FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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)
(617) 926-2500
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 31, 1998
Common Stock, Par Value $1 16,057,085 Shares
/1
IONICS, INCORPORATED
FORM 10-Q FOR
QUARTER ENDED MARCH 31, 1998
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 6
Part II - Other Information 8
Signatures 9
Exhibit Index 10
Exhibit 3.1 - Articles of Amendment to the 11
Restated Articles of Organization
dated May 8, 1998.
Exhibit 27 - Financial Data Schedule 15
(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
March 31,
1998 1997
Net revenue:
<S> <C> <C>
Membranes and related equipment $38,274 $39,833
Water, food and chemical supply 22,204 30,153
Consumer products 18,496 17,116
78,974 87,102
Costs and expenses:
Cost of membranes and related equipment 25,294 27,800
Cost of water, food and chemical supply 15,097 21,464
Cost of consumer products 10,298 9,783
Research and development 1,644 1,302
Selling, general and administrative 17,877 16,511
70,210 76,860
Income from operations 8,764 10,242
Interest income 151 288
Interest expense (119) (236)
Equity income 111 109
Income before income taxes and minority interest 8,907 10,403
Provision for income taxes 2,896 3,431
Income before minority interest 6,011 6,972
Minority interest expense 3 -
Net income $ 6,008 $ 6,972
Basic earnings per share $ .37 $ .44
Diluted earnings per share $ .37 $ .43
Shares used in basic earnings per
share calculations 16,027 15,864
Shares used in diluted earnings per
share calculations 16,411 16,402
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>
March 31, December 31,
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,555 $ 25,787
Short-term investments 794 107
Notes receivable, current 3,903 3,856
Accounts receivable 95,119 98,275
Receivables from affiliated companies 2,673 2,624
Inventories:
Raw materials 17,621 17,183
Work in process 9,378 8,773
Finished goods 3,195 2,954
30,194 28,910
Other current assets 6,254 6,291
Total current assets 161,492 165,850
Notes receivable, long-term 8,537 8,349
Investments in affiliated companies 4,643 3,983
Property, plant and equipment:
Land 6,941 6,767
Buildings 34,437 34,239
Machinery and equipment 239,573 236,526
Other, including furniture, fixtures and vehicles 42,628 41,397
323,579 318,929
Less accumulated depreciation (143,958) (138,972)
179,621 179,957
Other assets 49,382 48,597
Total assets $ 403,675 $ 406,736
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion
of long-term debt $ 3,642 $ 12,084
Accounts payable 23,587 27,099
Customer deposits 3,243 3,685
Accrued commissions 2,425 2,370
Accrued expenses 20,809 20,172
Taxes on income 2,456 602
Total current liabilities 56,162 66,012
Long-term debt and notes payable 1,727 804
Deferred income taxes 15,768 17,783
Other liabilities 2,614 2,478
Stockholders' equity:
Common stock, par value $1, 30,000,000 authorized shares;
issued: 16,057,085 in 1998 and 16,001,285 in 1997 16,057 16,001
Additional paid-in capital 156,327 154,479
Retained earnings 164,565 158,557
Accumulated other comprehensive income (9,320) (9,126)
Unearned compensation (225) (252)
Total stockholders' equity 327,404 319,659
Total liabilities and stockholders' equity $ 403,675 $ 406,736
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>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Operating activities:
Net income $ 6,008 $ 6,972
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,459 6,855
Provision for losses on accounts and notes receivable 167 371
Compensation expense on restricted stock awards 27 27
Changes in assets and liabilities:
Notes receivable (341) (1,119)
Accounts receivable 2,962 6,738
Inventories (1,128) (1,685)
Other current assets 108 494
Investments in affiliates (683) (61)
Accounts payable and accrued expenses (3,316) (2,772)
Income taxes 1,262 2,190
Other (1,952) (149)
Net cash provided by operating activities 9,573 17,861
Investing activities:
Additions to property, plant and equipment (6,175) (7,908)
Retirements of property, plant and equipment 439 112
Purchase of short-term investments (751) -
Net cash used by investing activities (6,487) (7,796)
Financing activities:
Principal payments on current debt (9,480) (7,363)
Proceeds from issuance of current debt 1,205 356
Principal payments on long-term debt (4) -
Proceeds from issuance of long-term debt 441 -
Proceeds from stock option plans 1,512 1,335
Net cash used by financing activities (6,326) (5,672)
Effect of exchange rate changes on cash 8 (349)
Net change in cash and cash equivalents (3,232) 4,044
Cash and cash equivalents at beginning of period 25,787 12,269
Cash and cash equivalents at end of period $ 22,555 $ 16,313
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 March 31,
1998 and December 31, 1997, the consolidated results of its
operations for the three months ended March 31, 1998 and 1997 and
the consolidated cash flows for the three months then ended.
2. The consolidated results of operations of the Company for the
three months ended March 31, 1998 and 1997 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 1997 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.
<TABLE>
4. Earnings per share (EPS) calculations:
<CAPTION>
For the period ended March 31, 1998 For the period ended March 31, 1997
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C>
Basic EPS
Income available to common $6,008 16,027 $ .37 $6,972 15,864 $ .44
stockholders
Effect of dilutive stock
options - 384 - 538
______________________ _______________________
Diluted EPS $6,008 16,411 $ .37 $6,972 16,402 $ .43
</TABLE>
5. Comprehensive Income
The Company has adopted the Statement of Financial Accounting Standards
("FAS") No. 130, "Reporting Comprehensive Income", which establishes
standards for the reporting and display of comprehensive income and its
components in general purpose financial statements for the year ended
December 31, 1998. The table below sets forth "comprehensive income" as
defined by FAS No. 130 for the three month periods ended March 31, 1998 and
1997.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income $6,008 $6,972
Other comprehensive income,
net of tax:
Translation adjustments (194) (2,325)
Comprehensive income $5,814 $4,647
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Comparison of the Three Months Ended March 31, 1998
with the Three Months Ended March 31, 1997
Revenues for the first quarter of 1998 decreased 9.3% to $79.0
million from $87.1 million in 1997. Revenues decreased in the
Membranes and Related Equipment and Water, Food and Chemical
Supply segments and increased in the Consumer Products segment.
Membranes and Related Equipment revenues decreased due primarily
to a slowdown in sales of ultrapure water systems to the
semiconductor industry. This decrease was partially offset by
additional sales of instrumentation, particularly to the
pharmaceutical industry, and wastewater treatment systems.
Water, Food and Chemical Supply revenues decreased due to a
reduction in revenue from the ultrapure and municipal water
supply businesses. The decrease in municipal water supply was
the result of the City of Santa Barbara's buy-out in the second
quarter of 1997 of the desalination plant that was constructed
and maintained by the Company.
Consumer Products revenues in 1998 increased due to higher
revenues from bottled water sales. This increase resulted from
growth in the customer base in both the United States and the
United Kingdom. The increase also reflected an overall average
price increase.
Cost of sales as a percentage of revenues was 64.2% in 1998 as
compared to 67.8% in 1997. Cost of sales as a percentage of
revenues decreased in all three business segments. The decrease
in the Membranes and Related Equipment segment primarily
reflected a shift in the mix of revenues towards the higher
margin instrumentation business. In addition, this decrease
reflected an improvement in the mix of revenues within the water
desalting business and increased unit volume within the
instrumentation business which permitted improved absorption of
their fixed overhead costs. The decrease in the Water, Food and
Chemical Supply segment was the result of a change in the mix of
ultrapure water supply contracts. The Consumer Products segment
decrease reflected improved absorption of fixed overhead costs
and price increases in the bottled water business.
Operating expenses as a percentage of revenues were 24.7% in the
first quarter of 1998, up from 20.5% in the first quarter of
1997. This increase primarily reflected the decrease in
ultrapure water revenues, noted above, which typically carry
disproportionately lower selling expenses as a percentage of such
revenues than do revenues from other businesses. In addition,
operating expenses increased due to expanded marketing
initiatives as well as the Company's continued commitment
to investment in its research and development programs.
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/7
Interest income of $0.2 million and interest expense of $0.1
million in 1998 remained relatively consistent with 1997.
Financial Condition
Working capital increased $5.5 million during the first three
months of 1998, while the Company's current ratio increased to
2.9 at March 31, 1998 from 2.5 at December 31, 1997. Cash
provided from net income, depreciation and a reduction in
accounts receivable totaled $15.4 million in the first three
months of 1998 while the primary uses of cash included principal
payments on current debt and investments in property, plant and
equipment. Significant capital expenditures were made for the
Company's bottled water operations and "own and operate"
facilities.
At March 31, 1998 the Company had $22.6 million in cash and cash
equivalents, a decrease of $3.2 million from December 31, 1997.
Notes payable and long-term debt decreased $7.5 million during
the same period. The Company believes that its cash, cash from
operations, lines of credit and foreign exchange facilities are
adequate to meet its currently anticipated needs.
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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/8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 27, 1998, the Company was served with a summons and
complaint in connection with a lawsuit captioned United States Filter
Corporation and IP Holding Company v. Ionics, Incorporated (98 CV
10541 REK), filed in the U.S. District Court, District of
Massachusetts (Boston). Plaintiffs allege that the Company is
infringing a certain reissue patent (No. Re 35,741), which issued on
March 10, 1998, by making, selling, offering to sell and using the
Company's electrodeionization (EDI) systems within the United States.
The Company, which pioneered the development of the EDI process over
30 years ago, holds a number of patents related to EDI technology,
believes that it has valid defenses to plaintiffs' infringement claim
and intends vigorously to defend itself in this litigation, which is
in the early pre-discovery stage.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1 Articles of Amendment to the Restated
Articles of Organization dated May 7, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended March 31, 1998.
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: May 14, 1998 By: /s/Arthur L. Goldstein
Arthur L. Goldstein
Chairman and Chief Executive Officer
(duly authorized officer)
Date: May 14, 1998 By: /s/Robert J. Halliday
Robert J. Halliday
Vice President, Finance
(chief financial officer)
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EXHIBIT INDEX
Sequentially
Numbered
Exhibit Page
3.0 Articles of Organization and By-Laws
3.1 Articles of Amendment to the Restated 12
Articles of Organization dated May 8, 1998.
27.0 Financial Data Schedule 16
(for electronic
purposes only)
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/11
Exhibit 3.1(a)
FEDERAL IDENTIFICATION
NO. 04-2068530
THE COMMONWEALTH OF MASSACHUSETTS
William Francis Galvin
Secretary of the Commonwealth
STATE HOUSE, BOSTON, MASS.
02133
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
We, Arthur L. Goldstein President
and Stephen Korn Clerk
of Ionics, Incorporated
_____________________________________________________________
(Name of Corporation)
located at 65 Grove Street, Watertown, 02172
_____________________________________________________________
(Exact name of corporation)
certify that these Articles of Amendment affecting articles
numbered:
3
- -------------------------------------------------------------
(Number those articles 1,2,3,4,5 and/or 6 being amended)
Restated
of the / Articles of Organization were duly adopted at a meeting held on
May 7, 1998, by vote of:
13,097,424 shares of Common Stock of 16,053,335 shares outstanding,
__________ ______________ __________
(type, class & series, if any)
shares of out of shares outstanding, and
(type, class & series, if any)
shares of out of shares outstanding,
(type, class & series, if any)
being at least a majority of each type, class or series outstanding and
entitled to vote thereon:
/12
To change the number of shares and the par value (if any) of any type, class
or series of stock which the corporation is authorized to issue, fill in the
following:
<TABLE>
The total presently authorized is:
<CAPTION>
___________________________________________________________________________
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
___________________________________________________________________________
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
___________________________________________________________________________
<S> <C> <C> <C> <C>
Common None Common 30,000,000 $1.00
___________________________________________________________________________
___________________________________________________________________________
Preferred None Preferred None
___________________________________________________________________________
</TABLE>
<TABLE>
Change the total authorized to:
<CAPTION>
___________________________________________________________________________
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
___________________________________________________________________________
<S> <C> <C> <C> <C>
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
___________________________________________________________________________
Common None Common 55,000,000 $1.00
___________________________________________________________________________
___________________________________________________________________________
Preferred None Preferred None
___________________________________________________________________________
</TABLE>
/13
The foregoing amendment will become effective when these Articles of Amendment
are filed in accordance with Chapter 156B, Section 6 unless these articles
specify, in accordance with the vote adopting the amendment, a later effective
date not more than thirty days after such filing, in which event the amendment
will become effective on such later date.
Later effective date:______________________
SIGNED UNDER THE PENALTIES OF PERJURY, this 7th day of May, 1998,
/s/Arthur L. Goldstein President
__________________________________________________________________
/s/Stephen Korn Clerk
__________________________________________________________________
/14
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
I hereby approve the within Articles of Amendment and, the filing
fee in the amount of $25,000 having been paid, said articles are
deemed to have been filed with me this 8th day of May 1998.
Effective date:
____________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF AMENDMENT TO BE SENT
TO:
____________________________________
____________________________________
____________________________________
____________________________________
/15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 22,555
<SECURITIES> 794
<RECEIVABLES> 101,166
<ALLOWANCES> (2,144)
<INVENTORY> 30,194
<CURRENT-ASSETS> 161,492
<PP&E> 323,579
<DEPRECIATION> (143,958)
<TOTAL-ASSETS> 403,675
<CURRENT-LIABILITIES> 56,162
<BONDS> 0
<COMMON> 16,057
0
0
<OTHER-SE> 311,347
<TOTAL-LIABILITY-AND-EQUITY> 403,675
<SALES> 78,974
<TOTAL-REVENUES> 78,974
<CGS> 50,689
<TOTAL-COSTS> 50,689
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 167
<INTEREST-EXPENSE> (119)
<INCOME-PRETAX> 8,796
<INCOME-TAX> 2,896
<INCOME-CONTINUING> 6,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,008
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
