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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7211
IONICS, INCORPORATED
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2068530
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 Grove Street,
Watertown, Massachusetts 02472
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(617) 926-2500
Former name, former address and former fiscal year, if changed
since last report - None
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.
At September 30, 1999 the Company had 16,170,559 shares of Common
Stock, par value $1 per share, outstanding.
<PAGE>
IONICS, INCORPORATED
FORM 10-Q
INDEX
Page
Part I - Financial Information:
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998 2
Consolidated Balance Sheets at September 30, 1999
and December 31, 1998 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
Part II - Other Information 13
Signatures 14
Exhibit Index 15
Exhibit 27 - Financial Data Schedule 16
(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,
1999 1998 1999
1998
<S> <C> <C> <C> <C>
Revenues:
Equipment Business Group $ 31,810 $ 29,355 $ 96,989 $ 93,526
Ultrapure Water Group 21,144 30,843 68,969
70,701
Consumer Water Group 26,668 21,900 72,199
60,513
Instrument Business Group 7,049 6,778 20,498
23,377
86,671 88,876 258,655
248,117
Costs and expenses:
Cost of sales - Equipment Business Group 22,767 20,800 69,218 66,920
Cost of sales - Ultrapure Water Group 16,174 25,011 51,860 55,043
Cost of sales - Consumer Water Group 14,237 11,876 39,371 33,356
Cost of sales - Instrument Business Group 2,781 3,190 8,661 9,693
Research and development 1,623 1,555 5,262 4,938
Selling, general and administrative 21,134 18,890 61,859 55,044
78,716 81,322 236,231 224,994
Income from operations 7,955 7,554 22,424 23,123
Interest income 92 388 604 689
Interest expense (111) - (446) (191)
Equity income 180 168 559 426
Income before income taxes and minority
interest 8,116 8,110 23,141 24,047
Provision for income taxes 2,653 2,676 7,514 7,794
Income before minority interest 5,463 5,434 15,627 16,253
Minority interest expense 94 251 482 442
Net income $ 5,369 $ 5,183 $ 15,145 $ 15,811
Basic earnings per share $ 0.33 $ 0.32 $ 0.94 $ 0.98
Diluted earnings per share $ 0.33 $ 0.32 $ 0.93 $ 0.97
Shares used in basic earnings
per share calculation 16,144 16,097 16,135 16,066
Shares used in diluted earnings
per share calculation 16,373 16,273 16,283 16,383
The accompanying notes are an integral part of these financial
statements.
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</TABLE>
<PAGE>
<TABLE>
IONICS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except share and par value amounts)
<CAPTION>
September 30, December 31,
1999 1998
<S>
ASSETS <C> <C>
Current assets:
Cash and cash equivalents $ 11,700 $ 28,770
Short-term investments 248 359
Notes receivable, current 4,404 4,144
Accounts receivable 123,667 111,844
Receivables from affiliated companies 1,280 2,329
Inventories:
Raw materials 19,380 19,164
Work in process 8,843 8,523
Finished goods 4,930 3,862
33,153 31,549
Other current assets 7,498 8,098
Total current assets 181,950 187,093
Notes receivable, long-term 9,183 8,824
Investments in affiliated companies 10,286 7,057
Property, plant and equipment:
Land 8,360 8,194
Buildings 47,112 41,594
Machinery and equipment 282,450 259,885
Other, including furniture, fixtures
and vehicles 48,679 44,267
386,601 353,940
Less accumulated depreciation (174,103) (158,257)
212,498 195,683
Other assets 60,728 53,466
Total assets $474,645 $452,123
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of
long-term debt $ 20,716 $ 6,873
Accounts payable 30,848 37,361
Customer deposits 4,318 3,965
Accrued commissions 1,944 2,203
Accrued expenses 28,979 31,884
Taxes on income 8,115 3,648
Total current liabilities 94,920 85,934
Long-term debt and notes payable 1,762 1,519
Deferred income taxes 16,108 17,036
Other liabilities 2,723 2,036
Stockholders' equity:
Common stock, par value $1, authorized shares:
55,000,000; issued: 16,170,559 in 1999 and
16,116,649 in 1998 16,171 16,117
Additional paid-in capital 158,506 157,571
Retained earnings 195,088 179,943
Accumulated other comprehensive income (10,570) (7,889)
Unearned compensation (63) (144)
Total stockholders' equity 359,132 345,598
Total liabilities and stockholders' equity $474,645 $452,123
The accompanying notes are an integral part of these financial
statements.
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</TABLE>
<PAGE>
<TABLE>
IONICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Cash flow from operating activities:
Net income $15,145 $15,811
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 19,875 18,844
Amortization of goodwill 1,616 1,203
Provision for losses on accounts and notes receivable 457 919
Compensation expense on restricted stock awards 81 81
Changes in assets and liabilities:
Notes receivable (1,020) (71)
Accounts receivable (9,568) (10,889)
Inventories (1,303) (4,949)
Other current assets 628 1
Investments in affiliates (3,464) (2,479)
Accounts payable and accrued expenses (10,035) 8,929
Income taxes 2,989 1,551
Other (877) (3,613)
Net cash provided by operating activities 14,524 25,338
Cash flow from investing activities:
Additions to property, plant and equipment (38,029) (27,981)
Disposals of property, plant and equipment 1,371 1,014
Acquisitions, net of cash acquired (8,394) -
Sale (purchase) of short-term investments 112 (132)
Net cash used in investing activities (44,940) (27,099)
Cash flow from financing activities:
Principal payments on current debt (7,475) (12,988)
Proceeds from issuance of current debt 20,886 4,505
Principal payments on long-term debt (738) (5)
Proceeds from issuance of long term debt 416 395
Proceeds from stock option plans 923 2,189
Net cash provided from (used in) financing activities 14,012 (5,904)
Effect of exchange rate changes on cash and cash equivalents (666) (12)
Net change in cash and cash equivalents (17,070) (7,677)
Cash and cash equivalents at beginning of period 28,770 25,787
Cash and cash equivalents at end of period $11,700 $18,110
The accompanying notes are an integral part of these financial
statements.
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</TABLE>
<PAGE>
IONICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
In the opinion of the management of Ionics, Incorporated (the
"Company"), all adjustments have been made that are necessary
to present fairly the consolidated financial position of the
Company, the consolidated results of its operations and the
consolidated cash flows for each period presented. The
consolidated results of operations for the interim periods are
not necessarily indicative of the results of operations to be
expected for the full year. These financial statements should
be read in conjunction with the Company's 1998 Annual Report as
filed on Form 10-K with the Securities and Exchange Commission.
Other than as noted below, 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. Certain
prior year amounts have been reclassified to conform to the
current year presentation with no impact on net income.
2. Contingent Liabilities:
On June 9, 1999, the Company was served with a summons and
complaint in connection with a lawsuit captioned United
States Filter Corporation, U.S. Filter/Ionpure, Inc. and IP
Holding Company v. Ionics, Incorporated, Millipore
Corporation and Millipore Investment Holdings Limited, filed
in the U.S. District Court, District of Massachusetts
(Boston). In this litigation, plaintiffs allege that the
Company is infringing six patents relating to
electrodeionization (EDI) technology. This lawsuit is the
second patent infringement suit brought by the plaintiffs
against the Company; a pending lawsuit filed by the
plaintiffs against the Company in March 1998 alleges
infringement of a certain reissue patent also involving EDI
technology. The Company, which pioneered the development of
the EDI process over 30 years ago and holds a number of
patents related to EDI technology, believes that it has valid
defenses to the plaintiffs' infringement claims in both
lawsuits and intends vigorously to defend itself against the
infringement charges.
3. Earnings Per Share (EPS) Calculations:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share amounts)
For Three Months Ended September 30,
1999 1998
<S> <C> <C> <C> <C> <C> <C>
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
Basic EPS
Income available to
common stockholders $ 5,369 16,144 $ 0.33 $5,183 16,097 $ 0.32
Effect of dilutive
stock options - 229 - 176
Diluted EPS $ 5,369 16,373 $ 0.33 $5,183 16,273 $ 0.32
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For Nine Months Ended September 30,
1999 1998
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
<C> <S> <S> <S> <S> <S> <S>
Basic EPS
Income available to
common stockholders $ 15,145 16,135 $ 0.94 $ 15,811 16,066 $ 0.98
Effect of dilutive
stock options - 148 - 317
Diluted EPS $ 15,145 16,283 $ 0.93 $ 15,811 16,383 $ 0.97
</TABLE>
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 the three months ended
September 30, 1999 and 1998 were 725,750 and 738,500,
respectively. The number of options that were antidilutive at
the nine months ended September 30, 1999 and 1998 were 725,750
and 736,000, respectively.
4. Comprehensive Income
The Company has adopted the Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of
comprehensive income and its components in general purpose
financial statements for the year ended December 31, 1998.
The table below sets forth "comprehensive income" as defined
by SFAS No. 130 for the three and nine-month periods ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 5,369 $ 5,183 $15,145 $15,811
Other comprehensive income,
net of tax:
Translation adjustments 1,674 2,682 (2,681) 2,199
Comprehensive income $ 7,043 $ 7,865 $12,464 $18,010
</TABLE>
5. In 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." At the
end of 1998, the Company changed from three reportable segments
to four reportable "business group" segments corresponding to a
"business group" structure which was put into place in the latter
part of 1998. Segment information for the prior year has been
restated to reflect this change. As of September 30, 1999, no
changes have been made to the basis of segmentation or the
measurement of profit or loss from that which was reported in the
Company's 1998 Annual Report as filed on Form 10-K with the
Securities and Exchange Commission, and there were no material
changes to total assets by segment.
The following table summarizes the Company's operations by the
four business group segments and "Corporate."
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<PAGE>
<TABLE>
<CAPTION>
For Three Months Ended September 30,
Equipment Ultrapure Consumer Instrument
Business Water Water Business
(Dollars in thousands) Group Group Group Group Corporate Total
<S> <C> <C> <C> <C> <C> <C>
1999
Revenue - unaffiliated
customers $ 31,810 $ 21,144 $ 26,668 $ 7,049 $ - $ 86,671
Inter-segment transfers 803 204 - 570 (1,577) -
Gross profit 9,043 4,970 12,431 4,268 - 30,712
Research and development (1,623)
Selling, general and
administrative (21,134)
Interest income 92
Interest expense (111)
Equity income 180
Income before income taxes
and minority interest 8,116
</TABLE>
<TABLE>
<CAPTION>
Equipment Ultrapure Consumer Instrument
Business Water Water Business
(Dollars in thousands) Group Group Group Group Corporate Total
<S> <C> <C> <C> <C> <C> <C>
1998
Revenue - unaffiliated
customers $ 29,355 $ 30,843 $ 21,900 $ 6,778 $ - $ 88,876
Inter-segment transfers 1,273 72 - 572 (1,917) -
Gross profit 8,555 5,832 10,024 3,588 - 27,999
Research and development (1,555)
Selling, general and
administrative (18,890)
Interest income 388
Interest expense -
Equity income 168
Income before income taxes
and minority interest 8,110
</TABLE>
<TABLE>
<CAPTION>
For Nine Months Ended September 30,
Equipment Ultrapure Consumer Instrument
Business Water Water Business
(Dollars in thousands) Group Group Group Group Corporate Total
<S> <C> <C> <C> <C> <C> <C>
1999
Revenue - unaffiliated
customers $ 96,989 $ 68,969 $ 72,199 $ 20,498 $ - $258,655
Inter-segment transfers 1,668 401 - 1,147 (3,216) -
Gross profit 27,771 17,109 32,828 11,837 - 89,545
Research and development (5,262)
Selling, general and
administrative (61,859)
Interest income 604
Interest expense (446)
Equity income 559
Income before income taxes
and minority interest 23,141
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For Nine Months Ended September 30,
Equipment Ultrapure Consumer Instrument
Business Water Water Business
(Dollars in thousands) Group Group Group Group Corporate Total
<S> <C> <C> <C> <C> <C> <C>
1998
Revenue - unaffiliated
customers $ 93,526 $ 70,701 $ 60,513 $ 23,377 $ - $248,117
Inter-segment transfers 2,481 751 - 1,135 (4,367) -
Gross profit 26,606 15,658 27,157 13,684 - 83,105
Research and development - (4,938)
Selling, general and
administrative (55,044)
Interest income 689
Interest expense (191)
Equity income 426
Income before income taxes
and minority interest 24,047
</TABLE>
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, 1999
with the Three and Nine Months Ended September 30, 1998
Revenues for the third quarter of 1999 decreased 2.5% to $86.7
million from $88.9 million in 1998. Revenues for the 1999 nine-
month period increased 4.2% to $258.7 million from $248.1 million
in the comparable 1998 period. Revenues during 1999 were higher
during the third quarter, compared to the respective period in
1998, in the Equipment Business, Consumer Water and Instrument
Business Groups. The Ultrapure Water Group's revenues were lower
in the third quarter of 1999 compared to the third quarter of
1998. For the 1999 nine-month period, revenues were higher in
the Equipment Business and Consumer Water Groups than in the
comparable 1998 period while revenues were lower in the Ultrapure
Water and in the Instrument Business Groups.
Within the Equipment Business Group, the 8.4% or $2.5 million
increase in revenues during the third quarter of 1999, compared
to the same quarter in 1998, is due primarily to increased sales
of capital equipment, particularly for water reuse applications.
Revenues for this Group increased 3.7% or $3.5 million in the
1999 nine-month period, compared to the 1998 nine-month period,
due to relatively strong international sales of desalination
equipment and the sale of water reuse applications. These
increases in revenue were partially offset by a decline in
revenue from the Equipment Business Group's water supply
business.
The Ultrapure Water Group's revenues decreased 31.4% or $9.7
million in the third quarter of 1999, as compared to the third
quarter of 1998. In addition, revenues decreased by $1.7 million
or 2.4% in the 1999 nine-month period compared to the 1998 nine-
month period. These decreases are due primarily to the continued
softness in the microelectronics industry despite stronger
results for this Group in the first half of 1999.
Revenues from the Consumer Water Group increased $4.8 million or
21.8% in the third quarter of 1999 compared to the third quarter
of 1998. The Consumer Water Group's revenues also increased
$11.7 million or 19.3% in the 1999 nine-month period from the
1998 nine-month period. These increases were due to continued
growth in both the bottled water and home water businesses.
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<PAGE>
The Instrument Business Group's revenues increased 4.0% in the
third quarter of 1999, as compared to the third quarter of 1998,
due to stronger sales of ultrapure water monitoring instruments
to the pharmaceutical market. Revenues for this Group decreased
12.3% in the 1999 nine-month period compared to the 1998 nine-
month period. This decrease resulted from weaker pharmaceutical
market sales in the first half of 1999 than in the first half of
1998, which benefited from strong demand due to the then recent
implementation of United States Pharmacopoeial Convention's USP
23 which mandated the monitoring of Total Organic Carbon (TOC) in
water processed by the pharmaceutical industry.
Cost of sales as a percentage of revenues for the third quarter
was 64.6% in 1999 and 68.5% in 1998. For the nine-month period,
cost of sales as a percentage of revenues was 65.4% in 1999 and
66.5% in 1998.
Cost of sales as a percentage of revenues decreased for the
Ultrapure Water Group and the Consumer Water Group for both the
third quarter and nine-month periods of 1999. The Equipment
Business Group's cost of sales as a percentage of revenues
decreased for the nine-month period but increased for the third
quarter of 1999. Cost of sales as a percentage of revenues for
the Instrument Business Group decreased for the third quarter but
increased for the nine-month period of 1999.
The increase in this percentage for the Equipment Business Group
in the third quarter of 1999 reflected a slight shift in the mix
of contracts to lower gross margin capital equipment projects as
well as a small increase in volume of capital equipment sales.
The small decrease in the Equipment Business Group's cost of
sales as a percentage of revenues for the comparable nine-month
periods is the result of a shift in the mix of contracts to
higher gross margin capital equipment projects and a greater
volume of higher margin spare parts sales in the first half of
1999 partially offset by the increase in the cost of sales as a
percentage of revenues in the third quarter of 1999.
The Ultrapure Water Group's decrease in cost of sales as a
percentage of revenues in the comparable third quarter and nine-
month periods reflects a higher relative proportion of this
Group's revenues derived from higher margin service business in
1999.
Cost of sales as a percentage of revenue decreased for the
Consumer Water Group in the third quarter and first nine months
of 1999, as compared to the third quarter and first nine months
of 1998, due to a higher volume of bottled water and Home Water
sales as well as to price increases in the Home Water business.
The Instrument Business Group's cost of sales as a percentage of
revenue decreased in the third quarter of 1999, as compared to
the third quarter of 1998, due to a decrease in manufacturing
overhead and improved margins in the service business. Cost of
sales as a percentage of revenue for the Instrument Business
Group increased in the first nine-month period of 1999, compared
to the first nine-month period of 1998, due to an increase in
manufacturing overhead in the first half of 1999, as well as to a
higher portion of revenues for first half of 1999 derived from
lower margin service business.
Operating expenses as a percentage of revenues increased during
the third quarter to 26.3% in 1999 from 23.0% in 1998. For the
nine-month period, operating expenses as a percentage of revenues
increased to 26.0% in 1999 from 24.2% in 1998. The increase in
operating expenses as a percentage of revenues primarily reflects
the rapid growth of the Consumer Water Group, which generally has
higher operating expenses and higher gross margins than do the
capital equipment businesses. The Consumer Water Group also had
higher operating expenses in the 1999 nine-month period due to
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<PAGE>
start-up expenses related to expansion into the French bottled
water market and expenses associated with a major computer system
implementation for the Aqua Cool business in the United States.
In addition, operating expenses as a percentage of revenues
increased due to the decline in Ultrapure Water Group and
Instrument Business Group revenues. Expanded marketing
initiatives as well as the Company's continued commitment to
investment in its research and development programs also
contributed to the increase in operating expenses as a percentage
of revenues.
Interest income of $0.1 million and $0.6 million for the third
quarter and first nine months of 1999, respectively, were lower
than interest income of $0.4 million and $0.7 million for the
third quarter and first nine months of 1998, respectively.
Interest expense in the 1999 periods was higher than the
comparable 1998 periods due to higher average borrowings by the
Company in 1999 than in 1998.
Financial Condition
Working capital decreased $14.1 million during the first nine
months of 1999 while the Company's current ratio decreased to 1.9
at September 30, 1999 from 2.2 at December 31, 1998. Cash
provided from net income, depreciation and amortization totaled
$36.6 million during the 1999 nine-month period. The primary
uses of cash were for additions to property, plant and equipment,
three small acquisitions in the first quarter of 1999 and a
reduction in accounts payable. Significant capital expenditures
were made primarily to support growth in the bottled water
operations, for new manufacturing and distribution facilities and
for "own and operate" facilities.
At September 30, 1999, the Company had $11.7 million in cash and
cash equivalents, a decrease of $17.0 million from December 31,
1998. Net property, plant and equipment increased by $16.8
million, accounts receivable increased by $11.8 million, other
assets increased by $7.3 million and accounts payable decreased
by $6.5 million. Notes payable and long-term debt increased by
$14.1 million. The Company believes that its cash and cash
equivalents balance, cash from operations, lines of credit and
foreign exchange facilities are adequate to meet its currently
anticipated needs.
Year 2000 Readiness Disclosure and Related Information
The Company's State of Readiness
The Company has undertaken a program to assure that its computer
software and systems (including information technology (IT) and
manufacturing systems), facilities and products will be able to
distinguish 21st century dates from 20th century dates (so-called
"Year 2000 (Y2K) Compliance or Compliant"). The Company's
program is divided into the following three phases:
Phase One - Inventory and Planning
The Company completed this phase in July 1998. In this phase,
the Company inventoried all hardware and software that
potentially is susceptible to Y2K problems, prepared plans for
assessing compliance and completing remediation, and prepared
vendor compliance letters.
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<PAGE>
Phase Two - Assessment
In this phase, which has been substantially completed, the
Company is assessing which of its IT systems and products are Y2K
Compliant. The Company has requested compliance statements from
hardware and software vendors, supply manufacturers and providers
of services to the Company, has received responses from many
vendors and service providers and has not discovered any
significant compliance problems. This phase also includes the
planning for remediation of non-compliant systems.
The Company's assessment plan includes assessment of Y2K
Compliance of non-information technology (non-IT) components
including the Company's membrane-related equipment, "own and
operate" equipment, other products, manufacturing equipment and
facilities. This assessment has also been substantially
completed.
The Company is obtaining compliance statements from vendors of
both IT and non-IT systems and is revising its vendors' status on
an on-going basis based upon information it is receiving. The
Company is working with its most important vendors to resolve
remediation and compliance problems as they are identified.
Phase Three - Remediation and Testing
In this phase, the Company is deploying plans for elimination,
upgrade, replacement or modification of non-compliant systems and
products and is testing Y2K Compliance. The Company has
substantially completed the remediation and testing phase.
Approximately 94% of non-IT components within the Company's "own
and operate" facilities and its products and systems are Y2K
Compliant. The remediation of the other 6% is under way and
completion is expected by the end of the fourth quarter of 1999.
The Company's core operating (IT and manufacturing) system for
its headquarters operations is not yet Y2K Compliant. To date,
the Company has completed modifications and unit testing of the
system. In addition, verification and validation testing is
complete, and full implementation is scheduled for completion on
November 15, 1999. The Company's bottled water accounting system
in the United States is not yet fully Y2K Compliant at all
locations. The Company has purchased a new integrated
distribution and accounting system, which management believes
will significantly enhance its bottled water operations. This
new system is Y2K Compliant, and its installation is
approximately 95% complete, with the one small remaining site
scheduled to be fully operational before year-end.
The Company's other IT systems are not uniform across all
operations and locations. The systems for all non-headquarters
operations have been reviewed. The Company has completed
implementing new Y2K Compliant IT systems at two major locations
in the U.S. The Company has either completed remediation or
implemented new IT systems which are Y2K Compliant at its other
significant non-headquarters operations.
Remediation or replacement of IT systems at other locations has
been completed substantially. The Company believes that failure
of these systems to become Y2K Compliant would be unlikely to
have a material impact on the Company due to the relatively small
size of these operations and the opportunity to perform relevant
tasks manually.
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<PAGE>
Costs to Address Y2K Issues
The Company's assessment and remediation of Y2K Compliance issues
is anticipated to total approximately $1.5 million, excluding the
cost of new systems implementation. Expenses to date of
approximately $1.3 million are consistent with such expectations.
The Company does not currently expect that its total actual Y2K
expenses will materially exceed its estimate.
Risk of the Company's Y2K Issues
If the Company fails to achieve Y2K Compliance in all its
systems, the Company could lose the ability to process certain of
its customers' orders, manufacture products or provide services
to customers until compliance is achieved or a means to work
around the failure is implemented. However, most of the
Company's businesses process a small number of relatively large
transactions, mitigating the short-term dependence on information
systems. Also, because the Company's systems are not uniform
across the Company, it is anticipated that any failure would not
be Company-wide. Furthermore, a failure to fill an order may not
necessarily result in complete loss of the order. Some orders
could be filled through alternative methods within a relatively
short period. Nevertheless, any disruption in order fulfillment,
manufacturing or the provision of services to customers could
result in some loss of revenue or claims against the Company.
Moreover, there is uncertainty as to whether the Company may
experience any disruption in these areas as a result of
uncertainty concerning the Y2K readiness of third-party vendors.
If disruption in any of these areas resulting from Y2K non-
compliance is greater than anticipated, the loss of revenue could
be material.
Contingency Plans
90% of the Company's contingency planning process is complete.
The remaining plans will be in place before the year-end to deal
with possible failures in systems which it determines may not
achieve Y2K Compliance on a timely basis.
Quantitative and Qualitative Disclosures about Market Risk
Derivative Instruments and Market Risk
There has been no material change in the information reported in
the Company's 1998 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission with respect to these risk
matters.
Forward-Looking Information
Safe Harbor Statement under Private Securities Litigation Reform
Act of 1996
The Company's future results of operations and certain statements
contained in this report, including, without limitation,
"Management's Discussion and Analysis of Results of Operations
and Financial Condition," constitute forward-looking statements.
Such statements are based on management's current views and
assumptions and involve risks, uncertainties and other factors
that could cause actual results to differ materially from
management's current expectations. Among these factors are
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
-12-
<PAGE>
foreign operations; the ability of the Company to achieve Y2K
Compliance in accordance with its current program, including the
ability of the Company to ascertain and plan for compliance
issues of third-party vendors; risks involved in litigation;
regulations and laws affecting business in each of the Company's
markets; market risk factors, as described above under
"Derivative Instruments and Market Risk;" and other risks and
uncertainties described from time to time in the Company's
filings with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 5. Other Information
On September 21, 1999, the Company announced that a joint venture
established in Trinidad and Tobago had been awarded a contract to
build, own and operate a 28.8 million gallon-per-day seawater
desalination plant, the largest in the Western Hemisphere.
Desalination Company of Trinidad and Tobago Ltd. (Desalcott) has
been established as a limited liability company under the laws of
Trinidad and Tobago to serve as the project company. It is
currently anticipated that the Company will acquire a minority
equity interest in Desalcott and that Hafeez Karamath Engineering
Services Ltd., a Trinidadian construction and development
company, will hold the majority equity interest.
Subject to the issuance of a notice to proceed by the Water and
Sewerage Authority of Trinidad and Tobago (WASA) and to
Desalcott's being able to obtain satisfactory long-term project
financing, the Company, through a local subsidiary, will
construct and commission the facility pursuant to an engineering,
procurement and construction contract currently valued at $109
million to be entered into between Desalcott and the Company's
affiliate. It is also anticipated that the Company through
another affiliate will enter into a contract to operate and
maintain the facility for a term of up to approximately 23 years.
Under the contract with WASA, Desalcott will supply water at an
initial price of $0.707 per cubic meter ($2.67 per thousand
gallons) to Trinidad's Point Lisas Industrial Park.
The Company will not include any revenues anticipated to be
generated by this project in its bookings until a notice to
proceed has been issued and satisfactory project financing has
been obtained.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended September 30,
1999.
All other items reportable under Part II have been omitted as
inapplicable or because the answer is negative, or because
the information was previously reported to the Securities and
Exchange Commission.
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<PAGE>
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 15, 1999 By: /s/Arthur L. Goldstein
Arthur L. Goldstein
Chairman and Chief Executive Officer
(duly authorized officer)
Date: November 15, 1999 By: /s/Robert J. Halliday
Robert J. Halliday
Vice President, Finance and
Chief Financial Officer
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<PAGE>
EXHIBIT INDEX
Sequentially
Numbered
Page
Exhibit
27.0 Financial Data Schedule 16
(for electronic purposes only)
-15-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,700
<SECURITIES> 248
<RECEIVABLES> 126,198
<ALLOWANCES> (2,531)
<INVENTORY> 33,153
<CURRENT-ASSETS> 181,950
<PP&E> 386,601
<DEPRECIATION> (174,103)
<TOTAL-ASSETS> 474,645
<CURRENT-LIABILITIES> 94,920
<BONDS> 0
0
0
<COMMON> 16,171
<OTHER-SE> 342,961
<TOTAL-LIABILITY-AND-EQUITY> 474,645
<SALES> 258,655
<TOTAL-REVENUES> 258,655
<CGS> 169,110
<TOTAL-COSTS> 169,110
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 457
<INTEREST-EXPENSE> 446
<INCOME-PRETAX> 22,582
<INCOME-TAX> 7,514
<INCOME-CONTINUING> 15,145
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,145
<EPS-BASIC> .94
<EPS-DILUTED> .93
</TABLE>
