-----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, CkgjK6gd2O/Xaxgs8iUoUf5PgAFzI6dCErPOa6UKdxSur7ijOgl5bUJXAEgVafIf lKMnI75rKkxn1JDfM76NOw== 0000950135-03-006151.txt : 20031224 0000950135-03-006151.hdr.sgml : 20031224 20031224125826 ACCESSION NUMBER: 0000950135-03-006151 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20031223 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20031224 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07211 FILM NUMBER: 031073452 BUSINESS ADDRESS: STREET 1: 65 GROVE ST CITY: WATERTOWN STATE: MA ZIP: 02172 BUSINESS PHONE: 6179262500 8-K 1 b48895ioe8vk.txt IONICS, INCORPORATED UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): December 24, 2003 IONICS, INCORPORATED (Exact name of registrant as specified in its charter) MASSACHUSETTS 1-7211 04-2068530 (State of incorporation) (Commission File Number) (IRS Employer Identification No.) 65 GROVE STREET, WATERTOWN, MA 02472 (617) 926-2500 (Address of principal executive (Zip Code) (Registrant's telephone offices) number, including area code) 1 Item 5. Other Events and Required FD Disclosure. On November 18, 2003, Ionics, Incorporated ("Ionics") and the shareholders and members of Ecolochem, Inc. and its affiliated companies (collectively, the "Ecolochem Group") entered into a Purchase Agreement that provides for the acquisition by Ionics of the stock and membership interests of the Ecolochem Group for $200 million in cash and 4,905,660 shares of Ionics common stock (the "Acquisition"). In connection with the Acquisition, Ionics intends to file a proxy statement that will be used to solicit proxies to approve the issuance of the shares of Ionics common stock proposed to be issued in the Acquisition. On August 14, 2003, the management and Board of Directors of Ionics approved a plan of disposition to sell its consumer chemical business, the Elite Consumer Products division in Ludlow, Massachusetts, which is part of Ionics' Consumer Water Group segment. The discontinuance of these operations was previously disclosed in Ionics' Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003. In connection with the filing of the proxy statement relating to the Acquisition, Ionics is filing this report to update certain information that was previously reported in its Annual Report on Form 10-K for the year ended December 31, 2002 to reflect the impact of the classification of the consumer chemical business operations as discontinued operations pursuant to Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets" ("SFAS No. 144"). Specifically, Ionics is filing selected consolidated financial data for the five years ended December 31, 2002, audited consolidated financial statements of Ionics and its subsidiaries as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002, and certain disclosures regarding Ionics' results of operations and financial condition as of and for the periods reflected in such audited consolidated financial statements (which appear as Exhibits 99.1, 99.3 and 99.2 to this report, respectively, and are incorporated herein by this reference), in each case that reflect the impact of the classification of these operations as discontinued operations pursuant to SFAS No. 144. Ionics has not updated any of the information contained in this report for events that have occurred since December 31, 2002 other than the discontinuance of these operations. The information contained in this report should be read in conjunction with Ionics' Annual Report on Form 10-K for the year ended December 31, 2002 (as amended), Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 and Current Reports on Form 8-K filed on November 19, 2003 and November 26, 2003. Item 7. Financial Statements and Exhibits. (a) Financial Statements of Business Acquired. None. (b) Pro Forma Financial Information. None. (c) Exhibits. Exhibit Number Description Exhibit 23.1 Consent of PricewaterhouseCoopers LLP Exhibit 99.1 Selected consolidated financial data for Ionics as of and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 Exhibit 99.2 Certain disclosures regarding Ionics' results of operations and financial condition as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002. Exhibit 99.3 The following consolidated financial statements of Ionics and its subsidiaries, together with the report of PricewaterhouseCoopers LLP thereon: Consolidated statements of operations for years ended December 31, 2002, 2001 and 2000 Consolidated balance sheets as of December 31, 2002 and 2001 2 Consolidated statements of cash flows for years ended December 31, 2002, 2001 and 2000 Consolidated statements of stockholders' equity for years ended December 31, 2002, 2001 and 2000 Notes to consolidated financial statements 3 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 duly authorized. IONICS, INCORPORATED December 24, 2003 By: /s/ Stephen Korn Name: Stephen Korn Title: Vice President and General Counsel 4 EXHIBIT INDEX Exhibit Number Description Exhibit 23.1 Consent of PricewaterhouseCoopers LLP Exhibit 99.1 Selected consolidated financial data for Ionics as of and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 Exhibit 99.2 Certain disclosures regarding Ionics' results of operations and financial condition as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002. Exhibit 99.3 The following consolidated financial statements of Ionics and its subsidiaries, together with the report of PricewaterhouseCoopers LLP thereon: Consolidated statements of operations for years ended December 31, 2002, 2001 and 2000 Consolidated balance sheets as of December 31, 2002 and 2001 Consolidated statements of cash flows for years ended December 31, 2002, 2001 and 2000 Consolidated statements of stockholders' equity for years ended December 31, 2002, 2001 and 2000 Notes to consolidated financial statements 5 EX-23.1 3 b48895ioexv23w1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-14194, 33-5814, 33-2092, 2-72936, 2-82780, 2-64255, 33-41598, 33-54293, 33-59051, 333-05225, 333-29135, 33-54400, 333-39684, 333-98139, 333-109103, 333-108904, 333-107473 and 333-105661) of Ionics, Incorporated of our report dated March 26, 2003, except for Note 6 and the second paragraph of Note 1, as to which the date is December 23, 2003, relating to the financial statements of Ionics, Incorporated, which appears in this Current Report on Form 8-K. PricewaterhouseCoopers LLP Boston, Massachusetts December 24, 2003 6 EX-99.1 4 b48895ioexv99w1.txt SELECTED CONSOLIDATED FINANCIAL DATA Exhibit 99.1 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for each of the five years ended December 31, 2002, 2001, 2000, 1999 and 1998 are derived from the Company's Consolidated Financial Statements. This data should be read in conjunction with Exhibit 99.2 and Exhibit 99.3 of this Current Report on Form 8-K. CONSOLIDATED STATEMENT OF OPERATIONS DATA
For the years ended December 31, --------------------------------------------------------------------------------------- Dollars in Thousands Except Per Share Amounts 2002 % 2001 % 2000 % 1999 % 1998 % - ----------------------------------------------------------------------------------------------------------------------------------- Revenues $ 320,327 100.0 $ 448,153 100.0 $ 458,058 100.0 $ 343,184 100.0 $337,992 100.0 Income (loss) from continuing operations before income taxes, minority interest, and gain on sale 2,610 0.8 (16,640) (3.7) (312) - 28,660 8.4 32,083 9.5 Income (loss) from continuing operations* 4,854 1.5 44,695 10.0 (694) (0.2) 18,702 5.4 20,894 6.2 Earnings (loss) from continuing operations per basic share 0.28 2.61 (0.04) 1.16 1.30 Earnings (loss) from continuing operations per diluted share 0.27 2.59 (0.04) 1.14 1.28
* Includes a pre-tax gain on the sale of the Aqua Cool Pure Bottled Water business of $8.2 million and $102.8 million in 2002 and 2001, respectively. CONSOLIDATED BALANCE SHEET DATA
December 31, ----------------------------------------------------------------------------- Dollars in Thousands 2002 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Current assets $ 342,026 $ 392,660 $ 268,938 $ 210,885 $ 205,461 Current liabilities 114,168 156,866 173,363 99,475 85,934 - ----------------------------------------------------------------------------------------------------------------------- Working capital 227,858 235,794 95,575 111,410 119,527 Total assets 608,013 633,313 585,813 500,906 452,123 Long-term debt and notes payable 9,670 10,126 10,911 8,351 1,519 Stockholders' equity 438,153 423,353 356,861 361,852 345,598
7 EX-99.2 5 b48895ioexv99w2.txt CERTAIN DISCLOSURES RE: RESULTS OF OPERATIONS ... Exhibit 99.2 CERTAIN DISCLOSURES REGARDING IONICS' RESULTS OF OPERATIONS AND FINANCIAL CONDITION AS OF DECEMBER 31, 2002 AND 2001 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002 RESULTS OF OPERATIONS COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001 The Company reported consolidated revenues of $320.3 million and net income of $4.8 million in 2002, compared to consolidated revenues of $448.2 million and net income of $44.7 million in 2001. During the third quarter of 2003, as part of the Company's restructuring plan, the Company approved plans to divest its Elite Consumer Products division. Accordingly, results for the Company's Elite Consumer Products division in Ludlow, MA, which is part of the Consumer Water group, have been reclassified to discontinued operations in the Consolidated Statements of Operations for all periods presented. Results for 2001 included the operations of the Aqua Cool Pure Bottled Water business ("Aqua Cool Business"), which was divested on December 31, 2001, as well as the results of the Company's majority-owned Malaysian subsidiary, Ionics Enersave ("Enersave") which was divested in May 2002. REVENUES Total Company revenues of $320.3 million for 2002 decreased $127.8 million or 28.5% from revenues of $448.2 million for 2001. The 2001 revenues of the Aqua Cool Business represented $76.2 million, or 59.6% of the decrease, and the revenues of the Company's majority-owned Malaysian subsidiary represented $14.8 million, or 11.6% of the decrease. EBG revenues of $154.4 million in 2002 decreased $7.2 million, or 4.4%, compared to revenues of $161.6 million in 2001. The decrease in revenues is primarily attributable to reduced revenues from the Zero Liquid Discharge ("ZLD") business, primarily as a result of the Company's business strategy to not pursue the civil construction scope on ZLD projects. This decrease was partially offset by increases in EBG's water supply business in Spain, as well as increases in the revenues of the Company's Italian subsidiary. UWG revenues of $102.4 million decreased $31.2 million, or 23.4%, compared to revenues of $133.6 million for 2001. The revenues associated with the Company's majority-owned Malaysian subsidiary, which was divested in May 2002, amounted to $19.0 million in 2001 and $4.2 million in 2002, and accordingly represented 11.1% of the revenue decrease. The additional decrease in revenues relates primarily to the continued downturn in the microelectronics sector. CWG revenues totaled $23.6 million in 2002 compared to revenues of $105.2 million in 2001, representing a decrease of $81.5 million or 77.5%. The 2001 revenues of the Aqua Cool Business of $76.2 million represented 93.5% of the decrease in revenues. CWG revenue levels were also adversely impacted by lower demand for home water treatment equipment as a result of the general downturn in the domestic economy. IBG revenues of $27.7 million in 2002 increased $1.1 million, or 4.3%, compared to revenues of $26.6 million in 2001. The increase in revenues primarily resulted from increased sales volume to the pharmaceutical industry driven by regulatory requirements in that industry, as well as continued growth in recurring sales of the Company's after-market products. Revenues from sales to affiliated companies of $12.2 million in 2002 decreased $9.1 million or 42.7% compared to revenues from affiliated companies of $21.2 million in 2001. The decrease in revenues from affiliated companies primarily resulted from lower equipment sales to the Trinidad joint venture company, Desalination Company of Trinidad and Tobago Ltd. ("Desalcott"), as a result of the substantial completion of the first four out of the five construction phases of the desalination facility in early 2002. The decrease was partially offset by an increase in sales of equipment in the second half of 2002 to the Kuwaiti joint venture company, Utilities Development Company ("UDC"), for the Kuwait reuse project. 8 The Company has entered into a number of large contracts, which are generally categorized as either "equipment sale" contracts or "build, own and operate" (BOO) contracts. The Company believes that the remaining duration on its existing sale of equipment contracts ranges from less than one year to three years and the remaining duration on its existing BOO contracts ranges from one year to 25 years. The time to completion of any of these contracts, however, is subject to a number of variables, including the nature and provisions of the contract and the industry being served. Historically, as contracts are completed, the Company has entered into new contracts with the same or other customers. In the past, the completion of any one particular contract has not had a material effect on the Company's business, results of operations or cash flows. COST OF SALES The Company's total cost of sales as a percentage of revenue was 70.5% in 2002 and 72.4% in 2001. The resulting gross margin increased to 29.5% in 2002 compared to 27.6% in 2001. Cost of sales as a percentage of revenue decreased in all segments. EBG's cost of sales as a percentage of revenue decreased to 74.0% in 2002 from 78.5% in 2001. The improvement in cost of sales as a percentage of revenue from 2001 to 2002 related to the elimination of losses incurred on the civil construction portion of ZLD projects that were incurred in 2001. Additionally, the improvement in cost of sales as a percentage of revenue is attributable to a shift in product mix from lower margin capital equipment sales to higher margin water supply and other products. UWG's cost of sales as a percentage of revenue decreased to 76.6% in 2002 from 80.2% in 2001. The decrease in cost of goods sold as a percentage of revenue primarily reflects the elimination of losses associated with projects in Australia, improved operating results in the group's Asian operations, and the reduction of losses associated with the Company's majority-owned Malaysian subsidiary, which was divested in May 2002. CWG's cost of sales as a percentage of revenue decreased to 44.0% in 2002 from 54.2% in 2001. The decrease in the cost of sales as a percentage of revenue was primarily attributable to the divestiture of the Company's Aqua Cool Business. IBG's cost of sales as a percentage of revenue decreased to 42.2% in 2002 from 48.0% in 2001, primarily reflecting absorption of manufacturing overhead as a result of higher sales volume along with cost reductions in the service businesses. Cost of sales to affiliated companies as a percentage of revenue decreased to 90.1% in 2002 from 97.4% in 2001. The decrease in 2002 was primarily due to lower revenues from sales to Desalcott, where, for accounting purposes, all profit on sales to Desalcott is being deferred, and the increase in equipment sales to UDC, where the Company defers profit equal to its 25% equity ownership in UDC, and will subsequently recognize the deferred profit over the estimated useful life of the equipment. OPERATING EXPENSES Research and development expenses as a percentage of revenue increased slightly during 2002 compared to 2001. The Company currently expects to continue to invest in new products and technologies at approximately the same level as in prior years. Selling, general and administrative expenses decreased $27.7 million to $91.2 million in 2002 from $118.9 million in 2001. The elimination of 2001 selling, general and administrative expenses relating to the Aqua Cool Business resulting from the divestiture of the business on December 31, 2001, as well as the divestiture of the Company's majority-owned Malaysian subsidiary in the second quarter of 2002, and the cessation of goodwill amortization amounted to approximately $40.2 million. These decreases in 2002 selling, general and administrative expenses were partially offset by increased operating expenses associated with the Company's European operations, primarily France, higher than normal professional service fees related primarily to the Company's restatement of its interim financial statements for the first and second quarters of 2002, increased provisions for doubtful accounts, and other general increases. 9 INTEREST INCOME AND INTEREST EXPENSE Interest income totaled $3.5 million in 2002 and $1.0 million in 2001. Interest expense, net of capitalized interest of $0.3 million, was $1.2 million in 2002 and $5.2 million in 2001. The increase in interest income in 2002 compared to 2001 reflects the investment of proceeds resulting from the divestiture of the Aqua Cool Business on December 31, 2001. Additionally, a portion of the proceeds from the disposition of the Aqua Cool Business were utilized to reduce domestic short-term borrowings which resulted in lower interest expense of $0.9 million in 2002 compared to $5.2 million in 2001. EQUITY INCOME The Company's proportionate share of the earnings and losses of affiliated companies in which it holds a minority equity interest is included in equity income. Equity income amounted to $3.4 million in 2002 and $1.4 million in 2001. The Company's equity income is derived primarily from its 20% equity interest in a Mexican joint venture company which owns two water treatment plants in Mexico, its 40% equity interest in Desalcott, its equity interests in several joint ventures in the Middle East which engage in bottled water distribution, and to a lesser extent from its other equity investments in affiliated companies. The increase in equity income of $2.0 million in 2002 compared to 2001 reflects the improved performance of Desalcott (the plant began commercial operation in May 2002) and the improved performance of the Company's investments in several joint ventures in the Middle East. GAIN ON SALE OF AQUA COOL On December 31, 2001, the Company completed the sale of its Aqua Cool Business in the United States, United Kingdom and France. Giving effect to reserves established by the Company for purchase price adjustments and direct and incremental costs, the Company recorded a pre-tax gain of $102.8 million in 2001. As a result of final purchase price adjustments based on the number of customers and working capital levels, and the resolution of certain claims made by Nestle, the Company and Nestle reached final agreement on a purchase price of $207.0 million in the first quarter of 2003. As a result of such adjustments, the Company realized an additional pre-tax gain of $8.2 million in 2002, net of direct and incremental costs of the transaction, including approximately $3.4 million of non-recurring management and employee compensation. INCOME TAXES The Company's effective tax rate for 2002 was 45.9% compared to 49.0% in 2001. The Company's 2002 tax rate was primarily affected by losses in certain of its foreign subsidiaries for which the Company may not be able to realize future tax benefits. The 2001 tax rate was primarily impacted by the gain on the sale of the Company's Aqua Cool Business, which included non-deductible goodwill, as well as significant losses by the Company's majority-owned Malaysian subsidiary that were not benefited since realization of those benefits was not likely. DISCONTINUED OPERATIONS On August 14, 2003, the Company's management and Board of Directors approved a plan of disposition to sell its consumer chemical business, the Elite Consumer Products division in Ludlow, MA, which is part of the Company's Consumer Water Group segment. Accordingly, the Company's consolidated financial statements and notes have been reclassified to reflect this business as a discontinued operation in accordance with Financial Accounting Standards Board Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The loss from discontinued operations was $0.1 million on a net-tax and pre-tax basis for 2002. In 2001, income from discontinued operations was $6,000, or $9,000 on a pre-tax basis. NET INCOME Net income amounted to $4.8 million in 2002 compared to $44.7 million for 2001. Net income in 2002 and 2001 included pre-tax gains of $8.2 million and $102.8 million, respectively, from the sale of the Company's Aqua Cool 10 Business. COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 The Company reported consolidated revenues of $448.2 million and net income of $44.7 million in 2001, compared to consolidated revenues of $458.1 million and a net loss of $1.9 million in 2000. The increase in net income resulted primarily from a pre-tax gain of $102.8 million on the sale of the Aqua Cool Business in the U.S., U.K. and France. During the third quarter of 2003, as part of the Company's restructuring plan, the Company approved plans to divest its Elite Consumer Products division. Accordingly, results for the Company's Elite Consumer Products division in Ludlow, MA have been reclassified to discontinued operations in the Consolidated Statements of Operations for all periods presented. REVENUES Total Company revenues were $448.2 million in 2001, compared to $458.1 million in 2000. Total revenues for 2001 and 2000 include revenues associated with the Company's Aqua Cool Business which was divested on December 31, 2001, and the Company's majority-owned Malaysian subsidiary which was divested in May 2002. EBG revenues of $161.6 million in 2001 decreased slightly compared to 2000 revenues of $162.1 million. Total equipment revenues decreased slightly, while supply business revenues increased over 2000. UWG revenues of $133.6 million in 2001 decreased by $22.8 million or 14.6% from 2000 revenues of $156.4 million in 2000. This decrease is primarily the result of continued deterioration, both domestically and internationally, in the Company's microelectronics equipment business, which declined substantially from 2000 levels due to softness in the microelectronics industry generally. CWG revenues of $105.2 million in 2001 increased by $13.7 million or 15.0% from revenues of $91.5 million in 2000, reflecting increases in the Company's bottled water and home water product business. IBG revenues of $26.6 million in 2001 decreased by 6.4% from 2000 revenues of $28.4 million, also reflecting the further deterioration of the microelectronics sector, which is an important customer for IBG products. Revenues from affiliated companies of $21.2 million in 2001 increased $1.5 million compared to revenues from affiliated companies of $19.7 million in 2000. The increase in revenues from affiliated companies primarily resulted from increased equipment sales to Desalcott, which was engaged throughout 2001 in the construction of the Trinidad desalination facility. The Company has entered into a number of large contracts, which are generally categorized as either "equipment sale" contracts or "build, own and operate" (BOO) contracts. The Company believes that the remaining duration on its existing sale of equipment contracts ranges from less than one year to three years and the remaining duration on its existing BOO contracts ranges from one year to 25 years. The time to completion of any of these contracts, however, is subject to a number of variables, including the nature and provisions of the contract and the industry being served. Historically, as contracts are completed, the Company has entered into new contracts with the same or other customers. In the past, the completion of any one particular contract has not had a material effect on the Company's business, results of operations or cash flows. COST OF SALES Cost of sales as a percentage of revenues was 72.4% and 73.1% in 2001 and 2000, respectively, and overall Company gross margin was 27.6% and 26.9% in 2001 and 2000, respectively. Cost of sales as a percentage of revenue decreased in the EBG and CWG segments, and increased in the UWG and IBG segments. Cost of sales as a percentage of revenue for the EBG segment was 78.5% in 2001 compared to 79.7% in 2000, reflecting a continued high level of equipment revenues, which have lower gross margins than service revenues. The losses incurred on several ZLD equipment contracts with civil construction scope had an adverse impact on EBG's cost of sales as a percentage of revenue in 2001. 11 Cost of sales as a percentage of revenues for UWG increased to 80.2% in 2001 from 79.2% in 2000, reflecting cost increases incurred on projects executed by the Company's majority-owned Malaysian subsidiary and one of the Company's Australian subsidiaries. The continued downturn of the microelectronics industry also had an adverse impact on both sales volume and profitability, as the utilization of capacity decreased with reduced sales volume while certain components of costs of sales remained fixed. Cost of sales as a percentage of revenue for CWG decreased to 54.2% in 2001 from 55.6% in 2000. Numerous factors impacted the CWG cost of sales percentage in 2001, including the gain on the sale of certain bottled water assets realized earlier in the year offset by costs associated with readying the Aqua Cool Business for sale in the second half of 2001. IBG cost of sales as a percentage of revenues increased to 48.0% in 2001 from 44.3% in 2000, primarily as a result of reduced sales volume levels caused by the further deterioration of the microelectronics sector. Cost of sales to affiliated companies as a percentage of revenue increased to 97.4% in 2001 from 93.1% in 2000. This increase in 2001 was primarily due to higher revenues from sales to Desalcott, the joint venture company relating to the Company's Trinidad project. OPERATING EXPENSES Research & development expenses decreased to $6.4 million in 2001 compared to $8.0 million in 2000. Selling, general and administrative expenses increased 6.0% in 2001 to $118.9 million from $112.2 million in 2000. The increase is primarily attributable to a significant shift in product mix between UWG, which has a lower operating expense component, and CWG, which has a significantly higher expense component. IMPAIRMENT OF LONG-LIVED ASSETS During 2001 and 2000, the Company wrote down approximately $12.3 million and $1.3 million, respectively, of impaired long-lived assets. In 2001, the write-downs included approximately $9.2 million to reduce the carrying value of assets held for sale related to the Company's divestiture of its majority-owned Malaysian subsidiary and $3.1 million of goodwill associated with previous acquisitions. In late 2001, the Company began negotiations to sell its majority-owned Malaysian subsidiary to the subsidiary's minority shareholders. In early 2002, the Company had signed a term sheet for the disposition of the Malaysian subsidiary and the sale was completed in May 2002. Accordingly, at December 31, 2001, the Company recorded an impairment charge of approximately $9.2 million, representing the difference between the Company's 55% ownership interest in the net asset value of the Malaysian subsidiary (principally property, plant and equipment and goodwill) and the anticipated net proceeds from the sale of the subsidiary of approximately $1.0 million. Additionally, $0.8 million of goodwill impairment was recognized in 2000 relating to an acquisition made by the Company in 1996. INTEREST INCOME AND INTEREST EXPENSE Interest income was $1.0 million in 2001 compared to $1.3 million in 2000. Interest expense totaled $5.2 million in 2001 and $4.9 million in 2000. Interest expense in 2001 reflected higher average borrowings (although at lower prevailing rates) compared to 2000. Increased borrowing levels in 2001 compared to 2000 were primarily attributable to continued investment in, and working capital requirements of, the Company's Trinidad project, as well as other working capital requirements. EQUITY INCOME Equity income amounted to $1.4 million in 2001 and $1.6 million in 2000. The Company's equity income was derived primarily from its 20% equity interest in a Mexican joint venture company which owns wastewater treatment plants in Mexico, its 40% equity ownership in Desalcott, as well as several joint ventures in the Middle East which engage in 12 bottled water distribution, and to a lesser extent from its other equity investments in affiliated companies. GAIN ON SALE OF AQUA COOL On December 31, 2001, the Company completed the sale of its Aqua Cool Business in the United States, United Kingdom and France. Giving effect to reserves established by the Company for purchase price adjustments and direct and incremental costs, the Company recorded a pre-tax gain of $102.8 million in 2001. INCOME TAXES The Company's effective tax rate for 2001 was 49.0% compared to 6.4% in 2000. The 2001 tax rate was primarily impacted by the gain on the sale of the Company's Aqua Cool Business, which included non-deductible goodwill, as well as significant losses by the Company's majority-owned Malaysian subsidiary that were not benefited since realization of those benefits was not likely. DISCONTINUED OPERATIONS On August 14, 2003, the Company's management and Board of Directors approved a plan of disposition to sell its consumer chemical business, the Elite Consumer Products division in Ludlow, MA, which is part of the Company's Consumer Water Group segment. Accordingly, the Company's consolidated financial statements and notes have been reclassified to reflect this business as a discontinued operation in accordance with Financial Accounting Standards Board Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Income from discontinued operations was $6,000, or $9,000 on a pre-tax basis, for 2001, and the loss from discontinued operations was $1.2 million, or $1.9 million on a pre-tax basis for 2000. Included in discontinued operations are long-lived asset impairment charges related to the Company's decision to abandon plans to commence bleach-manufacturing operations in Elkton, Maryland. In 2001 and 2000, these impairment charges amounted to $0.7 million and $2.0 million, respectively. The Elkton plant and equipment were part of a Company strategy to expand bleach manufacturing in the mid-Atlantic market. This strategy included the potential acquisition by the Company of a regional bleach manufacturer, but negotiations relating to the potential acquisition ceased during the fourth quarter of 2000. The impairment charge recorded in 2000 was consequently derived by writing off the net book value of specific equipment for which there was no salvage value or anticipated use within the Company. Due to overcapacity in the bleach manufacturing industry (as evidenced by the exit of other bleach manufacturers in the Northeast), the Company was subsequently unable during 2001 to utilize or otherwise sell the remaining equipment and consequently wrote off the remaining $0.7 million net book value. NET INCOME Net income was $44.7 million in 2001 compared to a net loss of $1.9 million in 2000. In 2001, net income included a net pre-tax gain of $102.8 million resulting from the sale of the Company's Aqua Cool Pure Bottled Water business in the U.S., U.K., and France. FINANCIAL CONDITION Net working capital decreased $7.9 million during 2002 to $227.9 million and the Company's current ratio increased to 3.0 in 2002 from 2.5 in 2001. At December 31, 2002, the Company had total assets of $608.0 million, compared to total assets of $633.3 million at December 31, 2001. Cash and cash equivalents decreased $42.2 million in 2002, primarily reflecting investments in projects and property, plant and equipment, as well as the paydown of short-term notes payable and current taxes payable. In addition, at December 31, 2002, the Company had $4.3 million in restricted cash reflecting advance payments for work to be performed on the Kuwait wastewater treatment facility. Net accounts receivable decreased $15.3 million in 2002, reflecting the decreased revenue levels during 2002 compared to 2001, as well as a reclassification of $10.0 million from current accounts receivable to receivables from affiliated companies, long-term relating to the Trinidad project. The reclassification is based on the expectation that the Company is obligated to contribute an additional $10.0 million to Desalcott as an additional source of funds for project completion costs once all 13 bridge loan proceeds have been expended. Net property, plant and equipment increased $13.4 million during 2002, reflecting capital expenditures of $32.8 million, primarily for build, own and operate facilities in the EBG and UWG segments, offset by depreciation charges of $22.6 million. Current income taxes payable decreased $20.0 million during 2002, primarily reflecting the tax payments made on the gain from the sale of the Aqua Cool Business. Net cash used by operating activities amounted to $2.6 million during 2002, reflecting cash used for payments of accounts payable, accrued expenses, and current income taxes, offset by depreciation charges and a reduction in accounts receivable. Net cash used in investing activities amounted to $33.1 million in 2002, reflecting additions to property, plant and equipment, primarily relating to investments made in the UWG segment for a build, own and operate facility in the power industry and in the EBG segment for the expansion of an existing build, own and operate facility in Curacao. Net cash used by financing activities totaled $13.9 million during 2002, primarily reflecting the repayment of the Company's short-term borrowings. 14 EX-99.3 6 b48895ioexv99w3.txt CONSOLIDATED FINANCIAL STATEMENTS Exhibit 99.3 CONSOLIDATED FINANCIAL STATEMENTS IONICS, INCORPORATED INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.............................................................. 16 Financial Statements: Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001, and 2000................................................................................ 17 Consolidated Balance Sheets at December 31, 2002 and 2001............................... 18 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000................................................................................ 19 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001, and 2000.................................................................... 20 Notes to Consolidated Financial Statements.............................................. 21
15 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Ionics, Incorporated: In our opinion, the accompanying consolidated balance sheets and related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Ionics, Incorporated and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for goodwill upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. PricewaterhouseCoopers LLP Boston, Massachusetts March 26, 2003, except for Note 6 and the second paragraph of Note 1, as to which the date is December 23, 2003 16 CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31 - --------------------------------------------------------------------------------------------------------- Amounts in Thousands, Except per Share Amounts 2002 2001 2000 - --------------------------------------------------------------------------------------------------------- Revenues: Equipment Business Group $ 154,378 $ 161,565 $ 162,060 Ultrapure Water Group 102,407 133,605 156,396 Consumer Water Group 23,633 105,169 91,460 Instrument Business Group 27,741 26,595 28,418 Affiliated companies 12,168 21,219 19,724 - --------------------------------------------------------------------------------------------------------- 320,327 448,153 458,058 --------------------------------------- Costs and expenses: Cost of sales of Equipment Business Group 114,251 126,757 129,160 Cost of sales of Ultrapure Water Group 78,423 107,148 123,904 Cost of sales of Consumer Water Group 10,393 57,030 50,837 Cost of sales of Instrument Business Group 11,719 12,756 12,598 Cost of sales to affiliated companies 10,965 20,677 18,372 Research and development 6,462 6,420 7,980 Selling, general and administrative 91,195 118,932 112,171 Impairment of long-lived assets - 1,559 548 Impairments of goodwill - 10,757 800 - --------------------------------------------------------------------------------------------------------- 323,408 462,036 456,370 --------------------------------------- (Loss) income from continuing operations (3,081) (13,883) 1,688 Interest income 3,463 1,013 1,286 Interest expense (1,215) (5,166) (4,909) Equity income 3,443 1,396 1,623 - --------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes, minority interest and gain on sale 2,610 (16,640) (312) Gain on sale of Aqua Cool 8,160 102,834 - Income tax (expense) benefit (4,947) (42,236) (20) - --------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before minority interest 5,823 43,958 (292) Minority interest in earnings (losses) 969 (737) 402 - --------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 4,854 44,695 (694) (Loss) income from discontinued operations, net of tax (62) 6 (1,176) - --------------------------------------------------------------------------------------------------------- Net income (loss) $ 4,792 $ 44,701 $ (1,870) ========================================================================================================= Basic earnings (loss) per share from continuing operations $ 0.28 $ 2.61 $ (0.04) (Loss) per basic share for discontinued operations - - (0.07) Earnings (loss) per basic share 0.27 2.61 (0.12) ========================================================================================================= Diluted earnings (loss) per share from continuing operations $ 0.27 $ 2.59 $ (0.04) (Loss) per basic share for discontinued operations - - (0.07) Earnings (loss) per diluted share 0.27 2.59 (0.12) ========================================================================================================= Shares used in basic earnings (loss) per share calculations 17,541 17,106 16,243 Shares used in diluted earnings (loss) per share calculations 17,671 17,246 16,243
The accompanying notes are an integral part of these consolidated financial statements. 17 ] CONSOLIDATED BALANCE SHEETS
At December 31 - --------------------------------------------------------------------------------------------- Dollars in Thousands, Except Share Amounts 2002 2001 - --------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 136,044 $ 178,280 Restricted cash 4,250 - Short-term investments 958 21 Notes receivable, current 6,645 4,892 Accounts receivable, net 92,715 107,967 Receivables from affiliated companies 23,642 24,725 Inventories 30,697 27,708 Deferred income taxes 14,664 16,297 Assets from discontinued operations 20,616 22,199 Other current assets 11,795 10,571 - --------------------------------------------------------------------------------------------- Total current assets 342,026 392,660 - --------------------------------------------------------------------------------------------- Receivables from affiliated companies, long-term 11,740 - Notes receivable, long-term 24,718 23,210 Investments in affiliated companies 22,618 23,798 Property, plant and equipment, net 166,795 153,407 Goodwill, net 20,118 18,955 Deferred income taxes, long-term 12,591 12,643 Other assets 7,407 8,640 - --------------------------------------------------------------------------------------------- Total assets $ 608,013 $ 633,313 ============================================================================================= Liabilities and Stockholders' Equity Current liabilities: Notes payable and current portion of long-term debt $ 4,134 $ 14,257 Accounts payable 35,677 33,908 Deferred revenue from affiliated companies 4,308 - Income taxes payable 25,692 45,735 Liabilities from discontinued operations 486 732 Other current liabilities 43,871 62,234 - --------------------------------------------------------------------------------------------- Total current liabilities 114,168 156,866 - --------------------------------------------------------------------------------------------- Long-term debt and notes payable 9,670 10,126 Deferred income taxes 35,337 34,199 Deferred revenue from affiliated companies 4,662 3,360 Other liabilities 6,023 5,409 Commitments and contingencies Stockholders' equity: Common stock, par value $1, authorized shares: 55,000,000 in 2002 and 2001; issued and outstanding: 17,555,046 in 2002 and 17,477,005 in 2001. 17,555 17,477 Additional paid-in capital 190,417 188,555 Retained earnings 247,109 242,317 Accumulated other comprehensive loss (16,928) (24,996) - --------------------------------------------------------------------------------------------- Total stockholders' equity 438,153 423,353 - --------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 608,013 $ 633,313 =============================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 18 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 - ----------------------------------------------------------------------------------------------------------------- Dollars in Thousands 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) $ 4,792 $ 44,701 $ (1,870) Less: (loss) income from discontinued operations (62) 6 (1,176) --------------------------------------- Income (loss) from continuing operations 4,854 44,695 (694) Adjustments to reconcile net income (loss) from continuing operations to net cash (used) provided by operating activities: Depreciation 22,577 31,732 29,348 Amortization of goodwill - 2,769 2,829 Amortization of other intangibles 191 146 132 Impairment of long-lived assets - 1,559 548 Impairment of goodwill - 10,757 800 Gain on sale of Aqua Cool business (8,160) (102,834) - Provision for losses on accounts and notes receivable 4,491 4,482 5,104 Equity in earnings of affiliates (3,443) (1,396) (1,623) Deferred income tax expense (benefit) 1,459 (5,690) (2,092) Changes in assets and liabilities, net of effects of businesses acquired: Notes receivable (4,499) (6,538) (7,913) Accounts receivable 15,352 22,152 (47,757) Receivables from affiliated companies (8,917) (23,933) 439 Inventories (2,133) (1,061) (334) Other current assets (694) 3,894 (942) Investments in affiliated companies 4,861 782 3,443 Deferred income tax assets 1,685 (7,844) (16,366) Accounts payable and accrued expenses (13,445) (8,336) 20,390 Customer deposits 1,363 (2,682) 2,372 Deferred revenue from affiliates 5,493 3,360 - Income taxes payable (22,496) 51,425 15,260 Other (1,106) (5,567) 538 --------------------------------------- Net cash (used) provided by operating activities (2,567) 11,872 3,482 --------------------------------------- INVESTING ACTIVITIES: Additions to property, plant and equipment (32,787) (39,169) (38,167) Disposals of property, plant and equipment 1,836 1,567 11,325 Additional investments in affiliated companies (230) (4,799) (9,515) Proceeds from sale of Aqua Cool - 210,476 - (Purchase) sale of short-term investments (836) 413 (931) Acquisitions, net of cash acquired (1,035) - (4,491) --------------------------------------- Net cash (used) provided by investing activities (33,052) 168,488 (41,779) --------------------------------------- FINANCING ACTIVITIES: Restricted cash (4,250) - - Principal payments on current debt (73,678) (171,343) (97,891) Proceeds from borrowings of current debt 62,846 116,476 145,508 Principal payments on long-term debt (989) (1,390) (2,827) Proceeds from borrowings of long-term debt 553 1,294 5,666 Proceeds from issuance of common stock - 21,814 - Proceeds from stock option plans 1,661 4,990 2,734 --------------------------------------- Net cash (used) provided by financing activities (13,857) (28,159) 53,190 --------------------------------------- Effect of exchange rate changes on cash 5,962 (520) (362) Net cash (used) provided by continuing operations (43,514) 151,681 14,531 Net cash provided (used) by discontinued operations 1,278 1,105 (2,203) Net change in cash and cash equivalents (42,236) 152,786 12,328 Cash and cash equivalents at end of prior year 178,280 25,494 13,166 --------------------------------------- Cash and cash equivalents at end of current year $ 136,044 $ 178,280 $ 25,494 =======================================
The accompanying notes are an integral part of these consolidated financial statements. 19 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Common Stock Additional Other --------------------- Paid-In Retained Comprehensive Dollars in Thousands Shares Par Value Capital Earnings (Loss) Income - --------------------------------------------------------------------------------------------------------- Balance December 31, 1999 16,201,483 $ 16,201 $ 159,288 $ 199,304 $ (12,905) Comprehensive income: Net income - - - (1,870) - Translation adjustments, (tax $2,227) - - - - (6,333) Total comprehensive income Stock options exercised 163,200 164 2,570 - - Tax benefit of stock option activity - - 156 - - Shares issued to directors 4,346 4 100 - - Restricted stock shares issued 17,937 18 - - - Restricted stock shares forfeited (17,937) (18) - - - Adjustment of equity ownership - - - 182 - Amortization of unearned compensation - - - - - - --------------------------------------------------------------------------------------------------------- Balance December 31, 2000 16,369,029 16,369 162,114 197,616 (19,238) Comprehensive income: Net income - - - 44,701 - Other comprehensive income, net of tax: Translation adjustments, (tax $974) - - - - (4,112) Minimum pension liability adjustment, (tax $1,009) - - - - (1,646) Total comprehensive income Stock options exercised 228,650 229 4,761 - - Tax benefit of stock option activity - - 641 - - Shares issued to directors 4,326 4 100 - - Shares issued for private placement 875,000 875 20,939 - - - --------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 2001 17,477,005 17,477 188,555 242,317 (24,996) COMPREHENSIVE INCOME: NET INCOME - - - 4,792 - OTHER COMPREHENSIVE INCOME, NET OF TAX: TRANSLATION ADJUSTMENTS, (TAX $2,195) - - - - 9,844 MINIMUM PENSION LIABILITY ADJUSTMENT, (TAX $1,089) - - - - (1,776) TOTAL COMPREHENSIVE INCOME STOCK OPTIONS EXERCISED 72,937 73 1,588 - - TAX BENEFIT OF STOCK OPTION ACTIVITY - - 159 - - SHARES ISSUED TO DIRECTORS 5,104 5 115 - - - --------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 2002 17,555,046 $ 17,555 $ 190,417 $ 247,109 $ (16,928) ========================================================================================================= Total Unearned Stockholders' Dollars in Thousands Compensation Equity - ------------------------------------------------------------------------- Balance December 31, 1999 $ (36) $ 361,852 Comprehensive income: Net income - (1,870) Translation adjustments, (tax $2,227) - (6,333) ------------- Total comprehensive income (8,203) ------------- Stock options exercised - 2,734 Tax benefit of stock option activity - 156 Shares issued to directors - 104 Restricted stock shares issued - 18 Restricted stock shares forfeited - (18) Adjustment of equity ownership - 182 Amortization of unearned compensation 36 36 - ------------------------------------------------------------------------- Balance December 31, 2000 - 356,861 Comprehensive income: Net income - 44,701 Other comprehensive income, net of tax: Translation adjustments, (tax $974) - (4,112) Minimum pension liability adjustment, (tax $1,009) - (1,646) ------------- Total comprehensive income 38,943 ------------- Stock options exercised - 4,990 Tax benefit of stock option activity - 641 Shares issued to directors - 104 Shares issued for private placement - 21,814 - ------------------------------------------------------------------------- BALANCE DECEMBER 31, 2001 - 423,353 COMPREHENSIVE INCOME: NET INCOME - 4,792 OTHER COMPREHENSIVE INCOME, NET OF TAX: TRANSLATION ADJUSTMENTS, (TAX $2,195) - 9,844 MINIMUM PENSION LIABILITY ADJUSTMENT, (TAX $1,089) - (1,776) ------------- TOTAL COMPREHENSIVE INCOME 12,860 ------------- STOCK OPTIONS EXERCISED - 1,661 TAX BENEFIT OF STOCK OPTION ACTIVITY - 159 SHARES ISSUED TO DIRECTORS - 120 - ------------------------------------------------------------------------- BALANCE DECEMBER 31, 2002 $ - $ 438,153 =========================================================================
The accompanying notes are an integral part of these consolidated financial statements. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The Company is involved worldwide in the manufacture and sale of membranes, equipment for the purification, concentration, treatment and analysis of water and wastewater, in the supply of purified water, food and chemical products, and in the sale of home water purification equipment. Principal markets include the United States, Europe and Asia, as well as other international markets. Basis of Presentation Certain prior year amounts have been reclassified to conform to the current year presentation with no impact on net income. During the third quarter ended September 30, 2003, the Company's management and Board of Directors approved a plan of disposition to sell its consumer chemical business, the Elite Consumer Products division in Ludlow, MA, which is part of the Company's Consumer Water Group segment. Accordingly, the Company's consolidated financial statements and notes have been reclassified to reflect this business as a discontinued operation in accordance with Financial Accounting Standards Board Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." As part of the Company's adoption of a matrix business organization effective January 1, 2002, results associated with the Company's trailer leasing and non-consumer bleach based chemical supply businesses are included in the Ultrapure Water Group (UWG) segment, rather than the Equipment Business Group (EBG) segment where they had historically been presented. Segment information for all periods has been presented to reflect these changes. (See Note 18.) Revenue Recognition For certain contracts involving customized equipment eligible for contract accounting under American Institute of Certified Public Accountants ("AICPA") Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Construction-Type Contracts" (SOP 81-1), revenue is recognized using the percentage of completion accounting method based upon an efforts-expended method. The nature of these contracts and the types of products and services provided are considered in determining the proper accounting for a given contract. Long-term, fixed-price and cost plus fixed-fee contracts are recorded on a percentage of completion basis using the cost-to-cost method of accounting where revenue is recognized based on the ratio of costs incurred to estimated total costs at completion. The Company follows this method since reasonably dependable estimates of the costs of the total contract can be made. As a general rule, sales and profits are recognized earlier under the cost-to-cost method of percentage of completion accounting compared to the completed contract method. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions regarding schedules and technical issues. Due to the size and nature of the Company's long-term contracts, the estimation of cost at completion is complicated and subject to numerous variables. Contract costs include material, labor, subcontracting and other related costs. Assumptions must be made relative to the length of time to complete the contract. With respect to contract change orders, claims or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. Such amounts are only included in the contract value when they can be reliably estimated and realization is reasonably assured, generally upon receipt of a customer-approved change order. Given the significance of the judgments and estimation processes described above, it is likely that materially different amounts could be recorded if different assumptions were used or if underlying circumstances were to change. The Company closely monitors compliance and consistency of application of its critical accounting policies related to contract accounting. In addition, reviews of the status of contracts are performed through periodic contract status and performance reviews. In all cases, changes to total estimated costs and anticipated losses, if any, are recognized in the period in which determined. For contracts involving the sale of equipment to a joint venture or other unconsolidated affiliated entity in which the Company has an ownership interest, the extent of revenue and profit recognized while the contract is being performed varies based on the level of equity interest held by the Company. Generally, when the Company's equity ownership in the affiliated customer is less than 20% and accounts for such interest on a cost basis, no revenue or profit is eliminated as the contract is being performed. When the Company's equity ownership is between 20% and 50%, provided that the Company does not exercise effective control over the affiliated entity, the Company recognizes revenue as the contract is being performed but eliminates a portion of the profit equal to the Company's equity ownership percentage in the entity. After construction has been completed and commercial operations have 21 commenced, the resulting eliminated intercompany profit is amortized into revenue over the estimated useful life of the equipment owned by the affiliated entity. When the Company's equity ownership exceeds 50%, or in instances where the Company effectively controls the affiliated entity, no revenue or profit is recognized on the sale of equipment as the contract is executed, and all of the profit on the contract is eliminated and amortized over the estimated useful life of the equipment after construction has been completed and commercial operations have commenced. With respect to the Company's sale of equipment to Desalcott (the project company) in connection with the Trinidad project where the Company is a 40% equity owner of Desalcott, since the Company is considered to have provided all of the cash equity funding for the project either directly or through a loan to the Company's local majority partner, equipment revenue earned has been recognized to the extent of costs incurred as the contract is executed; however, all of the profit has been eliminated, and will be amortized over the estimated useful life of the equipment after construction has been completed and commercial operations have commenced. The "Revenues (Affiliated Companies)" and "Cost of sales to affiliated companies" included in the Statement of Operations reflect the revenue and costs recorded from the sales of equipment to joint ventures or other unconsolidated entities. Revenue is recognized in accordance with SOP 81-1 or with Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), as appropriate, less the amount of intercompany profit eliminated equal to the Company's ownership interest in the affiliated companies. Eliminated intercompany profit, as described above, is amortized over the useful life of the equipment placed in service by the affiliated company (e.g. 23 years of the Trinidad project, and 27 years for the Kuwait project). The Company believes that the amortization of the intercompany profits is not material to the Company's financial statements. The amount of deferred profit at December 31, 2002 was approximately $4.5 million. In addition to the construction and sale of customized equipment to its customers, the Company also enters into water and other concession agreements under which the Company "owns and operates" desalination or water treatment facilities to produce and supply water to its customers. Under these contracts, where the Company remains the owner of the facility or equipment, revenue and profit is recognized as water quantities are sold to the customer (or, alternatively, pursuant to a "take or pay" arrangement if minimum quantities are not purchased). More specifically, the revenue derived from these contracts is generally recognized based on actual meter readings and agreed-upon rates in effect during the term of the contract. The constructed equipment is capitalized by the Company, included in property, plant and equipment, and amortized to cost of sales over the shorter of the estimated useful life of the equipment or the contract term. For sales of standard products and equipment not governed by SOP 81-1, such as the sale of instruments and consumer water products, the Company follows the guidance provided by SAB 101. The Company does not recognize revenue unless there is persuasive evidence of an arrangement, title and risk of loss has passed to the customer, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. It is the Company's policy to require an arrangement with its customers, either in the form of a written contract or purchase order containing all of the terms and conditions governing the arrangement, prior to the recognition of revenue. Title and risk of loss generally pass to the customer at the time of delivery of the product to a common carrier. At the time of the transaction, the Company assesses whether the sale price is fixed or determinable and whether or not collection is reasonably assured. The Company assesses whether the sale price is fixed or determinable based upon the payment terms of the arrangement. If the sales price is not deemed to be fixed or determinable, revenue is recognized as the amounts become due from the customer. The Company does not generally offer a right of return on its products and the products are generally not subject to customer acceptance rights. The Company assesses collectibility based on a number of factors, including past transaction and collection history with a customer and the credit-worthiness of the customer. The Company performs ongoing credit evaluations of its customers' financial condition but generally does not require collateral from its customers. If the Company determines that collectibility of the sales price is not reasonably assured, revenue is deferred until such time as collection becomes reasonably assured, which is generally upon receipt of payment from the customer. The Company includes shipping and handling costs in revenue and cost of sales. The Company provides lease financing to consumers for the purchase of certain home water treatment systems. Prior to entering into the lease agreement, the Company evaluates the creditworthiness of its customer and generally collateralizes the lease receivable with a security interest in the customer's personal residence. At the time the lease transaction is consummated, the Company recognizes revenue for the full amount of the sales value of the equipment 22 and records a lease receivable on its balance sheet. Interest income is recognized by the Company over the term of the lease based on the interest rate stated in the lease. The Company evaluates the collectibility of its lease receivables based on its historical loss experience and assessment of prospective risk, and does so through ongoing reviews of its receivables portfolio. The Company provides support services to customers primarily through service contracts, and the Company typically recognizes support service revenue ratably over the term of the service contract or as services are rendered. The Company also rents equipment to customers under short-term rental agreements. The Company generally invoices customers monthly and recognizes revenue over the rental period based on amounts billed. The rental equipment is capitalized and depreciated to cost of sales over its estimated useful life. Cash Equivalents Short-term investments with an original maturity of 90 days or less from the date of acquisition are classified as cash equivalents. Restricted Cash At December 31, 2002, the Company had $4.3 million in restricted cash. This amount represents cash received from a customer that was pledged to decrease the banking fees associated with a letter of credit the Company issued against an advance payment it received for work to be performed on the Kuwait wastewater treatment facility. Investments Management determines the appropriate classification of its investment in debt securities at the time of purchase. Debt securities which the Company has the ability and positive intent to hold to maturity are classified accordingly and carried at amortized cost. The Company is not involved in activities classified as the trading of investments. Allowance for Doubtful Accounts The Company evaluates the adequacy of its reserve for doubtful accounts on an ongoing basis through detailed reviews of its receivables portfolio. Estimates are used in determining the Company's allowance for bad debts and are based on historical collection experience, current trends including prevailing economic conditions and adverse events that may affect a customer's ability to repay, percentage of accounts receivable by aging category, and other factors such as the financial condition of large customers. The Company makes adjustments to its reserve if the evaluation of reserve requirements differs from the actual aggregate reserve. This evaluation is inherently subjective because estimates may be revised as more information becomes available. Reserves for doubtful accounts are established through a charge to operations included in selling, general and administrative expenses. Notes Receivable Notes receivable have been reported at their estimated net realizable value. The allowance for uncollectible notes receivable totaled $707,000 and $561,000 at December 31, 2002 and 2001, respectively. Inventories Inventories are carried at the lower of cost (first-in, first-out basis) or market. Investments in Affiliated Companies The Company consolidates the balance sheet and results of operations of all wholly and majority owned subsidiaries and controlled affiliates. The Company also holds minority investments in certain private companies having complementary or strategic operations in different geographical locations around the world. These investments are included in investments in affiliates and include investments accounted for under the equity method of accounting. Under the equity method of accounting, which generally applies to investments that represent a 20% to 50% ownership of the equity securities of the affiliates, the Company's proportionate share of the earnings or losses of the affiliates is included in equity income. With respect to the Company's investment in Desalcott, the Company records 100% of any net loss and 40% of any net income reported by Desalcott. In periods in which Desalcott has an accumulated loss (as opposed to retained earnings), the Company records 100% of any net income of Desalcott up to the amount of Desalcott's accumulated loss, and 40% of any net income thereafter. Realization of the Company's investments in equity securities may be affected by the affiliate's ability to obtain adequate funding and execute its business plans, general market conditions, industry considerations specific to the affiliate's business, and other factors. 23 The ability of an affiliate to obtain future funding or successfully execute its business plan could adversely affect the Company's earnings in the periods affected by those events. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or in an inability to recover the carrying value of the investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future. The Company records an impairment charge when it believes an investment has experienced a decline in value that is other-than-temporary. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Maintenance and repair costs are expensed as incurred. Significant additions and improvements are capitalized and depreciated. When an asset is retired or sold, any resulting gain or loss is included in the results of operations. Interest payments on debt capitalized as property, plant and equipment amounted to $268,000, $81,000 and $320,000 in 2002, 2001 and 2000, respectively. In general, depreciation is computed on a straight-line basis over the expected useful lives of the assets, as follows:
Classification Depreciation Lives - -------------------------------------------------------------------------------------------- Buildings and improvements 10 - 40 years Machinery and equipment, including supply equipment 3 - 25 years Other 3 - 12 years
In certain situations the units of production method is utilized in order to achieve a more appropriate matching of revenues and expenses. The Company's policy is to depreciate processing plants, other than leased equipment, over the shorter of their useful lives or the term of the corresponding supply contracts. Impairment of Long-Lived Assets On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). In accordance with SFAS 144, the Company assesses the potential impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could indicate an impairment include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the Company's use of the acquired asset or the strategy for its overall business and significant negative industry or economic trends. When the Company determines that the carrying value of intangible and other long-lived assets may not be recoverable, the related estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are compared to the carrying amount of the asset. If the sum of the estimated future cash flows is less than the carrying amount, the Company records an impairment based on the estimated discounted cash flows using a discount rate determined by Company management to be commensurate with the associated risks Goodwill Goodwill represents the excess acquisition cost over the fair value of the net assets acquired in the purchase of various entities. On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) that requires, among other things, the discontinuance of goodwill amortization. In accordance with SFAS 142, amortization of goodwill was discontinued as of January 1, 2002. Prior to the adoption of SFAS 142, goodwill was amortized on a straight-line basis over its estimated useful life, which generally was a period ranging from 10 to 40 years. SFAS 142 requires the Company to evaluate goodwill for impairment on an annual basis. The Company evaluates the recoverability of goodwill annually in the fourth quarter, or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Fair values are primarily determined using a discounted cash flow methodology. The determination of discounted cash flows is based on the businesses' strategic plans and future forecasts. The revenue growth rates included in the plans are management's best estimates based on current and forecasted market conditions and the profit margin assumptions are projected by each reporting unit based on the current cost structure, as well as any anticipated cost reductions. The Company completed its annual impairment test in the fourth quarter of 2002 using its best estimate of forecasts for future periods. No adjustment was required to the carrying value of goodwill based on the analysis performed 24 Warranty Obligations The Company's products are generally subject to warranty and related costs are provided for in cost of revenues when revenue is recognized. While the Company engages in extensive product quality programs and processes, the Company's warranty obligation is based upon historical product failure rates and costs incurred in correcting a product failure. If actual product failure rates or the costs associated with fixing failures differ from historical rates, adjustments to the warranty liability may be required in the period in which determined. The changes in the carrying amount of product warranties for the year ended December 31, 2002 are as follows:
Dollars in thousands 2002 -------------------- -------- Balance at end of prior year $ 844 Accruals for warranties issued during the period 934 Accruals related to pre-existing warranties 15 Settlements made (in cash or in kind) during the period (1,168) ------- Balance at end of year $ 625 =======
Research and Development All research and development costs are expensed as incurred. Foreign Exchange Assets and liabilities of foreign affiliates and subsidiaries, for which the local currency is the functional currency, are translated into U.S. dollars at year-end exchange rates, and the related statements of operations are translated at average exchange rates during the year. Translation gains and losses are accumulated net of income tax as a separate component of stockholders' equity. Some transactions of the Company and its subsidiaries are made in currencies different from their functional currency. Gains (losses) on these transactions or balances are included in selling, general and administrative expense as they occur. Net foreign currency transaction gains (losses) included in income before income taxes and minority interest totaled $2.8 million, $(0.6) million and $(0.8) million for 2002, 2001 and 2000, respectively. Income Taxes The Company estimates income taxes in each of the jurisdictions in which it operates and involves an assessment of permanent and temporary differences resulting from differing treatment of items for tax and book accounting purposes. Temporary differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company must also assess the likelihood that any deferred tax assets will be recovered, and must establish a valuation allowance to the extent that it believes that it is more likely than not any deferred tax asset will not be utilized from future taxable income. To the extent the Company has established a valuation allowance, income tax expense is recorded in the statement of operations. At any time, the Company's income tax expense could be impacted by changes in tax laws, or by administrative actions or court rulings. The Company has taken tax positions in its worldwide corporate income tax filings based on careful interpretations of global statutes, rules, regulations and court decisions that may be applied and interpreted differently by various taxing jurisdictions. These taxing jurisdictions may or may not challenge the Company's application and interpretation of a wide body of tax jurisprudence. However, the Company does not anticipate that any sustained challenge by any taxing jurisdiction could have a material adverse effect on its financial position or net income. The Company has elected not to provide tax on certain undistributed earnings of its foreign subsidiaries which it considers to be permanently reinvested. The cumulative amount of such unprovided taxes was approximately $9.7 million, $8.2 million and $5.1 million as of December 31, 2002, 2001 and 2000, respectively. Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding while giving effect to all potentially dilutive common shares that were outstanding during 25 the period calculated using the treasury stock method which determines the additional common shares that are issuable upon the exercise of outstanding stock options. Comprehensive Income (Loss) The Company reports comprehensive income (loss) in the Statements of Stockholders' Equity. For 2002, comprehensive income was $12.9 million and consisted of net income, foreign currency translation adjustments and minimum pension liability adjustment, net of tax effect. In 2001 and 2000, comprehensive income (loss) was $38.9 million and $(8.2) million, respectively, consisting primarily of net income (loss) and translation adjustments, net of tax effect. Derivative Instruments The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138 in the first quarter of 2001. SFAS 133 requires all derivatives to be recognized on the balance sheet at fair value. The adoption of SFAS 133 did not have a material impact on the Company's financial position or results of operations. The Company conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of the Company's foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign denominated monetary assets and anticipated cash flows. The terms of currency instruments used for hedging purposes are consistent with the timing of the transactions being hedged. The Company does not use derivative financial instruments for trading or speculative purposes. For purposes of presentation within the statement of cash flows, derivative gains and losses are presented within cash provided by operating activities. The Company enters into foreign currency forward contracts to hedge its exposures associated with a portion of its forecasted revenue transactions. These derivative instruments are designated as foreign currency cash flow hedges. All outstanding derivatives are recognized on the balance sheet at fair value and changes in their fair value are recorded in accumulated other comprehensive income (loss) until the underlying forecasted transaction occurs. Once the underlying forecasted transaction is realized, the gain or loss from the derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income (loss) to the statement of operations in the related revenue caption. In the event the underlying forecasted transaction does not occur, the amount recorded in accumulated other comprehensive income (loss) will be reclassified to selling, general and administrative expense in the statement of operations in the then-current period. No amounts were reclassified from accumulated other comprehensive income (loss) to "Selling, general and administrative expense" during 2002, 2001 or 2000. The Company's cash flow hedges generally mature within two years or less. The Company also enters into foreign exchange forward contracts to hedge its exposures associated with foreign-currency denominated assets and liabilities. These derivative instruments are designated as foreign currency fair value hedges. The derivatives are recognized on the balance sheet at fair value and period-end changes in fair value are recorded in selling, general and administrative expense in the statement of operations. Since the Company is using foreign exchange derivative contracts to hedge foreign exchange exposures, the changes in the value of the derivatives are highly effective in offsetting changes in the cash flows of the hedged item. Hedge effectiveness is assessed on a quarterly basis. Any ineffective portion of the derivatives designated as cash flow hedges is recognized in current earnings in "Selling, general and administrative expense." The ineffective portion of the derivatives consists of discounts or premiums on forward contracts and gains or losses associated with differences between actual and forecasted amounts. In any instance in which the designated hedged item matures, is terminated, or, in the case of an anticipated transaction, is deemed unlikely to occur, the related derivative contract is closed and any gain or loss is immediately recognized in the Statement of Operations in "Selling, general and administrative expense." Accounting for Stock-Based Compensation The Company applies the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its stock-based compensation plans. Accordingly, any difference between the option price and the fair market value of the stock at the date of grant is charged to operations over the expected period of benefit to the Company. During 2002, 2001 and 2000, no stock-based compensation expense is reflected in net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. 26 The following table illustrates the pro forma effect on net income and earnings per share if the Company had applied the fair value method of accounting for stock options and other equity instruments defined by SFAS No. 123, "Accounting for Stock-Based Compensation." The effect of applying SFAS No. 123 in the pro forma disclosure are not indicative of future awards, which are anticipated. SFAS No. 123 does not apply to awards prior to 1995.
(Amounts in thousands, except per share amounts) 2002 2001 2000 ------------------------------- Income (loss) from continuing operations, as reported $ 4,854 $ 44,695 $ (694) (Loss) income from discontinued operations, as reported (62) 6 (1,176) ------------------------------- Net income (loss), as reported $ 4,792 $ 44,701 $ (1,870) Less: Stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects 2,652 2,596 3,047 ------------------------------- Pro forma net income (loss) $ 2,140 $ 42,105 $ (4,917) =============================== Earnings (loss) per basic share from continuing operations, as reported $ 0.28 $ 2.61 $ (0.04) (Loss) earnings per basic share from discontinued operations, as reported 0.00 0.00 (0.07) ------------------------------- Earnings (loss) per basic share, as reported $ 0.27 $ 2.61 $ (0.12) =============================== Earnings (loss) per basic share, pro forma $ 0.12 $ 2.46 $ (0.30) =============================== Earnings (loss) per diluted share from continuing operations, as reported 0.27 2.59 (0.04) (Loss) earnings per diluted share from discontinued operations, as reported 0.00 0.00 (0.07) ------------------------------- Earnings (loss) per diluted share, as reported $ 0.27 $ 2.59 $ (0.12) =============================== Earnings (loss) per diluted share, pro forma $ 0.12 $ 2.44 $ (0.30) ===============================
The fair value of each option granted during 2002, 2001 and 2000 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
2002 2001 2000 ---- ---- ---- Expected term (years) 6 5 5 Volatility 42.2% 38.6% 37.4% Risk-free interest rate (zero coupon U.S. treasury note) 3.7% 4.9% 6.3% Dividend yield NONE None None
Use of Estimates The preparation of financial statements, in conformity with generally accepted accounting principles in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 27 RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." SFAS No. 143 provides the accounting requirements for retirement obligations associated with tangible long-lived assets. SFAS No. 143 is effective for financial statements for fiscal years beginning after June 15, 2002. The Company does not believe that SFAS No. 143 will have a material impact on its financial position or results of operations. In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002." SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that statement. SFAS No. 145 amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for financial statements for fiscal years beginning after May 15, 2002. The Company does not believe that SFAS No. 145 will have a material impact on the Company's financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not believe that SFAS No. 146 will have a material impact on the Company's financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). Along with new disclosure requirements, FIN 45 requires guarantors to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. This differs from the current practice to record a liability only when a loss is probable and reasonably estimable; FIN 45 also requires a guarantor to provide enhanced disclosures concerning guarantees, even when the likelihood of making a payment under the guarantee is remote. The recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 while the enhanced disclosure requirements are effective for periods ending after December 15, 2002. The Company does not believe that the adoption of FIN 45 will have a material impact on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" which amended SFAS No. 123, "Accounting for Stock-Based Compensation". This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. It also amends the disclosure provisions to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. The provisions of this Statement are to be applied to financial statements for fiscal years ending after December 15, 2002. The adoption of SFAS 148 will not have a material impact on the Company's financial position or results of operations. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46). This interpretation addresses the consolidation of certain variable interest entities (VIEs) for which a controlling financial interest exists. FIN 46 applies immediately to financial interests obtained in VIEs after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to VIEs in which a financial interest was obtained before February 1, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment or by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. The Company has a financial interest in certain entities that may be considered VIEs under FIN 46 (See Notes 5 and 9 for additional information concerning 28 Investments in Affiliated Companies). The Company is currently evaluating the impact of FIN 46 on its Investments in Affiliated Companies and if the Company determines that it has a controlling financial interest in any of these entities, consolidation may be required. The ultimate effect of adopting FIN 46 on the Company s financial position or results of operations has not yet been determined. NOTE 2. CONSOLIDATED BALANCE SHEET DETAILS
Dollars in Thousands 2002 2001 - --------------------------------------------------------------------------- Raw materials $ 17,706 $ 17,290 Work in process 6,628 6,445 Finished goods 6,363 3,973 - --------------------------------------------------------------------------- Inventories $ 30,697 $ 27,708 =========================================================================== Land $ 5,527 $ 6,238 Buildings 40,179 36,322 Machinery and equipment 259,471 229,194 Other, (includes furniture, fixtures and vehicles) 31,742 29,182 - --------------------------------------------------------------------------- 336,919 300,936 Accumulated depreciation (170,124) (147,529) - --------------------------------------------------------------------------- Property, plant and equipment, net $ 166,795 $ 153,407 =========================================================================== Customer deposits $ 4,114 $ 2,159 Accrued expenses 39,757 60,075 - --------------------------------------------------------------------------- Other current liabilities $ 43,871 $ 62,234 ===========================================================================
NOTE 3. SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Dollars in Thousands 2002 2001 2000 - -------------------------------------------------------------------------------------- Cash payments for interest and income taxes: Interest $ 1,520 $ 6,093 $4,662 Taxes $ 21,503 $ 1,865 $6,974
NOTE 4. ACCOUNTS RECEIVABLE
Dollars in Thousands 2001 2001 - ------------------------------------------------------------------------- Billed receivables $ 77,208 $ 75,131 Unbilled receivables 21,530 36,959 Allowance for doubtful accounts (6,023) (4,123) - ------------------------------------------------------------------------- Accounts receivable, net $ 92,715 $107,967 =========================================================================
Unbilled receivables represent the excess of revenues recognized on percentage of completion contracts over amounts billed. These amounts will become billable as the Company achieves certain contractual milestones. Substantially all of the unbilled amounts at December 31, 2002 are expected to be billed during 2003. Billed receivables include retainage amounts of $4,351,000 and $5,581,000 at December 31, 2002 and 2001, respectively. Substantially all of the retainage amounts are expected to be collected within one year. 29 NOTE 5. INVESTMENTS IN AFFILIATED COMPANIES The Company's investments in the following affiliates are accounted for under the equity method. The principal business activities of these foreign affiliates involve the production, sale and distribution of treated or bottled water, the sale of membranes, equipment and replacement parts, and the ownership and operation of water treatment facilities.
OWNERSHIP AFFILIATE PERCENTAGE - ----------------------------------------------------------------------------------- Aqua Cool Kuwait - Kuwait 49% Aqua Cool Saudi Arabia - Saudi Arabia 40% Aqua Design Ltd. - Cayman Islands 39% Carmel Desalination Ltd. - Israel 33% Desalination Company of Trinidad and Tobago Ltd. - Trinidad 40% Grupo Empresarial de Mejoramiento Ambiental, S. de R.L. de C.V. - Mexico 20% Jalal-Ionics - Bahrain 40% Magan Desalination Ltd. - Israel 49% Toray Membrane America, Inc. - Massachusetts, USA 43% UTE El Reventon - Spain 50% UTE Tamaino - Spain 50% Utilities Development Company, W.L.L. - Kuwait 25% Watlington Waterworks, Ltd. - Bermuda 26% Yuasa-Ionics Co., Ltd. - Japan 50%
The Company's percentage ownership interest in affiliates may vary from its interest in the earnings of such affiliate. Activity in investments in affiliated companies:
Dollars in Thousands 2002 2001 2000 - ---------------------------------------------------------------------------------- Investments at end of prior year $ 23,798 $ 18,310 $ 10,752 Equity in earnings, net 3,443 1,396 1,623 Distributions received (3,734) (1,511) (2,092) Cumulative translation adjustments and other (344) 804 (99) Reclassification of Agrinord S.r.l. resulting from change in ownership interest - - (1,389) Reclassification to long-term notes receivable from Utilities Development Company (775) - - Additional investments 230 4,799 9,515 - ---------------------------------------------------------------------------------- Investments at end of current year $ 22,618 $ 23,798 $ 18,310 ==================================================================================
At December 31, 2002 and 2001, the Company's equity in the net assets of its affiliates was $20.6 million and $21.9 million, respectively. The difference between the carrying amount and the underlying equity in net assets is being amortized into equity over the estimated useful life of the related intangible asset. Grupo Empresarial de Mejoramiento Ambiental, S. de R.L. C.V. ("GEMA") was formed in 1991. GEMA was incorporated to design and construct wastewater treatment plants and provide wastewater collection, treatment, conduction and distribution services. The carrying value of the Company's investment in GEMA was approximately $3.8 million and $4.6 million, respectively, at December 31, 2002 and 2001, and is included in "Investments in affiliated companies" in the Consolidated Balance Sheets. During 2002 and 2001, the Company received $2.2 million and $1.4 million, respectively, of cash dividends from GEMA. 30 Summarized financial information of GEMA is presented as follows (dollars in thousands):
December 31, ---------------------- 2002 2001 -------- -------- Current assets $ 16,375 $ 16,417 Non-current assets 37,428 47,188 -------- -------- Total assets $ 53,803 $ 63,605 ======== ======== Current liabilities $ 10,288 $ 10,310 Non-current liabilities 24,381 30,466 -------- -------- Total liabilities $ 34,669 $ 40,776 ======== ========
Years ended December 31, ------------------------ 2002 2001 -------- -------- Sales $ 38,803 $ 35,800 Cost of sales 13,586 12,960 Operating income 20,370 17,817 Income before income taxes 14,743 15,954 Net income 9,910 11,227
NOTE 6. DISCONTINUED OPERATIONS On August 14, 2003, the Company's management and Board of Directors approved a plan of disposition to sell its consumer chemical business, the Elite Consumer Products division in Ludlow, MA, which is part of the Company's Consumer Water Group segment. Accordingly, the Company's consolidated financial statements and notes have been reclassified to reflect this business as a discontinued operation in accordance with Financial Accounting Standards Board Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company recorded asset impairment charges related to its decision to abandon plans to commence bleach-manufacturing operations in Elkton, Maryland. In 2001 and 2000, these impairment charges amounted to $0.7 million and $2.0 million, respectively. The Elkton plant and equipment were part of a Company strategy to expand bleach manufacturing in the mid-Atlantic market. This strategy included the potential acquisition by the Company of a regional bleach manufacturer, but negotiations relating to the potential acquisition ceased during the fourth quarter of 2000. The impairment charge recorded in 2000 was consequently derived by writing off the net book value of specific equipment for which there was no salvage value or anticipated use within the Company. Due to overcapacity in the bleach manufacturing industry (as evidenced by the exit of other bleach manufacturers in the Northeast), the Company was subsequently unable during 2001 to utilize or otherwise sell the remaining equipment and consequently wrote off the remaining $0.7 million net book value. The summary of operating results from discontinued operations is as follows: 31
For the years ended December 31, -------------------------------- 2002 2001 2000 -------------------------------- Net sales $15,044 $ 18,579 $ 16,493 Gross margin 546 1,667 1,189 ------- -------- --------- (Loss) income from discontinued operations, before income tax (101) 9 (1,912) Income tax (benefit) expense (39) 3 (736) ------- -------- --------- (Loss) income from discontinued operations, net of tax $ (62) $ 6 $ (1,176) ======= ======== =========
Assets and liabilities from discontinued operations at December 31, 2002 and 2001 consisted of the following:
December 31, December 31, 2002 2001 ------------ ------------ Working capital assets $ 13,286 $ 13,869 Property, plant and equipment, net 7,330 8,330 ------------ ------------ Assets from discontinued operations $ 20,616 $ 22,199 ============ ============ Liabilities from discontinued operations $ 486 $ 732
NOTE 7. IMPAIRMENT OF LONG-LIVED ASSETS During 2001 and 2000, the Company wrote down approximately $12.3 million and $1.3 million, respectively, of impaired long-lived assets. In 2001, the write-downs included approximately $9.2 million to reduce the carrying value of assets held for sale related to the Company's divestiture of its majority-owned Malaysian subsidiary and $3.1 million of goodwill associated with previous acquisitions. In late 2001, the Company began negotiations to sell its majority-owned Malaysian subsidiary to the subsidiary minority shareholders. In early 2002, the Company had signed a term sheet for the disposition of the Malaysian subsidiary and the sale was completed in May 2002. Accordingly, at December 31, 2001, the Company recorded an impairment charge of approximately $9.2 million, representing the difference between the Company's 55% ownership interest in the net asset value of the Malaysian subsidiary (principally property, plant and equipment, and goodwill) and the anticipated net proceeds from the sale of the subsidiary of approximately $1.0 million. Additionally, $0.8 million of goodwill impairment was recognized in 2000 relating to an acquisition made in 1996. NOTE 8. GOODWILL AND INTANGIBLE ASSETS In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," amortization of goodwill was discontinued as of January 1, 2002. All of the Company's intangible assets are subject to amortization. The Company did not record any reclassification of amounts of intangible assets into or out of the amounts previously reported as goodwill. As of June 30, 2002, the Company completed the transitional goodwill impairment test and determined that no adjustment to goodwill was necessary. 32 The following tables reflect the adjustments to selected consolidated financial information to present pro forma amounts which exclude amortization of goodwill:
(Amounts in thousands, except per share amounts) For the years ended December 31, ------------------------------------------------ 2001 2000 -------- --------- Income (loss) from continuing operations $ 44,695 $ (694) Goodwill amortization, net of tax 2,188 2,228 -------- --------- Adjusted income from continuing operations $ 46,883 $ 1,534 ======== ========= Reported basic earnings (loss) from continuing operations per share $ 2.61 $ (0.04) Goodwill amortization, net of tax 0.13 0.14 -------- --------- Adjusted basic earnings from continuing operations per share $ 2.74 $ 0.10 ======== ========= Reported diluted earnings (loss) from continuing operations per share $ 2.59 $ (0.04) Goodwill amortization, net of tax 0.13 0.14 -------- --------- Adjusted diluted earnings from continuing operations per share $ 2.72 $ 0.10 ======== =========
The changes in the carrying amount of goodwill for the years ended December 31, 2002 and 2001 are as follows:
Equipment Ultrapure Consumer Instrument Business Water Water Business Dollars in thousands Group Group Group Group Corporate Total - ------------------------------------------------------------------------------------------------------------------ Balance December 31, 2000 $ 11,920 $ 17,524 $ 20,741 $ 1,864 $ - $ 52,049 Goodwill acquired during the year - - 141 - - 141 Sale of Aquacool - - (18,865) - - (18,865) Impairment losses - (9,222) - (1,794) - (11,016) Amortization expense (595) (767) (1,337) (70) - (2,769) Cumulative translation adjustment/other 35 (481) (139) - - (585) - ------------------------------------------------------------------------------------------------------------------ Balance December 31, 2001 11,360 7,054 541 - - 18,955 GOODWILL ACQUIRED DURING THE YEAR - 597 - - - 597 CUMULATIVE TRANSLATION ADJUSTMENT/OTHER 263 (18) 321 - - 566 - ------------------------------------------------------------------------------------------------------------------ BALANCE DECEMBER 31, 2002 $ 11,623 $ 7,633 $ 862 $ - $ - $ 20,118 ==================================================================================================================
The Company's net intangible assets included in other assets in the Consolidated Balance Sheets consist principally of patents and trademarks. At December 31, 2002 and 2001 the gross carrying value of these intangible assets was approximately $2.6 million and $1.5 million, respectively, and the accumulated amortization was $0.6 million and $0.3 million, respectively. All of the Company's intangible assets are subject to amortization and are amortized on a straight-line basis over a period ranging up to 20 years. Amortization expense for intangible assets is estimated to be approximately $0.3 million in 2003 through 2005, $0.2 million in 2006 and $0.1 million in 2007. NOTE 9. COMMITMENTS AND CONTINGENCIES Litigation The Company and its Chief Executive Officer and Chief Financial Officer have been named as defendants in a class action lawsuit captioned Jerome Deckler v. Ionics, Inc., et al., filed in the U.S. District Court, District of Massachusetts in March 2003. Plaintiff alleges violations of the federal securities laws relating to the restatement of the Company's financial statements for the first and second quarters of 2002 announced in November 2002. The Company believes the allegations in the lawsuit are without merit and intends vigorously to defend the litigation. While the Company believes that the litigation will have no material adverse impact on its financial condition, results of operations or cash flows, the litigation process is inherently uncertain and the Company can make no assurances as to the ultimate 33 outcome of this matter. The Company is involved in the normal course of its business in various other litigation matters, some of which are in the pre-trial discovery stages. The Company believes that none of the other pending matters will have an outcome material to the Company's financial position or results of operations or cash flows. The Company was notified in 1992 that it is a potentially responsible party (PRP) at a Superfund Site, Solvent Recovery Services of New England in Southington, Connecticut. Ionics' share of assessments to date for site work and administrative costs totals approximately $77,000. The United States Environmental Protection Agency ("EPA") has not yet issued a decision regarding clean-up methods and costs. However, based upon the large number of PRPs identified, the Company's small volumetric ranking (approximately 0.5%) and the identities of the larger PRPs, the Company believes that its liability in this matter will not have a material effect on the Company or its financial position, results of operations or cash flows. In 2002, Sievers Instruments, Inc. ("Sievers"), a wholly owned subsidiary of the Company, filed a patent infringement suit in the United States District Court for the District of Colorado against Anatel Corporation and against Anatel's acquiring company, Hach Company ("Anatel"). The suit alleges that Anatel's manufacture and sale of its Model 643 organic carbon analyzer unlawfully copied and interfered with sales of Sievers' TOC 400 total organic carbon analyzer in that the Model 643 infringes certain claims of Sievers' U.S. patents No. 5,976,468 and No. 6,271,043. The suit further asserts that the continuing sale of calibration standards by Anatel constitutes infringement. The defendants have raised certain defenses, withdrawn the accused product from the market, and introduced a redesigned analyzer. Defendants have asked the Court to rule that their redesigned analyzer does not infringe, and the Court has not yet issued its decision. The case is in early stages of discovery. Other From time to time, the Company enters into joint ventures with respect to specific projects, including the projects in Trinidad, Kuwait and Israel described below. Each joint venture arrangement is independently negotiated based on the specific facts and circumstances of the project, the purpose of the joint venture company related to the project, as well as the rights and obligations of the other joint venture partners. Generally, the Company has structured its project joint ventures so that the Company's obligation to provide funding to the underlying project or to the joint venture entity is limited to its proportional capital contribution, which can take the form of equity or subordinated debt. Except in situations that are negotiated with a specific joint venture entity as discussed below, the Company has no other commitment to provide for the joint venture's working capital or other cash needs. In addition, the joint venture entity typically obtains third-party debt financing for a substantial portion of the project's total capital requirements. In these situations, the Company is typically not responsible for the repayment of the indebtedness incurred by the joint venture entity. In connection with certain joint venture projects, the Company may also enter into contracts for the supply and installation of the Company's equipment during the construction of the project, for the operation and maintenance of the facility once it begins operation, or both. These commercial arrangements do not require the Company to commit to any funding for working capital or any other requirements of the joint venture company. As a result, the Company's exposure with respect to its joint ventures is typically limited to its debt and equity investments in the joint venture entity, the fulfillment of any contractual obligations it has to the joint venture entity and the accounts receivable owing to the Company from the joint venture entity. In the second quarter of 2002, construction was completed on the first four (out of five) phases of the Trinidad desalination facility owned by Desalination Company of Trinidad and Tobago Ltd. ("Desalcott"), in which the Company has a 40% equity interest, and the facility commenced water deliveries to its customer, the Water and Sewerage Authority of Trinidad and Tobago. In 2000, the Company acquired 200 ordinary shares of Desalcott for $10 million and loaned $10 million to Hafeez Karamath Engineering Services Ltd. ("HKES"), the founder of Desalcott and promoter of the Trinidad desalination project, to enable HKES to acquire an additional 200 ordinary shares of Desalcott. Prior to those investments, HKES owned 100 ordinary shares of Desalcott. As a result, the Company currently owns a 40% equity interest in Desalcott, and HKES currently owns a 60% equity interest in Desalcott. The Company's $10 million loan to HKES is included in notes receivable, long-term on the Company's Consolidated Balance Sheets. The loan bears interest at a rate equal to 2% above the London Interbank Offered Rate (LIBOR), with interest payable starting October 25, 2002 and every six months thereafter and at maturity. Prior to maturity, however, accrued interest payments (as well as principal payments) are payable only to the extent dividends or other 34 distributions are paid by Desalcott on the ordinary shares of Desalcott owned by HKES and pledged to the Company. Principal repayment is due in 14 equal installments commencing on April 25, 2004 and continuing semiannually thereafter. The loan matures and is payable in full on April 25, 2011. The loan is secured by a security interest in the shares of Desalcott owned by HKES and purchased with the borrowed funds, which is subordinate to the security interest in those shares in favor of the Trinidad bank that provided the construction financing for Desalcott. In addition, any dividends or other distributions paid by Desalcott to HKES must be applied to loan payments to the Company. In 2000, Desalcott entered into a "bridge loan" agreement with a Trinidad bank providing $60 million in construction financing. Effective November 8, 2001, the loan agreement was amended to increase maximum borrowings to $79.9 million. The Company is obligated to lend up to $10 million to Desalcott as an additional source of funds for project completion costs once all bridge loan proceeds have been expended. However, the bridge loan of $79.9 million and the $20 million equity provided to Desalcott (together with the additional $10 million dollars the Company is obligated to lend to Desalcott) have not provided sufficient funds to pay all of Desalcott's obligations in completing construction and commissioning of the project prior to receipt of long-term financing. Included in Desalcott's obligations is approximately $30.1 million payable to the Company's Trinidad subsidiary for equipment and services purchased in connection with the construction of the facility. The Company currently intends to convert $10 million of this amount into a loan to Desalcott to satisfy the Company's loan commitment described above. The terms of this loan are currently being negotiated with Desalcott. Although the Company currently anticipates that Desalcott will pay its remaining outstanding obligations to the Company's subsidiary partially out of cash flow from the sale of water and from the proceeds from new long-term debt financing, Desalcott has disputed certain amounts payable under the construction contract, and this matter is now subject to the dispute resolution procedures of the contract. The Company does not believe resolution of these matters will have a material impact on its results of operations or cash flows. Desalcott has received proposals for new long-term debt financing, including a term sheet and a draft term loan agreement from the Trinidad bank which provided the bridge loan and is currently negotiating the terms of the financing. Such new long-term debt financing may not be completed on terms acceptable to Desalcott, or at all. Moreover, although the Trinidad bank that made the bridge loan to Desalcott has not required repayment of the bridge loan, which matured on September 1, 2002, pending completion of the long-term debt financing. There can be no assurance that the bank will not exercise its rights and foreclose on its collateral, in which event the Company's equity investment in, and receivable from, Desalcott as well as the loan receivables from HKES would all be at risk. During 2001, the Company acquired a 25% equity interest in a Kuwaiti project company, Utilities Development Company W.L.L. ("UDC"), which was awarded a concession agreement by an agency of the Kuwaiti government for the construction, ownership and operation of a wastewater reuse facility in Kuwait. During the second quarter of 2002, UDC entered into agreements for the long-term financing of the project, and accordingly the Company commenced recognizing revenue in accordance with American Institute of Certified Public Accountants Statement of Position No. SOP 81-1. At December 31, 2002, the Company had invested a total of $2.6 million in UDC as equity contributions and subordinated debt. The Company is committed to make additional contributions of equity or subordinated debt to UDC of $15.9 million over a two to three year period. In 2001, the Company entered into agreements with an Israeli cooperative society and an Israeli corporation for the establishment of Magan Desalination Ltd. ("MDL") as an Israeli project company in which the Company has a 49% equity interest. In August 2002, MDL entered into a concession contract with a state-sponsored water company for the construction, ownership and operation of a brackish water desalination facility in Israel. At December 31, 2002, the Company had not yet made an equity investment in MDL, and had deferred costs of approximately $0.6 million relating to the design and development work on the project. The Company currently anticipates that it will invest approximately a total of $1.2 million in MDL for its 49% equity interest. MDL is currently seeking approximately $7.2 million of debt financing for the project. If MDL is unable to obtain such debt financing, the Company would expense all its deferred costs relating to the project and any investment the Company may have made in MDL, but would incur no other liability, inasmuch as no performance bond has been issued for the project. In January 2002, the Company entered into agreements with two Israeli corporations giving the Company the right to a one-third ownership interest in an Israeli project company, Carmel Desalination Ltd. ("CDL"). On October 28, 2002, CDL was awarded a concession agreement by the Israeli Water Desalination Agency (established by the Ministry of Finance and the Ministry of Infrastructure) for the construction, ownership and operation of a major seawater desalination facility in Israel. At December 31, 2002, the Company made an equity investment of $0.2 million in CDL, and had deferred costs of approximately $0.4 million relating to the engineering design and development work on the 35 project. If CDL obtains long-term project financing, the Company's total equity investment to be made in CDL would be approximately $8.0 million. The timing of such investment will depend upon the terms of the long-term financing agreement. The terms of the concession agreement require that long-term financing be obtained by April 2003 and CDL has requested an extension to October 2003 to obtain such financing. Although the Company currently anticipates that CDL will obtain long-term financing for the project, if CDL is unable to obtain such financing, the Company would expense all its deferred costs relating to the project and any investment the Company may have made in CDL (estimated to be approximately $0.8 million by the time of the closing of the long-term financing). Additionally, the Company could incur its one-third proportionate share ($2.5 million) of liability under a $7.5 million performance bond issued on behalf of CDL. On December 31, 2001, the Company completed the sale of its Aqua Cool Business in the United States, United Kingdom and France to affiliates of Perrier-Vittel S.A., a subsidiary of Nestle S.A. (Nestle). As a result of final purchase price adjustments based on the number of customers and working capital levels, and the resolution of certain claims made by Nestle, the Company and Nestle reached final agreement on a purchase price of approximately $207.0 million in the first quarter of 2003. As a result of such adjustments, the Company realized an additional net pre-tax gain of $8.2 million in 2002. The 2002 pre-tax gain is net of direct and incremental costs of the transaction including approximately $3.4 million of non-recurring management and employee compensation. In connection with the final resolution, the $10 million held in escrow pursuant to the divestiture agreement and approximately $2.9 million in cash from the Company were delivered to Nestle effective as of March 31, 2003. Guarantees and Indemnifications In the normal course of business, the Company issues letters of credit to customers, vendors and lending institutions as guarantees for payment, performance or both under various commercial contracts into which it enters. Bid bonds are also sometimes obtained by the Company as security for the Company's commitment to proceed with a project if it is the successful bidder. Performance bonds are typically issued for the benefit of the Company's customers as financial security for the completion or performance by the Company of its contractual obligations under certain commercial contracts. These instruments are not reflected on the Company's balance sheet as a liability because they will not result in a liability to the Company unless the Company fails to perform the contractual obligations which are secured by the corresponding instrument. In the past, the Company has not incurred significant liabilities or expenses as a result of the use of these instruments. Approximately $136.6 million and $77.3 million of these guarantees were outstanding at December 31, 2002 and 2001, respectively. Approximately 48% of the guarantees outstanding at December 31, 2002 are scheduled to expire in 2003. These instruments were executed with creditworthy institutions. Under its By-laws, the Company has an obligation to indemnify its directors and officers to the extent legally permissible against liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or officer of the Company. The Company has agreements to provide additional consideration in a business combination to the seller if contractually specified conditions related to the acquired entity are achieved. At December 31, 2002, the Company's exposure on these liabilities was not material to its financial position and results of operations. The Company provided such guarantees after considering the economics of the transaction, and the liquidity and credit risk of the other party in the transaction. The Company believes that the likelihood is remote that any such arrangement could have a significant adverse effect on its financial position, results of operation or liquidity. The Company records liabilities, as disclosed above, for such guarantees based on the Company's best estimate of probable losses which considers amounts recoverable under any recourse provisions. NOTE 10. LONG-TERM DEBT AND NOTES PAYABLE
Dollars in thousands 2002 2001 - ------------------------------------------------------------------ Borrowings outstanding $13,804 $24,383 Less installments due within one year 4,134 14,257 - ------------------------------------------------------------------ Long-term debt and notes payable $ 9,670 $10,126 ==================================================================
The Company maintains several foreign lines of credit. The Company's primary domestic credit facility, a $30 million 36 line of credit with FleetBank, expired on March 26, 2003. The Company is currently negotiating a new credit line with FleetBank, which will provide for lower total borrowings in light of the Company's current cash position. The Company also maintains other international unsecured credit facilities under which the Company may borrow up to an aggregate of $8.4 million. At December 31, 2002, the Company's total outstanding borrowings, including long-term debt, under all of its existing credit facilities were $13.8 million. The Company had no outstanding borrowings at December 31, 2002 and borrowings of $10.0 million at December 31, 2001 against its domestic lines of credit. Maturities of borrowings outstanding for the five years ending December 31, 2003 through 2007 are approximately $4.1 million, $1.4 million, $1.4 million, $1.5 million, $1.5 million and $3.9 million thereafter, respectively. Under foreign lines of credit, excluding those related to specific project financing, the Company had approximately $8.4 million available for borrowing at interest rates ranging from 5.4% to 9.0% at December 31, 2002. The Company had outstanding borrowings of $2.9 million and $7.7 million against these lines of credit at December 31, 2002 and 2001, respectively. The Company has arranged lines of credit totaling $10.0 million for its controlled affiliate in Barbados to provide project financing for a desalination plant at LIBOR plus 2.0% (3.4% at December 31, 2002) for its $6.4 million line, at a fixed rate of 8.0% for its $2.7 million line and at a fixed rate of 8.75% for its $0.9 million line. These lines of credit are payable in equal quarterly installments over a ten-year period which began in 2000. The controlled affiliate had outstanding borrowings of $7.4 million and $8.3 million against these lines of credit at December 31, 2002 and 2001, respectively. The Company utilizes other short-term bank loans to finance working capital requirements for certain business units. These loan and note agreements contain certain financial covenants relating to working capital, cash flow, capital expenditures and consolidated tangible net worth. The weighted-average interest rate on all borrowings was 6% at both December 31, 2002 and 2001. 37 NOTE 11. INCOME TAXES The components of domestic and foreign income from continuing operations before income taxes and minority interest were as follows:
Dollars in Thousands 2002 2001 2000 - ---------------------------------------------------------------------------- U.S. $ 734 $ 4,260 $(15,062) Non-U.S. 10,036 81,934 14,750 - ---------------------------------------------------------------------------- Income (loss) before income tax expense and minority interest $10,770 $86,194 $ (312) ============================================================================
Income tax (expense) benefit consisted of the following:
Dollars in Thousands 2002 2001 2000 - ---------------------------------------------------------------------------- Federal $ (68) $ (7,960) $ 3,275 Foreign (3,187) (37,246) (5,304) State (233) (2,720) 637 - --------------------------------------------------------------------------- Current provision (3,488) (47,926) (1,392) - --------------------------------------------------------------------------- Federal (1,071) (605) (94) Foreign (156) 6,316 1,546 State (232) (21) (40) - --------------------------------------------------------------------------- Deferred (provision) benefit (1,459) 5,690 1,412 - --------------------------------------------------------------------------- Income tax (expense) benefit $(4,947) $(42,236) $ 20 ===========================================================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 2002, the tax effects of the temporary differences were: 38
DEFERRED DEFERRED TAX Dollars in Thousands TAX ASSETS LIABILITIES - -------------------------------------------------------------------------------- Depreciation $ - $ 12,628 Amortization - 1,670 Inventory valuation 1,382 - Bad debt reserves 1,384 - Legal 970 - Accrued commissions 558 - Profit on sales to foreign subsidiaries 726 - Insurance accruals 580 - U.S. tax on unrepatriated earnings - 13,358 Alternative minimum tax credits 3,370 - Foreign withholding taxes on undistributed earnings - 1,594 Foreign deferred taxes 4,881 1,160 Tax effect of currency translation loss 5,111 - Net operating loss carryforwards 4,209 - Miscellaneous 9,922 5,674 - -------------------------------------------------------------------------------- 33,093 36,084 Valuation allowance for deferred tax assets (3,739) - - -------------------------------------------------------------------------------- Deferred income taxes $ 29,354 $ 36,084 ================================================================================
The United States statutory corporate tax rate is reconciled to the Company's effective tax rate for continuing operations as follows:
2002 2001 2000 - -------------------------------------------------------------------------------- U.S. Federal statutory rate 35.0% 35.0% 34.0% Foreign sales corporation/ETI exclusion (3.5) (0.7) 250.1 Goodwill - 6.6 (245.2) State income taxes, net of federal tax benefit 3.6 2.1 122.0 Foreign rate differential (8.4) (3.6) 382.3 U.S. tax on non-permanently reinvested foreign earnings 5.2 4.3 (437.4) Net change in valuation allowance 10.8 5.3 - Non-deductible charges 1.3 0.2 (99.4) Other, net 1.9 (0.2) - - ------------------------------------------------------------------------------- Effective tax rate 45.9% 49.0% 6.4% ===============================================================================
At December 31, 2002, the Company had unused tax loss carryforwards of $13.8 million which expire beginning in 2010. Because of the uncertainty of the realization of the tax benefits of losses incurred in certain foreign jurisdictions, the Company has established $3.7 million as a valuation allowance at December 31, 2002. $2.1 million of deferred tax benefit related to the minimum pension liability adjustment recorded in other comprehensive income has been included in other assets at December 31, 2002. Additionally, $0.7 million of current deferred tax liability has been included in income taxes payable at December 31, 2002. The Company has elected not to provide tax on certain undistributed earnings of its foreign subsidiaries which it considers to be permanently reinvested. The cumulative amount of such unprovided taxes was approximately $9.7 million, $8.2 million and $5.1 million as of December 31, 2002, 2001 and 2000, respectively. 39 NOTE 12. STOCKHOLDERS' EQUITY Stock Option Plans Under the Company's 1997 Stock Incentive Plan ("1997 Plan"), incentive stock options, non-qualified stock options, and long-term performance awards may be awarded to officers and other key employees and to consultants. The 1997 Plan contains an automatic addition provision under which a number of shares equal to two percent (2%) of the Company's outstanding stock were added to the 1997 Plan at the end of each of the four fiscal year-ends following adoption of the 1997 Plan, commencing on December 31, 1997 and ending December 31, 2000. At December 31, 2002 and 2001, there were 775,323 and 637,023 shares, respectively, reserved for issuance of additional options under the 1997 Plan after giving effect to the automatic addition provision. Options granted under the 1997 Plan have a term of 10 years and vest over a five-year period, except that options become fully vested if an option holder retires after reaching age 65. Only non-qualified stock options have been granted under the 1997 Plan. Under the Company's 1986 Stock Option Plan for Non-Employee Directors ("1986 Plan"), which has now expired, options were granted at a price not less than the fair market value of the stock at the date of grant. The options become fully exercisable after a six-month period, are exercisable only during certain "window" periods, and have a term of ten years and one day. As of December 31, 2002 and 2001, 0 and 29,000 shares, respectively, were reserved for issuance of additional options under the 1986 Plan. The 1986 Plan expired effective December 31, 2002. On February 25, 2003 the Company adopted the 2003 Non-Employee Directors Stock Option Plan ("2003 Plan") to replace the expired 1986 Plan, subject to the approval of the stockholders at the 2003 annual meeting. Under the 2003 Plan, options will be granted at a price not less than the fair market value of the stock at the date of grant. The options become fully exercisable after a six month period and have a term of ten years. Subject to stockholder approval, a total of 200,000 shares have been reserved for issuance under the 2003 Plan. The Company has adopted a restricted stock plan ("1994 Plan") under which shares of common stock may be granted to officers and other key employees of the Company. Restrictions on the sale of such common stock typically lapse over a five-year vesting period. No shares were granted under the 1994 Plan in 2002 or 2001. In 2000, 17,937 shares were granted under the restricted stock plan to an executive officer. The executive officer subsequently terminated his employment with the Company in 2000, and the restricted stock was forfeited pursuant to the 1994 Plan. As of December 31, 2002, a total of 280,178 shares remain reserved for issuance under the 1994 Plan. On August 19, 1998, the Company adopted the 1998 Non-Employee Directors' Fee Plan ("Fee Plan"). The Fee Plan permits non-employee directors to elect to receive payment of their annual retainer fee in common stock instead of cash. The valuation of the common stock is based on the last reported sales price of the common stock on the New York Stock Exchange on the trading date next preceding the date of the Board meeting at which payment will be made. Annual retainer fees are paid in two equal installments during the year. A total of 83,423 shares were reserved for issuance under the Fee Plan as of December 31, 2002. A summary of the status of the Company's stock option plans as of December 31, 2002, 2001 and 2000 and changes during the years ending on those dates is presented below:
2002 2001 2000 ----------------- ----------------- ------------------ WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise Options in Thousands OPTIONS PRICE Options Price Options Price - -------------------------------------------------------- ----------------- ------------------ Outstanding at end of prior year 2,889 $ 28.77 3,226 $ 28.38 2,734 $ 30.04 Granted 790 21.54 65 26.94 941 22.28 Exercised (73) 22.91 (229) 21.84 (163) 16.74 Canceled (103) 29.87 (173) 30.22 (286) 30.70 - ------------------------------------------------------------------------------------------------ Outstanding at end of current year 3,503 $ 27.21 2,889 $ 28.77 3,226 $ 28.38 Options exercisable at year-end 2,085 $ 30.24 1,873 $ 30.88 1,835 $ 30.86
40 The weighted average fair value of options granted were $9.95, $11.32 and $9.65 per option during 2002, 2001 and 2000, respectively. The following table summarizes the information about stock options outstanding at December 31, 2002:
OPTIONS IN THOUSANDS OPTIONS OUTSTANDING OPTIONS EXERCISABLE - --------------------------------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACT EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING YEARS PRICE EXERCISABLE PRICE - --------------------------------------------------------------------------------- $19.75-$23.74 1,695 7.3 $ 21.24 525 $ 20.88 $24.24-$26.50 364 3.0 24.51 341 $ 24.45 $27.06-$27.88 61 4.6 27.56 35 $ 27.55 $28.00-$29.88 777 5.8 29.48 601 $ 29.45 $30.00-$33.81 44 7.6 31.98 21 $ 32.93 $42.38-$48.18 562 3.8 43.43 562 $ 43.43 - -------------------------------------------------------------------------------- $19.75-$48.18 3,503 5.9 $ 27.21 2,085 $ 30.24
Other Plans The Company has a Section 401(k) stock savings plan under which 150,000 shares have been registered with the Securities and Exchange Commission for purchase on behalf of employees. Shares are normally acquired for the plan in the open market. Through December 31, 2002, no shares had been issued under the plan. The Company has adopted a Renewed Stockholder Rights Plan designed to protect stockholders against abusive takeover tactics. Each share of common stock now carries one right. Each right entitles the holder to purchase from the Company one share of common stock (or in certain circumstances, to receive cash, property or other securities of the Company) at a purchase price of $175 subject to adjustment. In certain circumstances, rights become exercisable for common stock (or a combination of cash, property or other securities of the Company) worth twice the exercise price of the right. The rights are not exercisable until the occurrence of certain events as defined in the Renewed Stockholder Rights Plan. The rights may be redeemed by the Company at $.01 per right at any time unless certain events occur. Unless redeemed earlier, the rights, which have no voting power, expire on August 19, 2007. 41 NOTE 13. EARNINGS PER SHARE CALCULATIONS (EPS)
Dollars and shares in thousands, Except per share amounts FOR THE YEAR ENDED 2002 For the Year Ended 2001 For the Year Ended 2000 - -------------------------------------------------------------------- ----------------------------- ----------------------------- INCOME Income Loss FROM from from CONTINUING PER SHARE Continuing Per Share Continuing Per Share OPERATIONS SHARES AMOUNT Operations Shares Amount Operations Shares Amount ----------------------------- ----------------------------- ----------------------------- Basic EPS Income (loss) from continuing operations available to common stockholders $ 4,854 17,541 $ 0.28 $ 44,695 17,106 $ 2.61 $ (694) 16,243 $ (0.04) Effect of dilutive stock options - 130 - - 140 (0.02) - - - - -------------------------------------------------------------------- ----------------------------- ----------------------------- Diluted EPS $ 4,854 17,671 $ 0.27 $ 44,695 17,246 $ 2.59 $ (694) 16,243 $ (0.04) ==================================================================== ============================= =============================
The effect of dilutive stock options excludes those stock options for which the impact would have been antidilutive based on the exercise price of the options. The number of options that were antidilutive at December 31, 2002, 2001 and 2000 were 1,818,000, 608,750 and 1,649,000, respectively. The number of options that were antidilutive at December 31, 2000 include 175,000 shares whose dilutive effect was included as a result of the Company's net loss. NOTE 14. OPERATING LEASES The Company leases equipment, primarily for industrial water purification and, until December 31, 2001, bottled water coolers to customers through operating leases. The original cost of this equipment was $114.7 million and $95.3 million at December 31, 2002 and 2001, respectively. The accumulated depreciation for such equipment was $51.4 million and $42.7 million at December 31, 2002 and 2001, respectively. The bottled water coolers were sold on December 31, 2001 as part of the sale of the Company's bottled water business. At December 31, 2002, future minimum rentals receivable under noncancelable operating leases in the years 2003 through 2007 and later were approximately $32.9 million, $28.8 million, $26.4 million, $25.7 million, $23.9 million and $123.4 million, respectively. The Company leases facilities and personal property under various operating leases. Future minimum payments due under lease arrangements are as follows: $4.0 million in 2003, $3.7 million in 2004, $2.7 million in 2005, $1.7 million in 2006 and $3.5 million in 2007 and later. Rent expense under these leases was approximately $4.2 million, $7.0 million and $5.7 million for 2002, 2001 and 2000, respectively. NOTE 15. PROFIT-SHARING AND PENSION PLANS The Company has a contributory profit-sharing plan (defined contribution plan) which covers employees of the Company who are members of the Fabricated Products Group of the Bridgeville division. The Company contributions to the defined contribution plan are made from the group's pre-tax profits, may vary from 8% to 15% of participants' compensation, and are allocated to participants' accounts in proportion to each participant's respective compensation. Company contributions were $446,000, $375,000 and $300,000 in 2002, 2001 and 2000, respectively. The Company also has a contributory defined benefit pension plan ("Retirement Plan") for all other domestic employees. Benefits are based on years of service and the employee's average compensation. The Company's funding policy is to contribute annually an amount that can be deducted for federal income tax purposes. The plan's assets are comprised of money market funds, equity funds, short-term bonds and intermediate-term bonds. In 2002, the Board of Directors approved a "prior period update" to January 1, 1996, so that the base monthly salary for participants in the Retirement Plan at each January 1 prior to January 1, 1996 is deemed to be the same as it was on January 1, 1996. The following table sets forth the defined benefit plan's funded status and amounts recognized in the Company's balance sheets at December 31, 2002 and 2001: 42
Dollars in Thousands 2002 2001 - ------------------------------------------------------------------------ Change in Benefit Obligation: Benefit obligation as of prior year-end $ 19,494 $ 15,799 Service cost 1,446 1,285 Interest cost 1,397 1,206 Assumption changes - (205) Actuarial loss 1,868 1,500 Expenses paid 822 660 Benefits paid (1,275) (751) - ------------------------------------------------------------------------ Projected benefit obligation $ 23,752 $ 19,494 ======================================================================== Change in Plan Assets: Fair value of plan assets as of prior year-end $ 14,297 $ 14,923 Actual return on plan assets (124) 248 Company contributions 2,890 - Expenses paid (123) (123) Benefits paid (1,275) (751) - ------------------------------------------------------------------------ Fair value of plan assets $ 15,665 $ 14,297 ======================================================================== Funded Status: Funded status as of year-end $ (8,087) $ (5,197) Unrecognized transition asset (44) (97) Unrecognized prior service cost 266 299 Unrecognized net actuarial loss 9,773 5,822 Intangible asset (267) (300) Accumulated other comprehensive loss (5,782) (2,617) - ------------------------------------------------------------------------ Accrued benefit cost $ (4,141) $ (2,090) ========================================================================
The Company determined the defined benefit plan's funded status and amounts recognized in the Company's balance sheet and the expense of the defined benefit plan using the following assumptions: expected return on plan assets of 7.0% at December 31, 2002 and 9.0% at December 31, 2001 and 2000; rate of compensation increase of 5.0% at December 31, 2002, 2001 and 2000; and a discount rate of 6.50%, 7.00%, and 7.50% at December 31, 2002, 2001 and 2000, respectively. Net periodic benefit cost consisted of the following:
Dollars in Thousands 2002 2001 2000 - --------------------------------------------------------------------------- Components of Net Periodic Benefit Cost: Service cost $ 1,446 $ 1,285 $ 1,055 Interest cost 1,397 1,206 1,107 Expected return on plan assets (1,372) (1,309) (1,445) Amortization of transition asset (53) (53) (53) Amortization of prior service cost 33 37 37 Recognized net actuarial loss 356 141 - - --------------------------------------------------------------------------- Net periodic benefit cost $ 1,807 $ 1,307 $ 701 ===========================================================================
The Ionics Section 401(k) Stock Savings Plan is available to substantially all U.S. employees of the Company. 43 Employees may contribute from 1% to 12% of compensation subject to certain limits. The Company matches 50% of employee contributions allocated to the Company's common stock up to 6% of their salary. The Company recognized expense of $659,000, $725,000 and $716,000 in 2002, 2001 and 2000, respectively, under this plan. In 1996, the Company's Board of Directors adopted a Supplemental Executive Retirement Plan for officers and key employees of the Company ("SERP"). The purpose of the SERP is to permit officers and other key employees whose base salary exceeds the maximum pay upon which retirement benefits may be accrued in any year to accrue retirement benefits on base salary in excess of that amount, equivalent to the benefits that would have been accrued under the Retirement Plan if base salary levels over that amount could be taken into account in calculating benefits under the Retirement Plan. The Company recognized expense of $98,000 and $50,000 in 2002 and 2000, respectively. No expense was recognized in 2001. The liability accrued as of December 31, 2002 and 2001 related to the plan was $505,000 and $406,000, respectively. The SERP is administered by the Compensation Committee of the Board of Directors. The Company generally does not provide post-retirement health care benefits to its employees or any other post-retirement benefits other than those described above. NOTE 16. FINANCIAL INSTRUMENTS Off-Balance-Sheet Risk On December 31, 2002, the Company entered into a series of U.S. dollar/euro forward contracts with the intent of offsetting the foreign exchange risk associated with forecasted cash flows related to an ongoing project. Because the contracts were executed on the last day of the year, the fair market value of the contracts is zero. In future periods, the fair market value of the contracts will be recorded in either the current assets or current liabilities section of the Consolidated Balance Sheets. End of period changes in the market value of the contracts will be recorded as a component of other comprehensive income in the "Stockholders' Equity" section of the Consolidated Balance Sheets. In 2002, the Company also entered into a foreign exchange contract to hedge the balance sheet exposure related to an intercompany loan. The fair market value of the contract, which was immaterial, was recorded in the "Other current assets" section of the Consolidated Balance Sheets. The end of period change in the fair market value of the contract which was immaterial, was recorded in income. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, investments, trade accounts receivable and notes receivable. The credit risk of cash equivalents and investments is low as the funds are primarily invested in money market investments and in Spanish Government securities. The Company's concentrations of credit risk with respect to trade accounts receivable and notes receivable is considered low. The Company's customer base is spread across many different industries and geographies, and the Company obtains guarantees or letters of credit for many of its foreign orders. Fair Value of Financial Instruments The carrying amounts of cash equivalents, investments, accounts payable and accrued expenses closely approximate their fair values as these items have relatively short maturities and are highly liquid. Based on market information, the carrying amounts of notes receivable and debt approximate their fair values. Investments in Marketable Securities Realized gains and losses from the sale of debt and equity securities during fiscal 2002 and 2001 were not significant. Long-term investments, maturing in 2004 and 2005, which the Company intends to hold to maturity have been recorded at a net cost of $1.5 million and $2.1 million at December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001, the Company also had short-term investments of $1.0 million and $21,000, respectively, which the Company intends to hold to maturity. The cost of these investments approximates fair value. NOTE 17. ACQUISITIONS AND DIVESTITURES Acquisitions 44 In June 2002, the Company's Australian subsidiary acquired the business and assets of Rudd Brothers, an Australian wholesale and retail distributor of chemical and cleaning products, for approximately $0.6 million in cash. This acquisition has been accounted for under the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired based on their estimated fair values at the date of acquisition. The assets acquired consist primarily of property, plant and equipment, inventory, and certain intangibles. The results of operations of Rudd Brothers have been included in the Company's statements of operations from the date of acquisition. Pro forma results of operations have not been presented, as the effect of this acquisition on the Company's consolidated results of operations was not material. In July 2002, the Company acquired the business and assets of the EnChem division of Microbar Incorporated. The purchase price was $0.4 million in cash plus additional contingent payments to be made over a five-year period based on the profitability of the acquired business. This acquisition has been accounted for under the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired based on their estimated fair values at the date of acquisition. The assets acquired consist primarily of patents and other intellectual property, inventory and equipment, and are used for wastewater treatment in the semiconductor industry. The results of operations of the EnChem division have been included in the Company's statements of operations from the date of acquisition. Pro forma results of operations have not been presented, as the effect of this acquisition on the Company's consolidated results of operations was not material. Divestitures In May 2002, the Company completed its planned divestiture of its 55% equity interest in a Malaysian affiliate, which had previously been treated as "held for sale" and included in "Other current assets" at December 31, 2001. Included in the Company's first half results were revenues of $4.2 million and a $0.4 million pre-tax loss resulting from Malaysian operations. For the second quarter of 2002, revenues totaled $1.6 million and pre-tax profit amounted to $0.2 million, including a gain of approximately $0.7 million on the sale of the Company's equity interest in the Malaysian subsidiary, which is included in "Selling, general and administrative" expenses. On December 31, 2001, the Company completed the sale of its Aqua Cool Pure Bottled Water business operations in the United States, the United Kingdom and France to affiliates of Perrier-Vittel, S.A., a subsidiary of Nestle, S.A. for approximately $220 million, of which $10 million was placed in escrow pursuant to the terms of the divestiture agreement. The Aqua Cool Business had sales of $76.2 million in 2001 and $67.2 million in 2000, losses before taxes and interest of $0.6 million in 2001 and $0.9 million in 2000. The Company's Consolidated Financial Statements and accompanying Notes reflect the operating results of the Aqua Cool Business as a continuing operation in the Consumer Water Group through December 31, 2001. The amount of the purchase price was subject to final adjustment based on the number of customers and working capital levels as defined in the divestiture agreement. Including reserves established for any purchase price adjustments and direct and incremental costs, the Company recorded a pre-tax gain on the sale amounting to $102.8 million in 2001. As a result of final purchase price adjustments based on the number of customers and working capital levels, and the resolution of certain claims made by Nestle, the Company and Nestle reached final agreement on a purchase price of approximately $207.0 million in the first quarter of 2003 and the $10 million held in escrow and approximately $2.9 million in cash from the Company were delivered to Nestle effective as of March 31, 2003. As a result of such adjustments, the Company realized an additional pre-tax gain of $8.2 million in 2002. NOTE 18. SEGMENT INFORMATION In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Since 1998, the Company has been reporting four "business group" segments corresponding to a "business group" structure put into place in the latter part of 1998. Starting in 2002, as part of the matrix organization, the lease of trailers for the production of ultrapure water is included in the results of the Ultrapure Water Group, rather than the Equipment Business Group, where such results had been included through 2001. In addition, the Company's non-consumer bleach-based chemical supply business, which through 2001 had been included in the results of the Equipment Business Group, is included in the results of the Ultrapure Water Group starting in 2002. The discussion and financial results contained in this Annual Report on Form 10-K reflect these changes for all periods presented. These segments are summarized as follows: Equipment Business Group - The EBG engages in the following activities: 45 - - Manufacture and sale of water purification and treatment equipment and processes from components to turnkey plants, including: - membrane-based equipment for seawater or brackish water desalination; - membrane-based equipment for surface water treatment; - equipment for wastewater treatment, including membrane-based equipment; brine concentrators, crystallizers and evaporators (zero liquid discharge (ZLD) equipment); and traditional wastewater treatment equipment. - - Supply of water for drinking and industrial use through ownership and/or operation of desalination or other water treatment facilities. - - Fabrication of specialty metal components for industrial and defense-related applications. - - Provision of food processing services through oversight for customers of whey-processing activities using the Company's membrane-based systems. Ultrapure Water Group - The UWG engages in the following activities: - - Manufacture and sale of equipment, from components to turnkey systems, utilizing various membrane-based and other technologies for the production of ultrapure (very highly purified) water to customers in various industries including microelectronics, pharmaceuticals and power generation. - - Production and sale of ultrapure and high quality process water through ownership and/or operation of ultrapure water facilities. - - Production of sodium hypochlorite and related chlor-alkali chemicals for industrial, municipal, commercial and other non-consumer applications (prior to 2002, this activity was part of EBG). - - Leasing of trailer-based ultrapure water equipment (prior to 2002, this activity was part of the EBG). - - Manufacture and sale of ozone-generation equipment. - - Regeneration of ion-exchange resin for industrial customers. Consumer Water Group - Until December 31, 2001, the largest business group within the CWG was the Company's Aqua Cool Pure Bottled Water division, which engaged in the U.S., U.K. and France in the production of purified drinking water and water deliveries in five-gallon bottles to homes and offices. This business was sold on December 31, 2001 to subsidiaries of Perrier-Vittel, S.A. The Company retains equity ownership interests in certain joint ventures in the bottled water business in Saudi Arabia, Kuwait and Bahrain. The CWG continues to engage in the following activities: - - Manufacture and sale of "point-of-entry" home water treatment equipment, including ion-exchange water conditioners to "soften" hard water and bacteriostatic treatment equipment, and related chemicals and media for filtration and treatment. - - Manufacture and sale of "point-of-use" over- and under-the-sink water purifiers. - - Provision of consumer finance services in connection with the sale of home water treatment equipment. Instrument Business Group - The IBG engages in the following activities: - - Manufacture and sale of laboratory and on-line instruments for the measurement of impurities in water ranging in quality from ultrapure process water to wastewater, including: 46 - total organic carbon (TOC) analyzers; - on-line boron analyzers; - instruments for the measurement of other water-borne contaminants, including total carbon, sulfur, nitric oxide, and total oxygen demand, and; - instruments for the detection of thin layers of oil on water. Geographic Areas Revenues are reflected in the country from which the sales are made. Long-lived assets include all long-term assets except for notes receivable. No foreign country's revenues from sales to unaffiliated customers or long-lived assets were material. Included in the United States segment are export sales of approximately 11%, 19% and 15% for 2002, 2001 and 2000, respectively. Including these U.S. export sales, the percentages of total revenues attributable to activities outside the U.S. were 40%, 44% and 42% in 2002, 2001 and 2000, respectively. 47 Additional information about the Company's business segments is set forth in the following table: Information about the Company's operations by geographic area follows:
UNITED DOLLARS IN THOUSANDS STATES INTERNATIONAL TOTAL - ---------------------------------------------------------------------------------- 2002 REVENUE - UNAFFILIATED CUSTOMERS $ 191,434 $ 116,725 $ 308,159 REVENUE - AFFILIATED COMPANIES 6,263 5,905 12,168 ----------------------------------------------- TOTAL REVENUE 197,697 122,630 320,327 LONG-LIVED ASSETS 144,694 84,836 229,530 - ---------------------------------------------------------------------------------- 2001 Revenue - unaffiliated customers $ 281,117 $ 145,817 $ 426,934 Revenue - affiliated companies 20,826 393 21,219 ----------------------------------------------- Total Revenue 301,943 146,210 448,153 Long-lived assets 131,920 85,523 217,443 - ---------------------------------------------------------------------------------- 2000 Revenue - unaffiliated customers $ 286,854 $ 151,480 $ 438,334 Revenue - affiliated companies 19,724 - 19,724 ----------------------------------------------- Total Revenue 306,578 151,480 458,058 Long-lived assets 172,211 127,162 299,373 - ----------------------------------------------------------------------------------
No single country outside the United States contributed more than 10% in 2002, 2001 or 2000 of the Company's total revenues. Additional information about the Company's business segments is set forth in the following table: 48
Equipment Ultrapure Consumer Instrument Business Water Water Business Dollars in Thousands Group Group Group Group Corporate Total - ----------------------------------------------------------------------------------------------------------------------------- 2002 Revenue - unaffiliated customers $ 154,378 $ 102,407 $ 23,633 $ 27,741 $ - $ 308,159 Revenue - affiliated companies 11,695 - 74 399 - 12,168 Inter-segment transfers 2,521 2,743 - 1,568 (6,832) - Gross profit - unaffiliated 40,127 23,984 13,240 16,022 - 93,373 Gross profit - affiliated 967 - 37 199 - 1,203 Equity income (loss) 2,638 7 953 - (155) 3,443 Earnings (loss) from continuing operations before interest, tax, minority interest, and gain on sale 4,731 (2,171) (4,274) 3,920 (1,844) 362 Interest income - - - - - 3,463 Interest expense - - - - - (1,215) Income from continuing operations before income taxes, minority interest, and gain on sale - - - - - 2,610 Capital employed 201,900 125,103 57,252 27,716 39,986 451,957 Identifiable assets 297,948 139,383 106,328 30,729 11,007 585,395 Investments in affiliated companies 20,285 - 2,333 - - 22,618 Goodwill 11,623 7,633 862 - - 20,118 Other intangible assets 1,009 740 - 279 - 2,028 Depreciation and amortization 8,843 11,864 795 971 295 22,768 Capital expenditures 13,382 17,250 626 1,037 492 32,787 ============================================================================================================================= 2001 Revenue - unaffiliated customers $ 161,565 $ 133,605 $ 105,169 $ 26,595 $ - $ 426,934 Revenue - affiliated companies 20,571 - 203 445 - 21,219 Inter-segment transfers 2,521 2,743 - 1,568 (6,832) - Gross profit - unaffiliated 34,808 26,457 48,139 13,839 - 123,243 Gross profit - affiliated 217 - 102 223 - 542 Equity income (loss) 1,441 68 (57) - (56) 1,396 Earnings (loss) from continuing operations before interest, tax, minority interest, and gain on sale 4,161 (5,490) (1,575) 942 (10,525) (12,487) Interest income - - - - - 1,013 Interest expense - - - - - (5,166) Income from continuing operations before income taxes, minority interest, and gain on sale - - - - - (16,640) Capital employed 190,319 130,154 63,493 31,062 32,708 447,736 Identifiable assets 289,045 126,943 49,453 25,641 118,433 609,515 Investments in affiliated companies 20,983 - 2,815 - - 23,798 Goodwill 11,360 7,054 541 - - 18,955 Other intangible assets 823 23 162 305 - 1,313 Depreciation and amortization 8,510 12,567 12,288 997 285 34,647 Capital expenditures 9,612 16,135 11,656 1,015 751 39,169 ============================================================================================================================= 2000 Revenue - unaffiliated customers $ 162,060 $ 156,396 $ 91,460 $ 28,418 $ - $ 438,334 Revenue - affiliated companies 18,961 - 371 392 - 19,724 Inter-segment transfers 6,087 3,444 - 3,088 (12,619) - Gross profit - unaffiliated 32,900 32,492 40,623 15,820 - 121,835 Gross profit - affiliated 970 - 186 196 - 1,352 Equity income (loss) 976 (20) 667 - - 1,623 Earnings (loss) from continuing operations before 5,694 6,777 1,038 2,598 (12,796) 3,311 interest, tax, and minority interest Interest income - - - - - 1,286 Interest expense - - - - - (4,909) Loss from continuing operations before income taxes and minority interest - - - - - (312) Capital employed 120,061 176,432 164,819 34,126 (52,621) 442,817 Identifiable assets 221,488 175,421 163,281 18,454 (11,141) 567,503 Investments in affiliated companies 15,394 44 2,872 - - 18,310 Goodwill 11,920 17,524 20,741 1,864 - 52,049 Other intangible assets 926 39 179 316 1,460 Depreciation and amortization 7,598 11,685 11,784 1,098 144 32,309 Capital expenditures 705 21,019 13,990 766 1,687 38,167 =============================================================================================================================
49 NOTE. 19. SELECTED QUARTERLY FINANCIAL DATA AS RESTATED (UNAUDITED)
Earnings Earnings from from Continuing Continuing Income Operations Operations Dollars in Thousands from Per Per Except Per Gross Continuing Basic Diluted Share Amounts Revenues Profit Operations Share Share - ------------------------------------------------------------------------------ 2002 First Quarter $ 75,947 $ 22,440 $ 1,430 $ 0.08 $ 0.08 Second Quarter 76,457 24,278 1,185 0.07 0.07 Third Quarter 83,485 22,797 387 0.02 0.02 Fourth Quarter 84,438 25,061 1,852 0.11 0.11 - ------------------------------------------------------------------------------ $ 320,327 $ 94,576 $ 4,854 $ 0.28 $ 0.27 ==============================================================================
Earnings Earnings from from Continuing Continuing Income Operations Operations Dollars in Thousands from Per Per Except Per Gross Continuing Basic Diluted Share Amounts Revenues Profit Operations Share Share - ------------------------------------------------------------------------------ 2001 First Quarter $ 117,795 $ 35,362 $ 2,808 $ 0.17 $ 0.17 Second Quarter 109,882 34,730 4,114 0.24 0.24 Third Quarter 113,652 33,119 4,005 0.23 0.23 Fourth Quarter 106,824 20,574 33,768 1.93 1.92 - ------------------------------------------------------------------------------ $ 448,153 $123,785 $ 44,695 $ 2.61 $ 2.59 ==============================================================================
The Company's consolidated financial statements for the three months ended March 31, 2002 and June 30, 2002 and the six months ended June 30, 2002 were restated primarily as a result of intercompany transactions including transactions between the Company and its French subsidiary that were erroneously recorded at the subsidiary level. The restatement resulted primarily from the French subsidiary's failure to properly record intercompany adjustments necessary to correct errors on its books, which became apparent to the Company's corporate management during the preparation of the Company's consolidated financial statements for the three- and nine-month periods ended September 30, 2002. These adjustments primarily affected accounting entries related to revenues from sales of spare parts and expenses related to project cost overruns, sales support costs and severance costs. These adjustments, which increased the historical pre-tax loss at the French subsidiary in the quarters ended March 31, 2002 and June 30, 2002 and the forecast of the French subsidiary's pre-tax losses for the year ended December 31, 2002, resulted in the Company's determination that it was more likely than not that the Company would not fully realize future tax benefits associated with the French subsidiary's net operating losses. Accordingly, the Company's income tax expense and its effective annual tax rate for the three months ended June 30, 2002 were increased. In addition, the restatement reflected other adjustments that primarily consisted of corrections to various otherwise immaterial accounting errors that were identified during the preparation of the Company's consolidated financial statements for the quarters ended March 31, 2002, June 30, 2002 and September 30, 2002. The restatement did not materially impact any items on the Company's consolidated balance sheets as of March 31, 2002 and June 30, 2002. The following table presents a summary of the impact of the restatements on the Company's consolidated statements of operations for the three months ended March 31, 2002 and the three and six months ended June 30, 2002.
(Amounts in thousands, except per share amounts) Three months ended March 31, 2002 ------------------------------------- As originally reported As restated ------------- ----------- Revenues $ 76,282 $ 75,946 Costs and expenses 74,389 74,744 Income from continuing operations 1,893 1,202 Income from continuing operations before income taxes and minority interest 3,218 2,527 Income tax expense 1,089 833 Minority interest in earnings 261 264 Income from continuing operations 1,868 1,430 Basic earnings from continuing operations per share $ 0.10 $ 0.08 Diluted earnings from continuing operations per share $ 0.09 $ 0.08
50
(Amounts in thousands, except per share amounts) Three months ended June 30, 2002 ------------------------------------- As originally reported As restated ------------- ----------- Revenues $ 76,281 $ 76,457 Costs and expenses 74,360 75,125 Income from continuing operations 1,921 1,332 Income from continuing operations before and minority interest 3,195 2,606 Income tax expense 1,082 1,260 Minority interest in earnings 79 161 Income from continuing operations 2,034 1,185 Basic earnings from continuing operations per share $ 0.12 $ 0.07 Diluted earnings from continuing operations per share $ 0.12 $ 0.07
Six months ended June 30, 2002 ------------------------------------- As originally reported As restated ------------- ----------- Revenues $ 152,564 $ 152,404 Costs and expenses 148,749 149,869 Income from continuing operations 3,814 2,534 Income from continuing operations before and minority interest 6,413 5,133 Income tax expense 2,171 2,093 Minority interest in earnings 340 425 Income from continuing operations 3,903 2,616 Basic earnings from continuing operations per share $ 0.22 $ 0.15 Diluted earnings from continuing operations per share $ 0.22 $ 0.15
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