FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7211
IONICS, INCORPORATED
(exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2068530
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 Grove Street, Watertown, Massachusetts 02172
(Address of principal executive offices)
(Zip Code)
(781) 926-2500
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 1997
Common Stock, Par Value $1 15,976,266 Shares
1/
IONICS, INCORPORATED
FORM 10-Q FOR
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
Page No.
Part I - Financial Information
Consolidated Statements of Operations 2
Consolidated Balance Sheets 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of
Results of Operations and Financial Condition 7
Part II - Other Information 10
Signatures 11
Exhibit Index 12
Exhibit 11 - Computation of Earnings Per Share 13
Exhibit 27 - Financial Data Schedule 14
(for electronic
purposes only)
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<TABLE>
PART I - FINANCIAL INFORMATION
IONICS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net revenue:
Membranes and related equipment $39,541 $37,885 $116,828 $111,146
Water, food and chemical supply 25,638 29,038 87,353 77,330
Consumer products 19,934 17,588 55,145 48,780
85,113 84,511 259,326 237,256
Costs and expenses:
Cost of membranes and related equipment 27,458 26,860 81,337 79,054
Cost of water, food and chemical supply 18,502 20,201 62,614 52,291
Cost of consumer products 11,086 10,095 30,641 27,473
Research and development 1,403 1,256 3,987 3,701
Selling, general and administrative 16,285 16,036 49,513 46,491
74,734 74,448 228,092 209,010
Income from operations 10,379 10,063 31,234 28,246
Interest income 361 261 923 1,006
Interest expense (205) (200) (668) (653)
Equity income 205 104 506 323
Income before income taxes 10,740 10,228 31,995 28,922
Provision for income taxes 3,544 3,375 10,558 9,544
Net income $ 7,196 $ 6,853 $ 21,437 $ 19,378
Earnings per share $ .44 $ .43 $ 1.31 $ 1.21
Shares used in earnings per
share calculations 16,393 16,044 16,414 16,042
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
IONICS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except share amounts)
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,170 $ 12,269
Notes receivable, current 3,812 3,496
Accounts receivable 88,845 91,392
Receivables from affiliated companies 3,056 2,999
Inventories:
Raw materials 16,279 15,028
Work in process 9,395 8,120
Finished goods 2,544 2,852
28,218 26,000
Other current assets 6,170 8,266
Total current assets 153,271 144,422
Notes receivable, long-term 8,261 7,737
Investments in affiliated companies 2,986 2,908
Property, plant and equipment:
Land 6,334 3,602
Buildings 32,866 33,157
Machinery and equipment 242,947 233,077
Other, including furniture, fixtures and vehicles 39,048 36,834
321,195 306,670
Less accumulated depreciation (135,490) (120,853)
185,705 185,817
Other assets 49,426 37,705
Total assets $399,649 $378,589
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion
of long-term debt $ 15,636 $ 11,513
Accounts payable 22,581 28,988
Customer deposits 5,609 7,147
Accrued commissions 2,297 2,402
Accrued expenses 21,638 18,123
Taxes on income 6,503 -
Total current liabilities 74,264 68,173
Long-term debt and notes payable 82 2,132
Deferred income taxes 9,111 14,422
Other liabilities 1,343 1,645
Stockholders' equity:
Common stock, par value $1, 30,000,000 authorized shares;
issued: 15,976,266 in 1997 and 15,823,205 in 1996 15,976 15,823
Additional paid-in capital 153,934 149,337
Retained earnings 151,665 130,228
Cumulative translation adjustments (6,447) (2,811)
Unearned compensation (279) (360)
Total stockholders' equity 314,849 292,217
Total liabilities and stockholders' equity $399,649 $378,589
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
IONICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
<S> <C> <C>
Operating activities:
Net income $ 21,437 $ 19,378
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,293 19,007
Provision for losses on accounts and notes receivable 1,030 700
Compensation expense on restricted stock awards 81 81
Changes in assets and liabilities:
Notes receivable (2,324) (1,074)
Accounts receivable 185 (5,829)
Inventories (2,428) (3,668)
Other current assets 1,994 (709)
Investments in affiliates (78) 658
Accounts payable and accrued expenses (3,539) (8,830)
Income taxes 5,451 6,053
Other (1,886) 1,950
Net cash provided by operating activities 40,216 27,717
Investing activities:
Additions to property, plant and equipment (23,938) (36,797)
Acquisitions, net of cash acquired (9,604) -
Net cash used by investing activities (33,542) (36,797)
Financing activities:
Principal payments on current debt (8,328) (10,445)
Proceeds from issuance of current debt 10,863 20,385
Principal payments on long-term debt (28) (2,340)
Proceeds from stock option plans 2,634 3,330
Net cash provided by financing activities 5,141 10,930
Effect of exchange rate changes on cash (914) (67)
Net change in cash and cash equivalents 10,901 1,783
Cash and cash equivalents at beginning of period 12,269 9,479
Cash and cash equivalents at end of period $ 23,170 $ 11,262
The accompanying notes are an integral part of these financial statements.
</TABLE>
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IONICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments (consisting of
only normal, recurring accruals) necessary to present fairly
the consolidated financial position of the Company as of
September 30, 1997 and December 31, 1996, the consolidated
results of its operations for the three and nine months ended
September 30, 1997 and 1996 and the consolidated cash flows
for the nine months then ended.
2. The consolidated results of operations of the Company for the
three and nine months ended September 30, 1997 and 1996 are
not necessarily indicative of the results of operations to be
expected for the full year.
3. Reference is made to the Notes to Consolidated Financial
Statements appearing in the Company's 1996 Annual Report as
filed on Form 10-K with the Securities and Exchange
Commission. There have been no significant changes in the
information reported in those Notes, other than from the
normal business activities of the Company, and there have been
no changes which would, in the opinion of Management, have a
materially adverse effect upon the Company.
4. Certain prior year amounts have been reclassified to conform
to the current year presentation with no impact on net income.
5. In 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards No. 128
("SFAS128"), "Earnings per Share." SFAS128 simplifies the
standards for computing earnings per share ("EPS") and makes
them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
SFAS128 requires restatement of all prior-period EPS data
presented. Neither basic nor diluted EPS computed in
accordance with SFAS128 would be materially different from the
Company's primary EPS presented in the financial statements.
In 1997, the FASB released Statement of Financial Accounting
Standards No. 130 ("SFAS130"), "Reporting Comprehensive
Income." SFAS130 establishes standards for reporting and
display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose
financial statements. SFAS130 is effective for fiscal years
beginning after December 15, 1997. This Statement is a
disclosure-only statement.
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Also in 1997, the FASB released Statement of Financial
Accounting Standards No. 131 ("SFAS131"), "Disclosures About
Segments of an Enterprise and Related Information." SFAS131
establishes standards for the way that public business
enterprises report information about operating segments in
annual financial statements and requires that those
enterprises report selected information about operating
segments in interim financial statements. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. SFAS131 is effective
for fiscal years beginning after December 15, 1997. This
Statement is a disclosure-only statement.
6. During September 1997, the Company acquired a 55% ownership
interest in Enersave Engineering Systems Sdn. Bhd.
("Enersave") for an initial payment of $9.6 million. An
additional payment of up to $2 million will be required
depending upon the achievement of certain future operating
results. Enersave, a Malaysian company with operations in
Malaysia, China and Indonesia, is a leading supplier of water
and wastewater treatment systems and services in Southeast
Asia. The acquisition was accounted for under the purchase
method with the results of Enersave included from September 1,
1997. Goodwill of approximately $8 million is being amortized
on a straight-line basis over 30 years. Pro forma results of
operations have not been presented, as the effect of this
acquisition on the consolidated financial statements was
immaterial. Revenues for the eight-month period prior to the
acquisition were approximately $10 million.
7. In October 1997, the Company completed the acquisition of 100%
of the assets and liabilities of Watertec Engineering Pty.
Ltd. as Trustee of Watertec Engineering Unit Trust and two
related corporations (together "Watertec") for an initial
payment of $1.9 million. An additional payment of up to $0.8
million will be required depending upon the achievement of
certain future operating results. Watertec is involved in the
manufacture and supply of ozonation systems for water
disinfection and systems for chemical metering. The
acquisition was accounted for under the purchase method with
the results of Watertec included from September 1, 1997.
Goodwill of approximately $1.2 million is being amortized on a
straight-line basis over 30 years. Pro forma results of
operations have not been presented, as the effect of this
acquisition on the consolidated financial statements was
immaterial. Fiscal 1997 revenues for the period prior to
September 1997 were approximately $2.3 million. Payment of
the initial purchase price obligation of $1.9 million occurred
on October 9, 1997. The obligation for payment was included
in accrued expenses at September 30, 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 1997 with
the Three and Nine Months Ended September 30, 1996
Revenues for the third quarter of 1997 increased 0.7% to $85.1 million
from $84.5 million during the third quarter of 1996. Revenues for the
nine-month period increased 9.3% to $259.3 million from $237.3 million
in the comparable period in 1996. Revenues increased in both the
Membranes and Related Equipment and the Consumer Products segments for
the three-month period. Revenues increased in all three business
segments during the comparable nine-month period. The largest
increase in revenues during the third quarter occurred in the Consumer
Products segment while the largest increase during the nine-month
period was in the Water, Food and Chemical Supply segment.
Revenues from the Membranes and Related Equipment segment grew during
both the third quarter and nine-month period due primarily to
continuing strength in the sale of instruments and water desalting
equipment. This increase was partially offset in the third quarter by
a decrease in revenues from the sale of ultrapure water equipment.
For the nine-month period, this increase was partially offset by a
decrease in revenues from the sale of wastewater treatment equipment.
Revenues from the Water, Food and Chemical Supply segment decreased in
the third quarter due to decreased sales of municipal water and some
softness in the food processing business. The decrease in municipal
water was primarily a result of the City of Santa Barbara's buyout of
the desalination plant constructed and maintained by the Company.
This decrease was partially offset by increased revenues in the
ultrapure water supply and chemical supply businesses. Revenues from
this segment increased during the nine-month period due primarily to
continuing growth in the ultrapure water supply business. This growth
was partially offset by the decreased sale of municipal water noted
above.
Consumer products revenues increased in both the third quarter and the
nine-month period primarily reflecting higher revenues from bottled
water sales. These increases resulted from an increase in the
customer base, an increase in consumption by the existing customer
base, particularly in the United Kingdom which experienced a
relatively warm summer, and price increases.
Cost of sales as a percentage of revenues for the third quarter was
67.0% in 1997 and 67.6% in 1996. For the nine-month period, cost of
sales as a percentage of revenues was 67.3% in 1997 and 66.9% in 1996.
In the Membranes and Related Equipment segment, cost of sales as a
percentage of revenues decreased in both the third quarter and the
nine-month period. This primarily reflected the strong performance of
contracts within the ultrapure water equipment business. In addition,
increased sales of instruments provided improved absorption of related
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fixed overhead costs. This decrease in cost of sales as a percentage
of revenues was partially offset by a change in the mix of revenues
from the sale of water desalting equipment and related spare parts.
In the Water, Food, and Chemical Supply segment, cost of sales as a
percentage of revenues increased during both periods. During both the
third quarter and nine-month period, this increase primarily reflected
a change in the mix of contracts for the supply of municipal water and
ultrapure water.
In the Consumer Products segment, cost of sales as a percentage of
revenues decreased in both the third quarter and nine-month period.
This improvement primarily reflected modest bottled water price
increases and the improved absorption of fixed overhead costs
resulting from continued expansion of the bottled water customer base.
During the third quarter of 1997, operating expenses as a percentage
of revenues of 20.8% were essentially consistent with the prior year.
For the nine-month period, operating expenses as a percentage of
revenues decreased to 20.6% in 1997 from 21.2% in 1996. This
improvement reflected higher absorption of relatively fixed operating
costs by increased sales volume.
Interest income increased during the third quarter primarily due to
higher average invested cash balances. Interest income decreased
during the nine-month period due to lower average interest rates and
foreign exchange fluctuations.
The Company periodically enters into foreign exchange contracts to
hedge certain operational and balance sheet exposures against changes
in foreign currency rates. Because the impact of movements in
currency exchange rates on foreign exchange contracts offsets the
related impact on the underlying items being hedged, these instruments
do not subject the Company to risk that would not otherwise result
from changes in currency exchange rates. Foreign currency contracts
are used solely for hedging and are not speculative or profit-seeking.
Financial Condition
Working capital increased by $2.8 million during the first nine months
of 1997 and the current ratio of 2.1 at September 30, 1997 was
approximately the same as at December 31, 1996. Cash provided from
net income and depreciation totaled $41.7 million during the first
nine months of 1997, while the primary uses of cash were for additions
to property, plant and equipment and for the acquisition of Enersave.
Significant capital expenditures were incurred to support the growth
in bottled water operations, trailers and other "own and operate"
facilities.
At September 30, 1997, the Company had $23.2 million in cash and cash
equivalents, an increase of $10.9 million from December 31, 1996.
This increase was, however, offset by an increase in short-term
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borrowings of $4.1 million over the corresponding period. The Company
believes that its cash and cash equivalent balances, cash from
operations, lines of credit and foreign exchange facilities are
adequate to meet its currently anticipated needs.
Recent Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards No. 128 ("SFAS128"),
"Earnings per Share." SFAS128 simplifies the standards for computing
earnings per share ("EPS") and makes them comparable to international
EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all
entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. SFAS128
requires restatement of all prior-period EPS data presented. Neither
basic nor diluted EPS computed in accordance with SFAS128 would be
materially different from the Company's primary EPS presented in the
financial statements.
In 1997, the FASB released Statement of Financial Accounting Standards
No. 130 ("SFAS130"), "Reporting Comprehensive Income." SFAS130
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a
full set of general-purpose financial statements. SFAS130 is
effective for fiscal years beginning after December 15, 1997. This
statement is a disclosure-only statement.
Also in 1997, the FASB released Statement of Financial Accounting
Standards No. 131 ("SFAS131"), "Disclosures About Segments of an
Enterprise and Related Information." SFAS131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. SFAS131 is effective for fiscal years beginning
after December 15, 1997. This Statement is a disclosure-only
statement.
Forward-Looking Information
The Company's future results of operations, as well as statements
contained in this Management's Discussion and Analysis which are
forward-looking statements, depend upon a number of factors that could
cause actual results to differ materially from management's current
expectations. Among these factors are business conditions and the
general economy; competitive factors, such as acceptance of new
products and price pressures; risk of nonpayment of accounts
receivable; risks associated with foreign operations; and regulations
and laws affecting business in each of the Company's markets.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 3, 1997, the Company was served with a third-party
complaint by Sybron Chemicals, Inc. ("Sybron") and a Sybron
employee, Michael Moldofsky ("Moldofsky"), in connection with
litigation pending in the District Court for Dallas County,
Texas, 44th Judicial District, entitled SGS-Thomson
Microelectronics, Inc. v. Sybron Chemicals, Inc. and Michael
Moldofsky. In the pending litigation, the plaintiff, SGS-Thomson
Microelectronics, Inc. ("S-T"), alleges that defendants Sybron
and Moldofsky caused S-T to incur damages of at least $24 million
as a result of allegedly defective ion-exchange resin
manufactured and sold to it by Sybron for use in an S-T ultrapure
water facility serving one of its semiconductor plants. In the
third-party complaint filed against the Company, the defendants
Sybron and Moldofsky allege that in the event they are found
liable to S-T, the Company may be liable to them for all or part
of S-T's alleged damages. The Company installed the resin in
question into deionized water vessels under a $3,500 contract
with S-T. The Company disputes all material allegations made
against it in the third-party complaint and believes that it
properly performed its services for S-T. S-T did not bring suit
against the Company. The Company intends to defend itself
vigorously in this litigation, which is in the early discovery
stages.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share (included on Page
13 of this report).
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated August 27, 1997,
reporting under Item 5 the renewal of the Company's existing
stockholder rights agreement through the adoption of a Renewed
Rights Agreement between the Company and BankBoston N.A. as
rights agent. No financial statements were required or filed.
All other items reportable under Part II have been omitted as
inapplicable or because the answer is negative, or because the
information was previously reported to the Securities and
Exchange Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
IONICS, INCORPORATED
Date: November 13, 1997 By: /s/Arthur L. Goldstein
Arthur L. Goldstein
Chairman and Chief Executive Officer
(duly authorized officer)
Date: November 13, 1997 By: /s/Robert J. Halliday
Robert J. Halliday
Vice President, Finance
(chief financial officer)
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EXHIBIT INDEX
Sequentially
Numbered
Exhibit Page
11 Computation of Earnings Per Share 14
27 Financial Data Schedule 15
(for electronic
purposes only)
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<TABLE>
EXHIBIT 11
IONICS, INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
(Amounts in thousands, except earnings per share)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income $ 7,196 $ 6,853 $21,437 $19,378
Earnings per common and common
equivalent share:
Weighted average number of shares 15,957 15,563 15,914 15,467
outstanding
Incremental shares for stock options
under treasury stock method 436 481 500 575
Weighted average number of common and
common equivalent shares outstanding 16,393 16,044 16,414 16,042
Earnings per common and common
equivalent share $ .44 $ .43 $ 1.31 $ 1.21
Earnings per common and common equivalent
share - assuming full dilution:
Weighted average number of shares
outstanding 15,957 15,563 15,914 15,467
Incremental shares for stock options
under treasury stock method 449 554 504 609
Weighted average number of common and
common equivalent shares outstanding -
assuming full dilution 16,406 16,117 16,418 16,076
Earnings per common and common
equivalent share - assuming $ .44 $ .43 $ 1.31 $ 1.21
full dilution
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 23,170
<SECURITIES> 0
<RECEIVABLES> 90,979
<ALLOWANCES> (2,134)
<INVENTORY> 28,218
<CURRENT-ASSETS> 153,271
<PP&E> 321,195
<DEPRECIATION> (135,490)
<TOTAL-ASSETS> 399,649
<CURRENT-LIABILITIES> 74,264
<BONDS> 0
<COMMON> 15,976
0
0
<OTHER-SE> 298,873
<TOTAL-LIABILITY-AND-EQUITY> 399,649
<SALES> 259,326
<TOTAL-REVENUES> 259,326
<CGS> 174,592
<TOTAL-COSTS> 174,592
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,030
<INTEREST-EXPENSE> 668
<INCOME-PRETAX> 31,489
<INCOME-TAX> 10,558
<INCOME-CONTINUING> 21,437
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,437
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.31
</TABLE>
