150 in 1999 and 16,116,649 in 1998 16,130 16,117 Additional paid-in capital 157,878 157,571 Retained earnings 184,615 179,943 Accumulated other comprehensive income (10,839) (7,889) Unearned compensation (117) (144) Total stockholders' equity 347,667 345,598 Total liabilities and stockholders' equity $ 447,007 $ 452,123 The accompanying notes are an integral part of these financial statements.
-3- /4 IONICS, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
Three Months Ended March 31, 1999 1998 Operating activities: Net income $ 4,672 $ 6,008 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,920 6,459 Provision for losses on accounts and notes receivable 176 167 Compensation expense on restricted stock awards 27 27 Changes in assets and liabilities: Notes receivable (64) (341) Accounts receivable 1,388 2,962 Inventories 831 (1,128) Other current assets 78 108 Investments in affiliates (1,102) (683) Accounts payable and accrued expenses (9,416) (3,316) Income taxes 877 1,262 Other (1,704) (1,952) Net cash provided by operating activities 2,683 9,573 Investing activities: Additions to property, plant and equipment (9,031) (6,175) Disposals of property, plant and equipment 214 439 Acquisitions, net of cash acquired (8,394) - Purchase of short-term investments (45) (751) Net cash used by investing activities (17,256) (6,487) Financing activities: Principal payments on current debt (5,862) (9,480) Proceeds from issuance of current debt 7,717 1,205 Principal payments on long-term debt (518) (4) Proceeds from issuance of long-term debt 116 441 Proceeds from stock option plans 275 1,512 Net cash provided/(used) by financing activities 1,728 (6,326) Effect of exchange rate changes on cash (440) 8 Net change in cash and cash equivalents (13,285) (3,232) Cash and cash equivalents at beginning of period 28,770 25,787 Cash and cash equivalents at end of period $ 15,485 $ 22,555 The accompanying notes are an integral part of these financial statements.
-4- /5 IONICS, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. In the opinion of Ionics, Incorporated (the "Company"), the accompanying consolidated financial statements contain all adjustments (consisting of only normal, recurring accruals) necessary to present fairly the consolidated financial position of the Company as of March 31, 1999 and December 31, 1998, the consolidated results of its operations for the three months ended March 31, 1999 and 1998 and the consolidated cash flows for the three months then ended. 2. The consolidated results of operations of the Company for the three months ended March 31, 1999 and 1998 are not necessarily indicative of the results of operations to be expected for the full year. 3. Reference is made to the Notes to Consolidated Financial Statements appearing in the Company's 1998 Annual Report as filed on Form 10-K with the Securities and Exchange Commission. There have been no significant changes in the information reported in those Notes, other than from the normal business activities of the Company, and there have been no changes which would, in the opinion of Management, have a materially adverse effect upon the Company. 4. Certain prior year amounts have been reclassified to conform to the current year presentation with no impact on net income. 5. Earnings per share (EPS) calculations:
(Amounts in thousands, except per share amounts) For the period ended March 31, 1999 For the period ended March 31, 1998 Net Per Share Net Per Share Income Shares Amount Income Shares Amount Basic EPS Income available to common $4,672 16,127 $ .29 $6,008 16,027 $ .37 stockholders Effect of dilutive stock options - 161 - 384 ______________________ _______________________ Diluted EPS $4,672 16,288 $ .29 $6,008 16,411 $ .37
6. Comprehensive Income The Company has adopted the Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in general purpose financial statements for the year ended December 31, 1998. The table below sets forth "comprehensive income" as defined by SFAS No. 130 for the three month periods ended March 31, 1999 and 1998.
(Amounts in thousands) Three Months Ended March 31, 1999 1998 Net income $4,672 $6,008 Other comprehensive income, net of tax: Translation adjustments (2,950) (194) Comprehensive income $1,722 $5,814
-5- /6 7. In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." At the end of 1998, the Company changed from three reportable segments to four reportable "business group" segments corresponding to a "business group" structure which was put into place in the latter part of 1998. Segment information for the prior year has been restated to reflect this change. As of March 31, 1999, no changes have been made to the basis of segmentation or the measurement of profit or loss from that which was reported in the Company's 1998 Annual Report as filed on Form 10-K with the Securities and Exchange Commission, and there were no material changes to total assets by segment. The following table summarizes the Company's operations by the four business group segments and "Corporate."
Equipment Ultrapure Consumer Instrument Business Water Water Business Dollars in Thousands Group Group Group Group Corporate Total 1999 Revenue - unaffiliated customers $ 34,439 $ 24,533 $ 21,859 $ 6,585 $ - $ 87,416 Inter-segment transfers 319 197 - 194 (710) - Gross profit 9,724 6,295 9,576 3,569 - 29,164 Research and development (1,868) Selling, general and administrative (20,109) Interest income 108 Interest expense (130) Equity income 163 Income before income taxes and minority interest 7,328 1998 Revenue - unaffiliated customers $ 33,758 $ 18,782 $ 18,496 $ 7,938 $ - $ 78,974 Inter-segment transfers 746 77 - 196 (1,019) - Gross profit 10,327 4,776 8,198 4,984 - 28,285 Research and development (1,644) Selling, general and administrative (17,877) Interest income 151 Interest expense (119) Equity income 111 Income before income taxes and minority interest 8,907
-6- /7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Comparison of the Three Months Ended March 31, 1999 with the Three Months Ended March 31, 1998 Revenues for the first quarter of 1999 increased 10.7%, and net income decreased by 22.2% compared to the results of the first quarter of 1998. The decline in net income was primarily due to a reduction in earnings before interest, taxes and minority interest (EBIT) in the Instrument Business Group. This reduction was attributable to lower revenues, unfavorable overhead absorption due to lower volume and a higher proportion of lower margin service revenue for the Instrument Business Group in the first quarter of 1999. Partially mitigating this decline was a significant increase in EBIT in the Ultrapure Water Group. The Ultrapure Water Group benefited from increased sales in the first quarter of 1999 in comparison to the first quarter of 1998. Total revenues were $87.4 million in the first quarter of 1999 compared with $79.0 million in the first quarter of 1998. Revenues were higher in the Ultrapure Water Group, the Consumer Water Group and the Equipment Business Group, while revenues declined in the Instrument Business Group. The Company's three acquisitions made at the beginning of the first quarter of 1999 did not provide significant revenues as these businesses were added to provide the Company with access to new markets rather than significant initial sales volume. The Equipment Business Group's revenues increased by 2.0% in the first quarter of 1999 as compared to the first quarter of 1998. This increase came from higher capital equipment sales while water supply sales of this Group remained relatively flat. The revenues of the Ultrapure Water Group increased by $5.8 million in the first quarter of 1999 compared to the first quarter of 1998. This increase reflects the shipment of orders largely received in 1998. Revenues for this Group were down significantly in 1998 primarily due to a slowdown in capital spending by the microelectronics industry. The 18.2% increase in the Consumer Water Group's revenues from the first quarter of 1999, compared with the first quarter of 1998, was due to growth in both bottled water and home water products. In addition, through the acquisition of Aquarelle SA, the Company entered the French bottled water market at the beginning of 1999. The Instrument Business Group's revenues declined by $1.4 million in the first quarter of 1999 as compared to the first quarter of 1998. This Group benefited from strong demand in the first part of 1998 due to the implementation of United States Pharmacopoeial Convention's USP 23 which mandated the monitoring of Total Organic Carbon (TOC) in water processed by the pharmacuetical industry. -7- /8 Cost of sales as a percentage of revenues was 66.6% in the first quarter of 1999 compared to 64.2% in the first quarter of 1998. Cost of sales as a percentage of revenues increased in the first quarter of 1999, compared to the first quarter of 1998, for the Equipment Business Group, the Consumer Water Group and the Instrument Business Group, while such percentage for the Ultrapure Water Group decreased slightly in the first quarter of 1999 compared with the first quarter of 1998. The increase in the Equipment Business Group primarily reflected a shift in the mix of contracts to the lower margin equipment businesses and to relatively stronger margins for wastewater equipment sales in the first quarter of 1998. The Consumer Water Group's slight increase in cost of sales in the first quarter of 1999, compared to the first quarter of 1998, primarily reflected a lower than normal cost of sales in the first quarter of 1998 due to a modest inventory adjustment which favorably impacted the consumer bleach business. This increase was offset by margin improvement in the home water business. The increase in the cost of sales as a percentage of revenues in the Instrument Business Group was due to an increase in manufacturing overhead, including relocation to a larger facility, as well as a higher portion of revenues for the quarter derived from lower margin service business. These increases were offset by a slight decrease in cost of sales for the Ultrapure Water Group in the first quarter of 1999, compared to the first quarter of 1998, because of a more favorable mix of jobs supported by a strong service business with favorable margins. Operating expenses as a percentage of revenues were 25.1% in the first quarter of 1999 and 24.7% in the first quarter of 1998. The increase in operating expenses as a percentage of revenues primarily reflected the decline in sales in the Instrument Business Group and more rapid growth in the Consumer Water Group which generally has higher operating expenses and higher gross margins than do the capital equipment businesses. The Consumer Water Group also had higher operating expenses in the first quarter of 1999 due to start-up expenses related to Aqua Cool's expansion into the French market and expenses for a major computer system implementation for the Aqua Cool business in the United States. In addition, operating expenses increased due to expanded marketing initiatives as well as the Company's continued commitment to investment in its research and development programs. Interest expense of $0.1 million and interest income of $0.1 million in the first quarter of 1999 remained relatively consistent with interest expense and income in the first quarter of 1998. Financial Condition Working capital decreased $10 million during the first three months of 1999 while the Company's current ratio decreased slightly to 2.1 at March 31, 1999 from 2.2 at December 31, 1998. Cash provided from net income and depreciation totaled $11.6 million during the first three months of 1999, while the primary uses of cash were for additions to property, plant and equipment, three acquisitions at the beginning of the first quarter of 1999 and a significant reduction in accounts payable. Significant capital expenditures were incurred to support growth in bottled water operations, for new manufacturing and distribution facilities and for "own and operate" facilities. -8- /9 At March 31, 1999 the Company had $15.5 million in cash and cash equivalents, a decrease of $13.3 million from December 31, 1998. Accounts payable decreased by $10.5 million, and other assets increased by $8.5 million, primarily due to goodwill from the three acquisitions made at the beginning of the first quarter of 1999. Notes payable and long-term debt increased by $2.0 million. The Company believes that its cash and cash equivalents, cash from operations, lines of credit and foreign exchange facilities are adequate to meet its currently anticipated needs. Year 2000 Readiness Disclosure and Related Information The Company's State of Readiness The Company has undertaken a program to assure that its computer software and systems (including information technology (IT) and manufacturing systems), facilities and products will be able to distinguish 21st century dates from 20th century dates (so-called "Year 2000 (Y2K) Compliance or Compliant"). The Company's program is divided into the following three phases: Phase One - Inventory and Planning The Company completed this phase in July 1998. In this phase, the Company inventoried all hardware and software that potentially is susceptible to Y2K problems, prepared plans for assessing compliance and completing remediation, and prepared vendor compliance letters. Phase Two - Assessment In this phase, the Company is assessing which of its systems and products are Y2K Compliant. The Company has requested compliance statements from hardware and software vendors, supply manufacturers and service trading partners and has received responses from many vendors and has not discovered any significant compliance problems. This phase also includes the planning for remediation of non-compliant systems. The Company anticipated the completion of this phase by the end of the first quarter of 1999. To date, approximately 95% of this phase is complete. Phase Three - Remediation and Testing In this Phase, the company will deploy plans for elimination, upgrade, replacement or modification of non-compliant systems and products and test compliance. The Company has scheduled completion of this phase by the third quarter of 1999. -9- /10 The Company's core operating (IT and manufacturing) system for its headquarters operations is not yet Y2K Compliant. The Company is currently pursuing a remediation plan for this system, has made significant progress, and expects to have it completed by mid-1999. The Company's bottled water accounting system in the United States is not yet fully Y2K Compliant. The Company has purchased a new integrated distribution and accounting system, which management believes will significantly enhance its bottled water operations. This new system is Y2K Compliant and implementation is scheduled for completion by the end of the third quarter of 1999. Individual bottled water business locations are running this new system as it is implemented, which the Company believes may reduce the risks associated with potential Y2K non-compliance should implementation not be fully completed by the end of 1999. The Company's other IT systems are not uniform across all operations and locations. The systems for all non-headquarters operations have been reviewed. The Company is currently implementing new Y2K Compliant IT systems at two major locations in the U.S. Completion of implementation of these systems is expected by mid-1999. The Company has either completed remediation or implemented new IT systems which are Y2K Compliant at its other significant non-headquarters operations. Remediation or replacement of IT systems at other locations is under way and is expected to be completed by mid-1999. The Company believes that failure of these systems to become Y2K Compliant would be unlikely to have a material impact on the Company due to the relatively small size of these operations and the opportunity to perform relevant tasks manually. The Company's assessment plan includes assessment of Y2K Compliance of non-information technology (non-IT) components including the Company's membrane-related equipment, "own and operate" equipment, other products, manufacturing equipment and facilities. Substantial progress has been made in these areas, and assessment is almost complete. The Company is obtaining compliance statements from vendors of both IT and non-IT systems and is revising its vendors' status on an on-going basis based upon information it is receiving. The Company is working with its most important vendors to resolve remediation and compliance problems as they are identified. Costs to Address Y2K Issues The Company's assessment and remediation of Y2K Compliance issues is anticipated to cost approximately $1.5 million, excluding the cost of new systems implementation. Expenses to date of approximately $900,000 are consistent with such expectations. The Company does not currently expect that actual Y2K expenses finally incurred will materially exceed its estimate. -10- /11 Risk of the Company's Y2K Issues If the Company fails to achieve Y2K Compliance in all its systems, the Company could lose the ability to process certain of its customers' orders, manufacture products or provide services to customers until compliance is achieved or a means to work around the failure is implemented. However, most of the Company's businesses process a small number of relatively large transactions, mitigating the short-term dependence on information systems. Also, because the Company's systems are not uniform across the Company, it is anticipated that any failure would not be Company-wide. Furthermore, a failure to fill an order may not necessarily result in complete loss of the order. Some orders could be filled through alternative methods within a relatively short period. Nevertheless, any disruption in order fulfillment, manufacturing or the provision of services to customers could result in some loss of revenue or claims against the Company. Moreover, there is uncertainty as to whether the Company may experience any disruption in these areas as a result of uncertainty concerning the Y2K readiness of third-party vendors. If disruption in any of these areas resulting from Y2K non- compliance is greater than anticipated, the loss of revenue could be material. Contingency Plans The Company plans to complete contingency plans by the end of the third quarter of 1999 to deal with possible failures in systems which it determines may not achieve Y2K Compliance on a timely basis. Quantitative and Qualitative Disclosures about Market Risk Derivative Instruments and Market Risk There has been no material change in the information reported in the Company's 1998 Annual Report as filed on Form 10-K with the Securities and Exchange Commission with respect to these risk matters. Forward-Looking Information Safe Harbor Statement under Private Securities Litigation Reform Act of 1995 The Company's future results of operations and certain statements contained in this report, including, without limitation, "Management's Discussion and Analysis of Results of Operations and Financial Condition," constitute forward-looking statements. Such statements are based on management's current views and assumptions and involve risks, uncertainties and other factors that could cause actual results to differ materially from management's current expectations. Among these factors are acceptance of new products and price pressures; risk of nonpayment of accounts receivable; risks associated with foreign operations; the ability of the Company to achieve Y2K Compliance in accordance with its current program including the ability of the Company to ascertain and plan for compliance issues of third-party vendors; risks involved in litigation; regulations and laws affecting business in each of the Company's markets; market risk factors, and other risks and uncertainties described from time to time in the Company's filings with the Securities and Exchange Commission. -11- /12 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended March 31, 1999. All other items reportable under Part II have been omitted as inapplicable or because the answer is negative, or because the information was previously reported to the Securities and Exchange Commission. -12- /13 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. IONICS, INCORPORATED Date: May 14, 1999 By: /s/Arthur L. Goldstein Arthur L. Goldstein Chairman and Chief Executive Officer (duly authorized officer) Date: May 14, 1999 By: /s/Robert J. Halliday Robert J. Halliday Vice President, Finance and Chief Financial Officer -13- /14 EXHIBIT INDEX Sequentially Numbered Exhibit Page 27.0 Financial Data Schedule 16 (for electronic purposes only) -14- /15 EX-27 2
5 1,000 3-MOS DEC-31-1999 MAR-31-1999 15,485 405 116,978 (2,858) 30,959 171,413 359,868 (162,714) 447,007 80,237 0 16,130 0 0 331,537 447,007 87,416 87,416 58,252 58,252 0 176 (130) 7,165 2,382 4,672 0 0 0 4,672 .29 .29
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