UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 Number)
65 Grove Street, Watertown, Massachusetts 02472
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-926-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $1 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
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State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant. The aggregate market
value shall be computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common
equity, as of a specified date within 60 days prior to the date of
filing. The aggregate market value of the Common Stock of the registrant
held by non-affiliates as of March 19, 1999 was $440,651,315 (15,772,754
shares at $27 15/16 per share) (includes shares owned by a trust for the
indirect benefit of a non-employee director, and by a trust for the
indirect benefit of a spouse of a non-employee director).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date.
As of March 19, 1999, 16,129,804 shares of Common Stock, $1 par value,
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Stockholders. Parts I, II
(for Item 201
information)
and IV
Portions of the Definitive Proxy Statement for
the Annual Meeting of Stockholders to be held
on May 6, 1999. Part III
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PART I
Statements in this Annual Report on Form 10-K which are not
historical facts, so-called "forward looking statements," are made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned that all
forward-looking statements involve risks and uncertainties,
including those detailed in the Company's filings with the
Securities and Exchange Commission.
Item 1. BUSINESS
Ionics, Incorporated ("Ionics," or the "Company") is a
leading water purification company engaged worldwide in the supply
of water and of water treatment equipment through the use of
proprietary separations technologies and systems. Ionics'
products and services are used by the Company or its customers to
desalt brackish water and seawater, to purify and supply bottled
water, to treat water in the home, to manufacture and supply water
treatment chemicals and ultrapure water, to process food products,
recycle and reclaim process water and wastewater, and to measure
levels of water-borne contaminants and pollutants. The Company's
customers include industrial companies, consumers, municipalities
and other governmental entities, and utilities. Unless the
context indicates otherwise, the terms "Ionics" and "Company" as
used herein includes Ionics, Incorporated and all its
subsidiaries.
The Company's business activities are now reported in four
business group segments. This segmentation reflects a change from
three reportable segments which the Company provided in prior
periods. The current reporting reflects the business group
structure which the Company put into place in the latter part of
1998. The business group structure is based upon defined areas of
management responsibility with respect to markets, applications
and products. These business group segments are: the Equipment
Business Group; Ultrapure Water Group; Consumer Water Group; and
Instrument Business Group. In 1998, these segments accounted for
approximately 37%, 32%, 23% and 8%, respectively, of the Company's
total revenues. Approximately 47% of the Company's 1998 revenues
were derived from foreign sales or operations.
Fifty years ago, the Company pioneered the development of the
ion-exchange membrane and the electrodialysis process. Since that
time, the Company has expanded its separations technology base to
include a number of membrane and non-membrane-based separations
processes which the Company refers to as "The Ionics ToolboxR."
These separations processes include electrodialysis reversal
(EDR), reverse osmosis (RO), ultrafiltration (UF), microfiltration
(MF), electrodeionization (EDI), electrolysis, ion exchange,
carbon adsorption, and thermal processes such as evaporation and
crystallization, as well as solvent extraction and recovery
processes. The Company believes that it is the world's leading
manufacturer of ion-exchange membranes and of membrane-based
systems for the desalination of water.
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The Company was incorporated in Massachusetts in 1948. The
Company's principal executive offices are located at 65 Grove
Street, Watertown, Massachusetts 02472.
Financial Information About Business Segments
The information contained in Note 15 of Notes to Consolidated
Financial Statements contained in the Company's Annual Report to
Stockholders for the year ended December 31, 1998 is incorporated
herein by reference.
Equipment Business Group
The Equipment Business Group accounted for approximately 37%
of revenues in 1998. This segment provides technologies,
treatment systems and services for seawater desalination, brackish
water desalination, wastewater reuse and recycle, potable water
and high purity water. In addition this segment includes the
Company's custom fabrication activities and food and chemical
processing activities.
Desalination and Related Water Treatment Equipment
Opportunities for the sale of desalination and related
water treatment equipment arise from changes in the needs of
people and municipalities, from industrial shifts and growth,
and from environmental concerns. With less than 1% of the
total water on the planet fresh and usable, desalination has
played an important role in creating new water sources.
The Company sells a wide spectrum of products and systems to
serve this market which utilize technologies including EDR, ion
exchange, EDI, RO, UF, ozonation and carbon adsorption.
Depending on the customers' needs, the Company provides
standardized versions of systems utilizing one or more of the
technologies mentioned, or can supply complete turnkey plants
that may include standardized models as well as peripheral water
treatment equipment, complete engineering services, process and
equipment design, project engineering, commissioning, operator
training and field service.
In 1997, the Company introduced the new Ionics EDR 2020TM
system, a third-generation brackish water desalination system
incorporating several new, patented improvements at reduced cost.
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Wastewater Treatment Equipment
The market for wastewater treatment, recycle and reuse has
shown significant growth as world demand for water of specified
quality continues to increase and as regulations limiting waste
discharges to the environment continue to mount. The wastewater
market is increasingly driven by the concept of total water
management, which involves the recognition that the water streams
which enter, leave or become part of a process can be managed to
achieve overall economic efficiencies. Ionics services the
wastewater market with brine concentrators and crystallizers,
traditional wastewater treatment equipment, and special
electrodialysis reversal membrane-based concentrators for recycle
and reuse.
The Company designs, engineers and constructs brine
concentrators, evaporators and crystallizers which are used to
clean, recover and recycle wastewater, particularly in zero
liquid discharge industrial uses. Such systems may also
incorporate electrodialysis reversal membrane systems as
preconcentrators. Ionics also holds a license for a patented
solvent extraction technology which separates contaminated
sludges, sediments and soils into oil, water and solids. This
technology has potential use for cleanup of toxic organic
materials at contaminated sites.
Ionics also designs, engineers and constructs customized
systems for industrial wastewater customers which may include
conventional treatment systems as well as advanced separation
technologies such as electrodialysis reversal, reverse osmosis,
electrolysis and microfiltration. Typical industrial customers
are power stations, chemical and petrochemical plants,
metal-working and automobile factories, textile manufacturers and
a variety of other industrial applications. The Company also
provides custom and packaged sewage treatment systems for
municipalities.
Drinking Water Supply
Ionics' position as a seller of purified or treated water
has evolved from its traditional role as a supplier of water
treatment equipment. In certain situations, opportunities are
available for the Company to provide a complete service package
involving financing, construction, operation and maintenance of
water treatment facilities.
Ionics, through its wholly owned subsidiary, Ionics Iberica,
S.A., owns and operates a 5.5 million gallon per day capacity
brackish water EDR facility and a 3.6 million gallon per day RO
seawater facility on Grand Canary Island, Spain. Under long-term
contracts, the Company is selling the desalted water from both
facilities to the local water utility for distribution.
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The Company's wholly owned subsidiary, Ionics (Bermuda)
Ltd., owns and operates a 600,000 gallon per day EDR brackish
water desalting plant on the island of Bermuda. This plant
supplies fresh water under a long-term contract with Watlington
Waterworks Ltd., a Bermuda corporation partially owned by Ionics.
Through its Ionics Aqua Design subsidiaries, the Company
owns and operates more than 30 desalination plants on a number of
Caribbean islands, which provide drinking water to hotels,
resorts and governmental entities. Drinking water on these
islands is usually supplied pursuant to water supply contracts
with terms ranging from five to ten years. In 1998, the Company
signed long-term, build-own-operate municipal desalination
contracts with the governments of Bonaire, Anguilla and Barbados.
The Barbados facility will be the largest brackish water
desalination facility in the Caribbean, and the Company will
supply water under a 15-year contract.
Chemical Supply
The Company uses its CloromatR electrolytic membrane-based
technology to produce sodium hypochlorite and related chlor-
alkali chemicals for industrial, commercial and other non-
consumer applications. The Company's wholly owned Australian
subsidiary, Elite Chemicals Pty. Ltd. (Elite), utilizes Cloromat
systems to produce sodium hypochlorite on-site in Brisbane for
the industrial, commercial and janitorial supply of bleach
products, and to supply sodium hypochlorite to treat the City of
Brisbane's drinking water supply under a five-year contract.
Elite has recently expanded its distribution of bleach products
to the Sydney area.
Food Processing
Under an agreement with a major U.S. dairy cooperative, the
Company oversees whey processing activities at two plants owned
by the cooperative, and receives a processing fee based on the
production of demineralized whey for its services. Included in
the equipment being utilized by the Company at these plants are
its ElectromatR electrodialysis systems.
Custom Fabricated Products
At its Bridgeville, Pennsylvania facility, the Company
fabricates specially designed products for industrial and
defense-related applications. The Company's experience and
expertise in design, welding, machining and assembly to meet
exceptionally fine tolerances have been utilized to fabricate
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products ranging from intricate small parts to large multi-ton
assemblies.
Ultrapure Water Group
The Ultrapure Water Group accounted for approximately 32% of
the Company's 1998 revenues. This segment provides equipment and
services for specialized industrial users of ultrapure water.
Ultrapure water is water that has been purified by a series of
processes to the degree that remaining impurities are measured in
parts per billion or trillion.
Ultrapure Water Equipment
The demand for technologically advanced ultrapure water
equipment and systems has increased as the industries which use
ultrapure water have become more knowledgeable about their
quality requirements. Ultrapure water needs are particularly
important in the semiconductor, pharmaceutical, petroleum and
power generation industries. The semiconductor industry in
particular has increasingly demanded higher purity water as the
circuits on silicon wafers have become more densely packed.
The Company supplies sophisticated ultrapure water systems
which utilize a combination of ion-exchange, EDI, RO and UF
technologies. These systems are either trailer-mounted or land-
based and vary from standardized modules to large multimillion
dollar systems, depending on the customer's requirements. In
1998, the Company was awarded an order for an ultrapure water
system utilizing the Company's EDI technology to be located in
Beijing, the first such installation in China.
Included in the equipment sold by the Ultrapure Water Group
is the Company's OzgenR ozone-generation equipment, which is
being utilized by semiconductor plants as well as for swimming
pool and aquarium disinfection.
The Company established the Ionics Life Sciences division at
the beginning of 1999 to expand its delivery of ultrapure water
equipment and services to the pharmaceutical industry.
Ultrapure Water Supply
In industries such as power generation, semiconductors,
pharmaceuticals and biotechnology, ultrapure water is critical to
product quality and yield. Depending on the composition and
quantity of the impurities to be removed or treated, any one of
several membrane separations methods can be utilized to provide
ultrapure water to the customer. Ionics has pioneered in the
application of three membrane technologies (EDR, RO and UF)
combined together in a mobile system called the "triple membrane"
trailer for use in the commercial processing of ultrapure water.
Ionics provides ultrapure water services and the production and
sale of ultrapure water from trailer-mounted units at customer
sites.
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Ionics has also commercially implemented its EDI technology
in the production of ultrapure water. EDI is a continuous,
electrically driven, membrane-based water purification process
which produces ultrapure water without the use of strong chemical
regenerants, such as sulfuric acid and caustic soda, which are
commonly required. The Company's TMT-II trailers utilize a
combination of EDI, RO and UF technologies and represent what the
Company believes to be the most advanced technology used in the
commercial processing of ultrapure water.
At the end of 1998, Company-owned or operated equipment for
the production of ultrapure water and other purified process
water under contract with companies in various industries had a
total capacity of approximately 24,000 gallons per minute.
In January 1996, the Company acquired Apollo Ultrapure Water
Systems, Inc., based near Los Angeles, enabling the Company to
provide additional resources to service the growing Southern
California ultrapure water market. In November 1997, the Company
acquired a majority interest in a Malaysian company now called
Ionics Enersave Engineering Sdn Bhd, which provides ultrapure
water services and systems to the southeast Asian market.
One of the Company's important ultrapure water service
activities is ion-exchange regeneration services, which are
provided at four U.S. and four overseas locations. In 1998, the
Company commissioned a state-of-the-art resin regeneration
facility in Singapore, and has just completed a 66,000 square
foot facility in San Jose, California which contains resin
regeneration, manufacturing and service facilities. The Company
also provides system sanitization and high-flow deionization
services at customer sites.
Consumer Water Group
This business group segment accounted for approximately 23%
of the Company's 1998 revenues. The Company's consumer water
products serve the bottled water, home water purification, and
consumer bleach-based product market areas.
Aqua CoolR Pure Bottled Water
Ionics entered the bottled water business in 1984. The
Company's strategy is to utilize its proprietary desalination and
purification technology to produce a brand of drinking water,
named Aqua Cool Pure Bottled Water, which can be reproduced with
uniform consistency and high quality at numerous locations around
the world. Distribution operations have been established at
seven Company-owned locations throughout England; at 18 Company-
owned locations serving a number of metropolitan areas in the
eastern, southeastern and central United States; and, through
joint ventures, in Bahrain, Kuwait and Saudi Arabia. The
Company's business focuses on the sale of Aqua Cool in five-
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gallon bottles to a variety of commercial and residential
customers. The Company has recently expanded its product-line to
include office coffee service and other services complementary to
bottled water distribution.
At the end of 1998, there were a total of 29 Aqua Cool
distribution centers in the United States and overseas, supplied
with Aqua Cool by nine regional water purification and bottling
facilities, supplying a customer base of approximately 135,000.
Early in 1999, the Company acquired Aquarelle, a French bottled
water distributor, with the intent of expanding the Company's
bottled water operations into continental Europe.
Home Water Purification Systems
Point-of-Use Devices
The Company participates in the "point-of-use" market for
over- and under-the-sink water purifiers through the sale of
reverse osmosis and activated carbon-based filtering devices, and
through the manufacture and sale of HYgeneR, a proprietary, EPA-
registered, silver-impregnated activated carbon filtering medium.
The Company incorporates HYgene, which is designed to prevent
bacterial build-up while providing the capability of removing
undesirable tastes and odors from the water supply, into its own
bacteriostatic water conditioners and also sells HYgene to
manufacturers of household point-of-use water filters.
Point-of-Entry Devices
Ionics' point-of-entry water products include ion-exchange
water conditioners to "soften" hard water, and chemicals and
media for filtration and treatment. The Company sells its
products, under the General Ionics and other brand names, through
both independent distributorships and wholly owned sales and
service dealerships.
In 1998, the Company introduced a new line of bacteriostatic
water conditioning systems, and began to market water
conditioning systems in Ireland.
Bleach-Based Consumer Products
The Company's Elite New England division operates a Cloromat
facility to produce and distribute bleach-based products for the
consumer market, primarily one-gallon bleach products under
private label or under the Company's own "EliteR", "Super
ValueTM" and "UltraPureTM" brands, and methanol-based automobile
windshield wash solution. These operations are conducted in a
129,000 square foot manufacturing facility located in Ludlow,
Massachusetts.
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Instrument Business Group
The Company's Instrument Business Group accounted for
approximately 8% of the Company's 1998 revenues. This business
segment comprises the Ionics Instrument Group located in
Watertown, Massachusetts and Ionics Sievers Instruments, located
in Boulder, Colorado. The Company has become a leading
manufacturer of instruments that measure total organic carbon
across the water "spectrum" from ultrapure water to wastewater.
The Sievers Model 400 TOC analyzer is the only on-line TOC
analyzer designed specifically to comply with new United States
Pharmacopoeia (USP) requirements for determining water quality in
the pharmaceutical industry. Ionics Sievers recently introduced
TOC analyzers sensitive to the parts-per-trillion range, used
primarily for ultrapure water measurement in the semiconductor
and pharmaceutical industries.
Sievers TOC monitors complement the Company's TOC monitor
line for process water and wastewater applications. The
Company's other instrument products, which are used both in the
laboratory and on-line, measure and detect, among other things,
total carbon, sulfur, nitric oxide, chemical oxygen demand and
total oxygen demand. The Company also sells instruments for the
measurement of dissolved metals and specific chemical analyzers
for ammonia, phosphates, nitrates and chlorine.
In 1998, the Company began to market a line of instruments
for the detection of thin layers of oil on water. One line of
such instruments is designed and manufactured by Agar
Technologies Process and Environmental Control Ltd., an Israeli
corporation acquired by the Company early in 1999.
Other Information Concerning the Business of the Company
Raw Materials and Sources of Supply
All raw materials essential to the business of the Company
can normally be obtained from more than one source. In those few
instances where raw materials are being supplied by only one
source, the current supplier has given the Company a lead time
for cancellation, which the Company believes is sufficient to
enable it to obtain other suppliers. In addition, the Company
maintains inventories of single source items which it believes
are adequate under the circumstances.
The Company produces the membranes required for its
equipment and systems that use the ED, EDR, MF, UF and EDI
processes. In 1997, the Company started to produce RO membranes.
Membranes used for the RO process are also purchased from outside
suppliers, and are normally available from multiple sources.
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Patents and Trademarks
The Company believes that its products, know-how, servicing
network and marketing skills are more significant to its business
than trademarks or patent protection of its technology.
Nevertheless, the Company has a policy of applying for patents
both in the United States and abroad on inventions made in the
course of its research and development work for which a
commercial use is considered likely. The Company owns numerous
United States and foreign patents and trademarks and has issued
licenses thereunder, and currently has additional pending patent
applications. Of the approximately 90 outstanding U.S. patents
held by the Company, a substantial portion involves membranes,
membrane technology and related separations processes such as ED
and EDR, RO, UF and EDI. The Company does not believe that any
of its individual patents or groups of related patents, nor any
of its trademarks, is of sufficient importance that its
termination or abandonment, or the cancellation of licenses
extending rights thereunder, would have a material adverse effect
on the Company.
Seasonality
The activities of the Company's businesses are not of a
seasonal nature, other than certain activities of the Consumer
Products segment. Bottled water sales and bleach products for
swimming pool use tend to increase during the summer months.
Also, sales levels for automobile windshield wash solution
increase in the winter months.
Customers
The nature of the Company's business is such that it
frequently has in progress large contracts with one or more
customers for specific projects; however, there is no one
customer whose purchases account for 10% or more of the Company's
consolidated revenues and whose loss would have a material
adverse effect on the Company and its subsidiaries taken as a
whole.
Backlog
The Company's backlog of firm orders was $189,917,000 at
December 31, 1998 and $153,679,000 at December 31, 1997. For
multi-year contracts, the Company includes in reported backlog
the revenues associated with the first five years of the
contract. For multi-year contracts which are not otherwise
included in backlog, the Company includes in backlog up to one
year of revenues. The Company expects to fill approximately 77%
of its December 31, 1998 backlog during 1999. The Company does
not believe that there are any seasonal aspects to its backlog
figures.
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Government Contracts
The Company does not believe that any of its sales under
U.S. Government contracts or subcontracts during 1998 are subject
to renegotiation. The Company has not had adjustments to its
negotiated contract prices, nor are any proceedings pending for
such adjustments.
Research and Development
The Company is actively engaged in research and development
directed toward products for use in water purification,
processing and measurement, and separations technology. The
Company's research and development expenses were approximately
$6,635,000 in 1998, $5,410,000 in 1997, and $5,108,000 in 1996.
Competition
The Company experiences competition from a variety of
sources with respect to virtually all of its products, systems
and services, although the Company knows of no single entity that
competes with it across the full range of its products and
services. Competition in the markets served by the Company is
based on a number of factors, which may include price,
technology, applications experience, know-how, availability of
financing, reputation, product warranties, reliability, service
and distribution.
With respect to the Company's Equipment Business Group,
there are a number of companies, including several sizable
chemical companies, that manufacture membranes, but not
equipment. There are numerous smaller companies, primarily
fabricators, that build water treatment and desalination
equipment, but which generally do not have their own proprietary
membrane technology. A limited number of companies manufacture
both membranes and equipment. The Company has numerous
competitors in its conventional water treatment, instruments and
fabricated products business lines.
In 1998, the International Desalination Association released
a report providing data regarding the manufacturers of
desalination equipment. According to the report, which covered
land-based water desalination plants delivered or under
construction as of December 31, 1997, with a capacity to produce
100 cubic meters (approximately 25,000 gallons) or more of fresh
water daily, the Company ranked first in terms of the cumulative
number of such plants sold, having sold 1,742 plants of such
capacity, more than the next three manufacturers combined. In
addition, the Company ranked first in the total capacity of such
plants sold.
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With respect to the Ultrapure Water Group business segment,
the Company competes with suppliers of ultrapure water services
on a national and regional basis, and with other manufacturers of
membrane-related equipment.
With respect to the Company's Consumer Water Group business
segment, there are numerous bottled water companies which compete
with the Company, including several which are much larger than
the Company. Most of the Company's competitors in point-of-entry
and point-of-use products for the home are small assemblers,
serving local or regional markets. However, there are also
several large companies competing nationally in these markets.
In the case of its silver-impregnated activated carbon
product lines, the Company knows of two competitors with which it
competes on a national basis.
The Company competes with many suppliers of bleach and
bleach-based cleaning products and automobile windshield wash for
the consumer market, a number of which are much larger than the
Company.
The Company is unable to state with certainty its relative
market position in all aspects of its business. Many of its
competitors have financial and other resources greater than those
of the Company.
Environmental Matters
Continued compliance by the Company and its subsidiaries
with federal, state and local provisions regulating the discharge
of materials into the environment or otherwise relating to the
protection of the environment is expected to have no material
effect upon capital expenditures, earnings or the competitive
position of the Company or any of its subsidiaries.
In May 1998, a wholly owned California subsidiary of the
Company was notified by the U.S. Environmental Protection Agency
("EPA") that it was a potentially responsible party (PRP)in
connection with the Operating Industries, Inc. Superfund Site in
Monterey Park, California. Because of its relatively small
volumetric contribution of waste to the site,the subsidiary was
eligible to participate in a de minimis settlement, and in
January 1999 made full and timely payment of $13,685 in
settlement.
The Company is one of approximately 1,000 PRPs at a
Superfund site at Solvent Recovery Services of New England in
Southington, Connecticut (the "SRS Site"). The Company's
volumetric ranking in comparison to the total volume of wastes
treated at the SRS Site is approximately 0.5%. A non-time
critical removal action, consisting of containment, pumping, and
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treatment of the most heavily contaminated non-bedrock ground
water, was completed in 1995. The Company's share of combined
assessments to date against all PRPs for non-time critical
removal actions and other work totals approximately $60,000. The
ultimate site cleanup cost is currently not expected to exceed
$59 million, of which the Company's share would not exceed
$308,000 including the amounts already assessed against the
Company. While it is too soon to predict the scope and cost of
the final clean-up remedy that the EPA will select, based on the
Company's small volumetric ranking and the identities of the
larger PRPs, which include many substantial companies, the
Company believes that its liability in this matter will not have
a material effect on the Company or its financial position.
During 1995, the Company acquired certain real property in
Maryland to accommodate expansion of the Elite bleach-based
consumer chemicals business. Prior to its acquisition by the
Company, the property had been determined to have some
contamination of soil and ground water. In conjunction with the
purchase, the Company worked closely with the Maryland Department
of the Environment and, based upon an environmental study
completed by a third party consultant, reached a preliminary
agreement regarding treatment. Based upon the costs of treatment
identified by the consultant, the Company has provided a
conservative accrual, recorded as part of the cost of the
property. The Company believes that additional liability
associated with treatment of the property, if any, will not have
a material effect on the Company or its financial condition.
Certain former operations of a division of the Company are
the subject of an investigation into possible violations of
environmental regulations by the Office of the Attorney General
of the Commonwealth of Massachusetts. See Item 3, Legal
Proceedings, page I-15.
The Company has never had a product liability claim grounded
in environmental liability, and believes that the nature of its
products and business makes such a claim unlikely.
Employees
The Company and its consolidated subsidiaries employ
approximately 2,200 full-time persons. None of the Company's
employees are represented by unions or have entered into
workplace agreements with the Company, except for the employees
of the Company's Australian subsidiary and certain employees of
the Company's Spanish subsidiary. The Company considers its
relations with its employees to be good.
Foreign Operations
The Company's sales to customers in foreign countries
primarily involve desalination systems, ultrapure water systems,
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water and wastewater treatment systems, sodium hypochlorite,
Cloromat systems, products and services related to these
foregoing systems, instruments and bottled water. The Company
seeks to minimize financial risks relating to its international
operations. Wherever possible, the Company obtains letters of
credit or similar payment assurances denominated in U.S. dollars.
If U.S. dollar payments cannot be secured, the Company, where
appropriate, enters into foreign currency hedging transactions.
The Company also uses foreign sources for equipment parts and may
borrow funds in local (foreign) currencies to offset the asset
risk of foreign currency devaluation. Net foreign currency
transaction (losses)/gains included in income before income taxes
and minority interest totaled $(28,000) in 1998, $100,000 in
1997, and $548,000 in 1996.
The Company engages in certain foreign operations both
directly and through the following wholly owned subsidiaries:
Ionics (Bermuda) Ltd.; Ionics Iberica, S.A.; Ionics (U.K.)
Limited; Ionics Italba, S.p.A.; Ionics Nederland B.V.; Elite
Chemicals Pty. Ltd.; Ionics France S.A.; Resources Conservation
Co. International; Ionics (Korea) Inc.; Aqua Design, Inc.,
including its subsidiaries and affiliates; Ionics Asia-Pacific
Pte Ltd.; Ionics Watertec Pty. Ltd.; Ionics Foreign Sales
Corporation Limited; Aquarelle S.A. (acquired in early 1999); and
Agar Technologies Process and Environmental Control Ltd.
(acquired in early 1999). In 1997, the Company acquired a 55%
ownership interest in Ionics Enersave Engineering Sdn Bhd, a
Malaysian corporation with subsidiary operations in Indonesia and
China.
The Company also engages in various foreign operations
through investments in affiliated companies and joint venture
relationships. The activities include the production, sale and
distribution of bottled water through a 40% owned affiliate in
Bahrain, a 40% owned affiliate in Saudi Arabia, and a 49% owned
affiliate in Kuwait.
In addition, the Company has a 20% ownership interest in
Watlington Waterworks, Limited in Bermuda. Watlington collects,
treats and distributes water throughout Bermuda for both potable
and non-potable uses. The Company also has a 50% ownership
interest in Yuasa-Ionics Co., Ltd., Tokyo, Japan, which among its
activities serves as a distributor of certain of the Company's
products in Japan; and, through Ionics Iberica, S.A., 20%
interests in Aguas Tratadas de Cadereyta, S.A. de C.V. and Aguas
Tratadas de Madero, S.A. de C.V., companies organized to provide
water treatment services in Mexico. Through its Italian
subsidiary, the Company has a 50% ownership interest in Agrinord
S.r.l., an Italian company engaged in waste treatment operations.
Further geographical and financial information concerning
the Company's foreign operations appears in Notes 1, 5, 8, 13, 14
and 15 to the Company's Consolidated Financial Statements
included as part of the Company's 1998 Annual Report to
Stockholders, which Notes are incorporated herein by reference.
/15
I-13
Financial Information About Geographic Areas
The information contained in Note 15 of Notes to
Consolidated Financial Statements contained in the Company's
Annual Report to Stockholders for the year ended December 31,
1998 is incorporated herein by reference.
Item 2. PROPERTIES
The Company's executive offices are located in Watertown,
Massachusetts. Manufacturing and other operations are carried
out in a number of locations. The following table provides
certain information as to the Company's principal general offices
and manufacturing facilities:
<TABLE>
<CAPTION>
Business Approximate
Segment Utilizing Property Square Feet
Location the Location Interest of Floor Space
<S> <C> <C> <C>
Watertown, MA (headquarters) Equipment Business Group Owned 134,000
Instrument Business Group
Consumer Water Group
Watertown, MA Equipment Business Group Owned 127,000
Consumer Water Group
Bridgeville, PA Equipment Business Group Owned 77,000
Consumer Water Group
Elkton, MD Consumer Water Group Owned 234,000
Ludlow, MA Consumer Water Group Owned 129,000
San Jose, CA Ultrapure Water Group Owned 66,000
Boulder, CO Instrument Business Group Leased 74,000
London, England Consumer Water Group Owned 36,000
</TABLE>
The Company also owns or leases smaller facilities in which its
business segments conduct business. The Company makes use primarily of
leased facilities for its Aqua Cool bottled water distribution centers.
The majority of these facilities contain less than 10,000 square feet.
The Company considers the business facilities that it utilizes to be
adequate for the uses to which they are being put.
/16
I-14
Item 3. LEGAL PROCEEDINGS
The Company is involved in the normal course of its business in
various litigation matters. Although the Company is unable to determine
at the present time whether it will have any liability in any of the
pending matters, some of which are in the early stages of pre-trial
discovery, the Company believes generally that it has meritorious defenses
and that none of the pending matters will have an outcome material to the
financial condition or business of the Company.
The Attorney General of the Commonwealth of Massachusetts is
conducting an investigation into certain former operations of a division
of the Company during portions of the years 1991 through 1995. The
Company is cooperating with this investigation of possible violations of
environmental statutes and regulations that relate to one facility that
ceased operations in 1995. The Company cannot predict the outcome of this
matter, but it may result in administrative, civil or criminal charges
and/or monetary payments.
On March 27, 1998, the Company was served with a summons and
complaint in connection with a lawsuit now captioned United States Filter
Corporation, U.S. Filter/Ionpure, Inc., IP Holding Company, Millipore
Corporation and Millipore Investment Holdings Limited v. Ionics,
Incorporated, filed in the U.S. District Court, District of Massachusetts
(Boston). Plaintiffs allege that the Company is infringing a certain
reissue patent, 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 was recently notified that
plaintiffs are seeking to add to their complaint claims of infringement of
certain earlier-issued patents. 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
plaintiffs' infringement claims and intends vigorously to defend itself in
this litigation, which is in the early discovery stages.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
/17
I-15
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Reference is made to the Company's Annual Report to Stockholders for
the year ended December 31, 1998. The information set forth on page 37
entitled "Common Stock Price Range" and on the inside back cover of such
Annual Report is hereby incorporated by reference.
Item 6. SELECTED FINANCIAL DATA
Reference is made to the Company's Annual Report to Stockholders
for the year ended December 31, 1998. The information set forth on
page 37 of such Annual Report entitled "Statement of Operations
Data" and "Balance Sheet Data" is hereby incorporated by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to the Company's Annual Report to Stockholders
for the year ended December 31, 1998. The information set forth on
pages 17 through 21 of such Annual Report entitled "Management's
Discussion and Analysis of Results of Operations and Financial
Condition" is hereby incorporated by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Derivative Instruments
The Company had $318,000 of foreign exchange contracts outstanding
at December 31, 1998. These contracts are immaterial to the Company
and as they were used to hedge foreign currency denominated
transactions, any change in the fair value of the contracts would be
offset by changes in the underlying value of the transactions. The
Company has no other derivative financial instruments, or other
financial and commodity instruments for which fair value disclosure
would be required under SFAS No. 119. The Company holds no
investment securities which would require disclosure of market risk.
Market Risk
The Company's primary market risk exposures are in the areas of
interest rate risk and foreign currency exchange rate risk. The
Company's investment portfolio of cash equivalents is subject to
interest rate fluctuations, but the Company believes this risk is
immaterial due to the short-term nature of these investments. At
December 31, 1998, the Company had $6.9 million of short-term debt
and $1.5 million of long-term debt outstanding. The short-term debt
was issued under various working capital lines and due to its short-
/18
II-1
term maturities, a hypothetical 10% decrease in the Company's
weighted average short-term borrowing rate at December 31, 1998
would not have materially affected the year-end carrying value of
the debt. The Company's exposure to currency exchange rate
fluctuations has been and is expected to remain modest due to the
fact that the operations of its international subsidiaries are
primarily conducted in their respective local currencies.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Company's Annual Report to Stockholders
for the year ended December 31, 1998. The consolidated balance
sheets of the Registrant as of December 31, 1998 and 1997, the
related consolidated statements of operations, cash flows and
stockholders' equity for the years ended December 31, 1998, 1997 and
1996, and the related notes with the opinion thereon of
PricewaterhouseCoopers LLP, independent accountants, on pages 21
through 36, and Selected Quarterly Financial Data (unaudited) on
page 37, are hereby incorporated by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
This item is not applicable to the Company.
/19
II-2
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 with respect to directors is
hereby incorporated by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 6,
1999, filed with the Securities and Exchange Commission on March 24,
1999.
The information regarding executive officers is as follows:
Age as of Positions
Name March 1, 1999 Presently Held
Arthur L. Goldstein* 63 President, Chief Executive Officer
and Director since 1971; Chairman
of the Board since 1990
William E. Katz 74 Executive Vice President since 1983;
Director since 1961
John P. Bergeron 47 Vice President since February 23, 1999;
Treasurer since November 1997
Edward J. Cichon 44 Vice President, Equipment Business
Group since July 1998
Robert J. Halliday 44 Vice President, Finance since
December 1990; Chief Financial
Officer since August 1992
Stephen Korn 53 Vice President, General Counsel
and Clerk since September 1989
Theodore G. Papastavros 65 Vice President since 1975;
Vice President, Strategic Planning
since February 1990
___________________
* Member of Executive Committee
There are no family relationships between any of the
officers or directors. Officers of the Company are appointed
each year at the annual meeting of Directors.
Except for Mr. Cichon, all of the above executive officers
have been employed by the Company in various capacities for more
than five years. Prior to joining the Company in July 1998, Mr.
Cichon served as a Senior Vice President of Metcalf & Eddy, Inc.,
a water and wastewater engineering and services firm, where he
was employed for 18 years.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated
by reference from the Company's definitive proxy statement for
the Annual Meeting of Stockholders to be held May 6, 1999, filed
with the Securities and Exchange Commission on March 24, 1999.
/20
III-1
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by Item 12 is hereby incorporated
by reference from the Company's definitive proxy statement for
the Annual Meeting of Stockholders to be held May 6, 1999, filed
with the Securities and Exchange Commission on March 24, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated
by reference from the Company's definitive proxy statement for
the Annual Meeting of Stockholders to be held May 6, 1999, filed
with the Securities and Exchange Commission on March 24, 1999.
/21
III-2
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Index to Financial Statements and Financial
Statement Schedules on page IV-8. The Financial
Statement Schedules are filed as part of this Annual
Report on Form 10-K.
2. Financial Statement Schedules
See Index to Financial Statements and Financial
Statement Schedules on page IV-8.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
<S> <C> <C>
3.0 Articles of Organization and By-Laws
3.1 Restated Articles of Organization filed *
April 16, 1986 (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1997).
3.1(a) Amendment to the Restated Articles of *
Organization filed June 19, 1987 (filed
as Exhibit 3.1(a) to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1997).
3.1(b) Amendment to Restated Articles of *
Organization filed May 13, 1988
(filed as Exhibit 3.1(b) to
Registration Statement No. 33-38290 on
Form S-2 effective January 24, 1991).
3.1(c) Amendment to Restated Articles of *
Organization filed May 8, 1992
(filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ending June 30, 1996).
3.1(d) Amendment to Restated Articles of *
Organization filed May 8, 1998
(filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ending March 31, 1998).
/22
IV-1
3.2 By-Laws, as amended through November 14, 1997 *
(filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1997).
4.0 Instruments defining the rights of security holders,
including indentures
4.1 Renewed Rights Agreement, dated as of *
August 19, 1997 between Registrant and
BankBoston N.A. (filed as Exhibit 1 to
the Company's Current Report on Form 8-K
dated August 27, 1997).
4.2 Form of Common Stock Certificate (filed as *
Exhibit 4.2 to the Company's Annual Report
on Form 10-K for the year ended
December 31, 1997).
10.0 Material Contracts
10.1 1979 Stock Option Plan, as amended through *
February 22, 1996 (filed as Exhibit 10.1 to
the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.2 1986 Stock Option Plan for Non-Employee Directors, *
as amended through February 19, 1997 (filed as
Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996).
10.3 Amended and Restated Credit Agreement between *
the Company and the First National Bank of Boston
dated as of December 31, 1992 (filed as
Exhibit 10.3 to the Company's Annual Report
for the year ended December 31, 1997).
10.3(1)Amendment Agreement No. 1, dated as of *
December 31, 1995, to Amended and Restated
Credit Agreement between the Company and The
First National Bank of Boston (filed as Exhibit
10.3(1) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.3(2)Amendment Agreement No. 2, dated as of
December 31, 1998, to Amended and Restated
Credit Agreement between the Company and
BankBoston N.A.
10.4 Operating Agreement dated as of September 27, *
1989 between the Company and Aqua Cool
Enterprises, Inc. (filed as Exhibit 10.4 to
the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
/23
IV-2
10.5 Term Lease Master Agreement dated as of *
September 27, 1989 between the Company and
Aqua Cool Enterprises, Inc. (filed as
Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.6 Option Agreement dated as of September 27, 1989 *
among the Company, Aqua Cool Enterprises, Inc.
and the other parties named therein (filed as
Exhibit 10.6 to the Company's registration
statement on Form S-2, No. 33-38290,
effective January 24, 1991).
10.7 1994 Restricted Stock Plan (filed as Exhibit 10.12 *
to the Company's Annual Report on Form 10-K dated
March 30, 1995).
10.8 1997 Stock Incentive Plan (filed as Exhibit 10.12 *
to the Company's Annual Report on Form 10-K dated
December 31, 1996).
10.9 Ionics, Incorporated Supplemental Executive *
Retirement Plan effective as of January 1, 1996
(filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K dated December 31, 1997).
10.10 Form of Employee Retention Agreement dated *
February 24, 1998 between the Company and
certain officers of the Company and its
subsidiaries (filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K dated
December 31, 1997).
10.11 1998 Non-Employee Directors Fee Plan (filed *
as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period
ending September 30, 1998).
13.0 Annual Report to Stockholders of the Company for the
year ended December 31, 1998 (constituting the following
sections: Management's Discussion and Analysis of Results of
Operations and Financial Condition; Report of Independent
Accountants; Consolidated Statements of Operations;
Consolidated Balance Sheets; Consolidated Statements of
Cash Flow; Consolidated Statements of Stockholders' Equity;
Notes to Consolidated Financial Statements; Selected
Financial Data; Board of Directors; Corporate Officers;
Principal U.S. Offices, Affiliates & Subsidiaries;
Corporate Headquarters; Principal Overseas Offices,
Affiliates & Subsidiaries; Investor Information; Transfer
Agent & Registrar; and Auditors).
/24
IV-3
21.0 Subsidiaries of the Registrant.
23.0 Consents
23.1 Consent of PricewaterhouseCoopers LLP
to incorporation by reference of that firm's
report dated February 19, 1999, which is
included on page 21 of the Registrant's
Annual Report to Stockholders
for the year ended December 31, 1998.
24.0 Power of Attorney.
27.0 Financial Data Schedule. **
________________________________
* incorporated herein by reference
** for electronic purposes only
</TABLE>
/25
IV-4
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during
the last quarter of fiscal 1998.
Undertaking
For purposes of complying with the amendments to the rules
governing Form S-8 effective July 13, 1990 under the
Securities Act of 1933, the undersigned hereby undertakes as
follows, which undertaking shall be incorporated by
reference into Registrant's 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,
and 33-54400.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant
to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
/26
IV-5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
By: /s/Arthur L. Goldstein
Arthur L. Goldstein,
Chairman of the Board,
President and Chief
Executive Officer
Date: March 29, 1999
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Date: March 29, 1999 By: /s/Arthur L. Goldstein
Arthur L. Goldstein,
Chairman of the Board,
President and
Chief Executive Officer
(principal executive
officer) and Director
Date: March 29, 1999 By: /s/Robert J. Halliday
Robert J. Halliday,
Vice President, Finance
and Chief Financial Officer
(principal financial officer
and principal accounting
officer)
/27
IV-6
Date: March 29, 1999 By/s/Douglas R. Brown
Douglas R. Brown, Director
Date: March 29, 1999 By/s/William L. Brown
William L. Brown, Director
Date: March 29, 1999 By/s/Arnaud de Vitry d'Avaucourt
Arnaud de Vitry d'Avaucourt,
Director
Date: March 29, 1999 By/s/Kathleen F. Feldstein
Kathleen F. Feldstein,
Director
Date: March 29, 1999 By/s/William E. Katz
William E. Katz, Director
Date: March 29, 1999 By/s/John J. Shields
John J. Shields, Director
Date: March 29, 1999 By/s/Carl S. Sloane
Carl S. Sloane, Director
Date: March 29, 1999 By/s/Daniel I.C. Wang
Daniel I.C. Wang, Director
Date: March 29, 1999 By/s/Mark S. Wrighton
Mark S. Wrighton, Director
Date: March 29, 1999 By/s/Allen S. Wyett
Allen S. Wyett, Director
/28
IV-7
IONICS, INCORPORATED
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGES
Report of Independent Accountants 21*
Financial Statements:
Consolidated Statements of Operations for the
Years Ended December 31, 1998, 1997 and 1996 22*
Consolidated Balance Sheets as of
December 31, 1998 and 1997 23*
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996 24*
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996 25*
Notes to Consolidated Financial Statements 26-36*
Supporting Financial Statement Schedules for the years ended
December 31, 1998, 1997 and 1996:
Schedule II - Valuation and Qualifying Accounts IV-9
Report of Independent Accountants on Financial
Statement Schedule IV-10
__________________
All other schedules are omitted because the amounts are
immaterial, the schedules are not applicable, or the required
information is shown in the financial statements or the notes
thereto.
* Page references are to the Annual Report to Stockholders of
the Company for the year ended December 31, 1998, which pages
are incorporated herein by reference.
/29
IV-8
<TABLE>
IONICS, INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Additions Additions
Balance at Charged to Due to
End of Costs and Acquired Balance at
Description Prior Year Expenses Businesses Deductions(A) End of Year
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and uncollectible
notes receivable:
Years ended:
December 31, 1998 $2,289,000 $1,319,000 $ 0 $ 717,000 $2,891,000
December 31, 1997 $2,858,000 $1,408,000 $ 40,000 $2,017,000 $2,289,000
December 31, 1996 $2,410,000 $1,011,000 $ 286,000 $ 849,000 $2,858,000
(A) Deductions result primarily from the write-off of accounts.
</TABLE>
/30
IV-9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ionics, Incorporated:
Our report on the consolidated financial statements of
Ionics, Incorporated as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998
has been incorporated by reference in this Form 10-K from page
21 of the 1998 Annual Report to Stockholders of Ionics,
Incorporated. In connection with our audits of such financial
statements, we have also audited the related financial statement
schedule for each of the three years in the period ending
December 31, 1998, listed in the Index on page IV-8 of this Form
10-K.
In our opinion, the financial statement schedule referred
to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
/s/PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 19, 1999
/31
IV-10
<TABLE>
EXHIBIT INDEX
<CAPTION>
Sequentially
Exhibit Numbered
No. Description Page
<S> <C> <C>
3.0 Articles of Organization and By-Laws
3.1 Restated Articles of Organization filed *
April 16, 1986 (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1997).
3.1(a) Amendment to the Restated Articles of *
Organization filed June 19, 1987 (filed
as Exhibit 3.1(a) to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1997).
3.1(b) Amendment to Restated Articles of *
Organization filed May 13, 1988
(filed as Exhibit 3.1(b) to
Registration Statement No. 33-38290 on
Form S-2 effective January 24, 1991).
3.1(c) Amendment to Restated Articles of *
Organization filed May 8, 1992
(filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly
period ending June 30, 1996).
3.1(d) Amendment to Restated Articles of *
Organization filed May 8, 1998
(filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ending March 31, 1998).
3.2 By-Laws, as amended through November 14, 1997 *
(filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1997).
4.0 Instruments defining the rights of security holders,
including indentures
4.1 Renewed Rights Agreement, dated as of *
August 19, 1997 between Registrant and
BankBoston N.A. (filed as Exhibit 1 to
the Company's Current Report on Form 8-K
dated August 27, 1997).
/32
4.2 Form of Common Stock Certificate (filed as *
Exhibit 4.2 to the Company's Annual Report
on Form 10-K for the year ended
December 31, 1997).
10.0 Material Contracts
10.1 1979 Stock Option Plan, as amended through *
February 22, 1996 (filed as Exhibit 10.1 to
the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.2 1986 Stock Option Plan for Non-Employee Directors, *
as amended through February 19, 1997 (filed as
Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996).
10.3 Amended and Restated Credit Agreement between *
the Company and the First National Bank of Boston
dated as of December 31, 1992 (filed as
Exhibit 10.3 to the Company's Annual Report
for the year ended December 31, 1997).
10.3(1) Amendment Agreement No. 1, dated as of *
December 31, 1995, to Amended and Restated
Credit Agreement between the Company and The
First National Bank of Boston (filed as Exhibit
10.3(1) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.3(2) Amendment Agreement No. 2, dated as of 35
December 31, 1998, to Amended and Restated
Credit Agreement between the Company and
BankBoston N.A.
10.4 Operating Agreement dated as of September 27, *
1989 between the Company and Aqua Cool
Enterprises, Inc. (filed as Exhibit 10.4 to
the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
10.5 Term Lease Master Agreement dated as of *
September 27, 1989 between the Company and
Aqua Cool Enterprises, Inc. (filed as
Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.6 Option Agreement dated as of September 27, 1989 *
among the Company, Aqua Cool Enterprises, Inc.
and the other parties named therein (filed as
Exhibit 10.6 to the Company's registration
statement on Form S-2, No. 33-38290,
effective January 24, 1991).
/33
10.7 1994 Restricted Stock Plan (filed as Exhibit 10.12 *
to the Company's Annual Report on Form 10-K dated
March 30, 1995).
10.8 1997 Stock Incentive Plan (filed as Exhibit 10.12 *
to the Company's Annual Report on Form 10-K dated
December 31, 1996).
10.9 Ionics, Incorporated Supplemental Executive *
Retirement Plan effective as of January 1, 1996
(filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K dated December 31, 1997).
10.10 Form of Employee Retention Agreement dated *
February 24, 1998 between the Company and
certain officers of the Company and its
subsidiaries (filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K dated
December 31, 1997).
10.11 1998 Non-Employee Directors Fee Plan (filed *
as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period
ending September 30, 1998).
13.0 Annual Report to Stockholders of the Company for the 40
year ended December 31, 1998 (constituting the following
sections: Management's Discussion and Analysis of Results
of Operations and Financial Condition; Report of Independent
Accountants; Consolidated Statements of Operations;
Consolidated Balance Sheets; Consolidated Statements of
Cash Flow; Consolidated Statements of Stockholders' Equity;
Notes to Consolidated Financial Statements; Selected
Financial Data; Board of Directors; Corporate Officers;
Principal U.S. Offices, Affiliates & Subsidiaries;
Corporate Headquarters; Principal Overseas Offices,
Affiliates & Subsidiaries; Investor Information; Transfer
Agent & Registrar, and Auditors).
21.0 Subsidiaries of the Registrant. 75
23.0 Consents
23.1 Consent of PricewaterhouseCoopers LLP 76
to incorporation by reference of that firm's
report dated February 19, 1999, which is
included on page 21 of the Registrant's
Annual Report to Stockholders
for the year ended December 31, 1998.
24.0 Power of Attorney. 77
27.0 Financial Data Schedule. **
________________________________
* incorporated herein by reference
** for electronic purposes only
</TABLE>
/34
Exhibit 10.3(2)
AMENDMENT AGREEMENT NO. 2
to that certain
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
Dated as of December 31, 1992
This AMENDMENT AGREEMENT NO. 2 (the "Amendment"), is made as
of December 31, 1998, by and among IONICS, INCORPORATED (the
"Company" or the "Borrower"), a Massachusetts corporation having
its principal place of business at 65 Grove Street, Watertown,
Massachusetts 02472, BANKBOSTON,N.A. (f/k/a The First National
Bank of Boston and referred to herein as "BKB"), 100 Federal
Street, Boston, Massachusetts 02110, and such other banks that
are or may become parties to this Agreement from time to time in
accordance with the provisions hereof (BKB and such other banks
being collectively referred to herein as the "Banks" and each a
"Bank") and BKB as agent for the Banks (the "Agent").
WHEREAS, the Borrower, the Banks and the Agent are parties
to that certain Amended and Restated Credit Agreement, dated as
of December 31, 1992 (as amended by Amendment Agreement No. 1
thereto dated as of December 31, 1995 and as further amended and
in effect from time to time, the "Credit Agreement"), pursuant to
which the Banks, upon certain terms and conditions, have made
loans to the Borrower; and
WHEREAS, the Borrower has requested and the banks and the
Agent have agreed, on the terms and subject to the conditions set
forth herein, to amend the Credit Agreement to (a) extend the
maturity of the Loans and (b) modify certain covenants and
provisions;
NOW, THEREFORE, the parties hereto hereby agree as follows:
Section 1. Defined Terms. Capitalized terms which are used
herein without definition and which are defined in the Credit
Agreement shall have the same meanings herein as in the Credit
Agreement.
Section 2. Amendment of Credit Agreement.
(a) Section 1.1 of the Credit Agreement is hereby amended
by deleting the reference to the date "December 31, 1998" therein
and substituting therefor the date "December 31, 2001".
(b) Section 1.2 of the Credit Agreement is hereby amended
as follows:
/35
(i) by deleting each reference to the date "December 31, 1998"
therein and substituting for each reference therefor the date "December 31,
2001";
(ii) by deleting the reference to the date "April 1, 1999"
therein and substituting therefor the date "April 1, 2002"; and
(iii) by deleting the reference to the date "December 31, 1999"
therein and substituting therefor the date "December 31, 2002".
(c) Section 1.2.2 of the Credit Agreement is hereby amended as
follows:
(i) by deleting the reference to the date "December 31, 1998"
from the fourth sentence thereof and substituting therefor the date
"December 31, 2001"; and
(ii) by deleting the date "December 31, 2001" from the fourth
sentence thereof and substituting therefor the date "December 31, 2004".
(d) Section 3 of the Credit Agreement is hereby amended by adding the
following new Section 3.9 after Section 3.8 therein:
Section 3.9 Year 2000 Problem. The Company and its Consolidated
Subsidiaries have (i) reviewed the areas within their businesses and
operations which could be adversely affected by failure to become "Year
2000 Compliant" (i.e. that computer applications, imbedded microchips and
other systems used by the Borrower or any of its Consolidated
Subsidiaries,will be able properly to recognize and perform properly date-
sensitive functions involving certain dates prior to and any date after
December 31, 1999), (ii) developed a detailed plan and timetable to become
Year 2000 Compliant in a timely manner,and (iii) committed adequate
resources to support the Year 2000 plan of the Borrower and its
consolidated Subsidiaries. Based upon such review, the Borrower reasonably
believes that the Borrower and its Consolidated Subsidiaries will become
"Year 2000 Compliant"in a timely manner except to the extent that failure
to do so will not have any materially adverse effect on the business or
financial condition of the Borrower or any of its Consolidated
Subsidiaries.
(e) Section 5.6 of the Credit Agreement is hereby amended as follows:
(i) by deleting the number $163,000,000" and substituting
therefor the number $231,000,000"; and
(ii) by deleting the reference to the date "September 30, 1995"
and substituting therefor the date "December 31, 1998".
(f) Exhibit A to the Credit Agreement is hereby amended by deleting the
reference to the date "December 31, 1998" and substituting therefor the date
/36
"December 31, 2001" and by deleting each reference to "The First National
Bank of Boston therein and substituting therefor a reference to "The
First National Bank of Boston therein and substituting therefor a
reference to "BankBoston, N.A. (f/k/a The First National Bank of
Boston)".
Section 3. Effectiveness. The effectiveness of this Amendment
shall be subject to the satisfaction of the following conditions:
(a) Delivery. The Borrower, the Banks and the Agent shall have
executed and delivered this Amendment.
(b) Loan Note. The Borrower shall have executed and delivered an
amended and restated Loan Note in substantially the form of Exhibit A to
the Credit Agreement, dated as of December 31, 1998 and completed with
the appropriate insertions.
(c) Proceedings and Documents. All proceedings in connection with
the transactions contemplated by this Amendment and all documents
incident thereto shall be reasonably satisfactory in substance and form
to the Banks and the Agent, and the Agent shall have received all
information and such counterpart originals or certified or other copies
of such documents as the Agent may reasonably request.
Section 4. Representations and Warranties. The Borrower represents
and warrants to the Banks and the Agent as follows:
(a) Representations and Warranties in Credit Agreement. The
representations and warranties of the Borrower contained in the Credit
Agreement, (i) were true and correct in all material respects when made,
and (ii) except to the extent such representations and warranties by
their terms are made solely as of a prior date,continue to be true and
correct in all material respects on the date hereof.
(b) Authority, Etc. The execution and delivery by the Borrower of
this Amendment and the performance by the Borrower of all of its
agreements and obligations under this Amendment (i) are within the
corporate authority of the Borrower, (ii) have been duly authorized by
all necessary corporate proceedings by the Borrower, (iii) do not
conflict with or result in any breach or contravention of any provision
of law, statute, rule or regulation to which the Borrower is subject or
any judgment, order, writ, injunction,license or permit applicable to the
Borrower, and (iv) do not conflict with any provision of the corporate
charter or by-laws of, or any agreement or other instrument binding upon,
the Borrower.
/37
(c) Enforceability of Obligations. This Amendment, and the Credit
Agreement as amended hereby, constitute the legal, valid and binding
obligations of the Borrower enforceable against in accordance with their
respective terms. Immediately prior to and after giving effect to this
Amendment, no Default or Event or Default exists under the Credit
Agreement or any other Loan Document.
Section 5. No Waiver. Except as otherwise expressly provided for
in this Amendment, nothing in this Amendment shall extend to or affect in
any way any of the Borrower's obligations or any of the rights and
remedies of the Banks or the Agent in respect of the Credit Agreement
arising on account of the occurrence of any Event of Default, all of
which are expressly preserved.
Section 6. Miscellaneous Provisions. (a) Except as otherwise
expressly provided by this Amendment, all of the terms, conditions and
provisions of the Credit Agreement shall remain the same. It is declared
and agreed by each of the parties hereto that the Credit Agreement, as
amended hereby, shall continue in full force and effect, and that this
Amendment and the Credit Agreement shall be read and construed as one
instrument.
(b) THIS AMENDMENT IS INTENDED TO TAKE EFFECT AS AN AGREEMENT UNDER
SEAL AND SHALL BE CONSTRUED ACCORDING TO AND GOVERNED BY THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS.
(c) This Amendment may be executed in any number of counterparts,
but all such counterparts shall together constitute but one instrument.
In making proof of this Amendment it shall not be necessary to produce or
account for more than one counterpart signed by each party hereto by and
against which enforcement thereof is sought.
(d) The Borrower hereby agrees to pay to the Agent, on demand by
the Agent, all reasonable out-of-pocket costs and expenses incurred or
sustained in connection with the preparation of this Amendment (including
reasonable legal fees).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
/38
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as an agreement under seal of the date first written above.
IONICS, INCORPORATED
By:/s/Robert J. Halliday
Title: CFO
BANKBOSTON, N.A., individually and as
Agent
By: /s/Henry L. Petrillo
Title: Director
/39
EXHIBIT 13
IONICS, INCORPORATED
ANNUAL REPORT TO STOCKHOLDERS OF
IONICS, INCORPORATED FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998
(The following sections constitute an Exhibit to Form 10-K: Management's
Discussion and Analysis of Results of Operations and Financial Condition;
Report of Independent Accountants; Consolidated Statements of Operations;
Consolidated Balance Sheets; Consolidated Statements of Cash Flow;
Consolidated Statements of Stockholders' Equity; Notes to Consolidated
Financial Statements; Selected Financial Data; Board of Directors; Corporate
Officers; Principal U.S. Offices, Affiliates & Subsidiaries; Corporate
Headquarters; Principal Overseas Offices, Affiliates & Subsidiaries;
Investor Information; Transfer Agent & Registrar; and Auditors).
_____________________________________
/40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The results of operations described below refer to the activities of the
Company's four business groups which now comprise the reportable segments
of the Company. See Note 15 to the financial statements for a more
detailed description of the Company's four business group segments.
1998 Compared to 1997
The financial performance of the Company reflected a 0.3% decrease in
revenues and a 24.5% decline in net income in 1998. The decline in net
income was primarily due to reductions in earnings before interest, taxes
and minority interest (EBIT) of 37.4% and 43.4% in the Equipment Business
Group and the Ultrapure Water Group, respectively. These reductions were
primarily due to tightness in the capital equipment markets, particularly
in the demand for ultrapure water equipment by the microelectronics
industry. Partially mitigating these declines were increases in EBIT of
18.3% and 17.0% in the Instrument Business Group and the Consumer Water
Group, respectively. The Instrument Business Group benefited from increased
instrument sales, with the strongest demand coming from the pharmaceutical
industry. The increased earnings of the Consumer Water Group were largely
driven by the continuing strength of the Company's home and office bottled
water business.
Total revenues were $351.3 million in 1998, compared with $352.5 million in
1997. Revenues were higher in the Consumer Water Group, the Instrument
Business Group and the Ultrapure Water Group while revenues declined in the
Equipment Business Group.
The Equipment Business Group's revenues declined by $16.1 million in 1998
as compared to 1997 because of reduced capital equipment sales; the
expiration of the Santa Barbara water supply contract in early 1997; the
sale of bleach manufacturing equipment in the U.K. in the fourth quarter of
1997; and the consolidation of the Company's food processing business in
early 1998.
The Ultrapure Water Group's revenues increased by 2.5% in 1998. The
businesses in the Ultrapure Water Group primarily serve the
microelectronics industry, and, to a lesser extent, the power and
pharmaceutical industries. Revenues in 1998 from the microelectronics
industry were down significantly from 1997 revenues, primarily due to a
slowdown in capital spending by that industry. This decline was offset by
additional revenues in 1998 resulting from the acquisition of a majority
interest in Enersave Engineering Systems Sdn Bhd, a Malaysian corporation
(now Ionics Enersave), in the third quarter of 1997. The decline in
profits relating to the reduction of revenues from the microelectronics
industry was greater than the profits contributed by Ionics Enersave.
The revenues of the Instrument Business Group increased by 17.5% in 1998
compared to 1997, largely driven by the pharmaceutical industry's increased
purchases of the Company's instruments for measuring total organic carbon
(TOC) levels as a standard for measuring water purity under the United
States Pharmacopoeial Convention's USP 23, adopted in 1998.
/41
The 10.7% increase in revenues in 1998 compared to 1997 of the Consumer
Water Group was due to growth in the Company's bottled water business. The
bottled water business expanded its customer base in both the United States
and the United Kingdom, while also pursuing product line expansions and
realizing a higher average price per bottle for its primary product.
1997 Compared to 1996
The Company's revenues totaled $352.5 million in 1997, up from $326.7
million in 1996. Revenues were higher in all four business groups with the
largest growth occurring in the Ultrapure Water Group.
The Equipment Business Group had a slight increase in revenues in 1997 from
1996. Overall, capital equipment sales for this Group were up in 1997,
driven by strength in demand for desalination equipment which more than
offset reduced revenues from wastewater equipment sales. This Group's
revenues from supply contracts were down in 1997, primarily as a result of
the City of Santa Barbara's buy-out of the desalination plant constructed
and maintained by the Company.
Sales for the Ultrapure Water Group increased 14.5% in 1997 compared to
1996 as a result of the Company's acquisition in September 1997 of Ionics
Enersave and from revenue recognized on ultrapure water contracts booked in
late 1996 and early 1997.
Revenues for the Instrument Business Group and the Consumer Water Group
increased 18.8% and 10.4%, respectively, in 1997 compared to 1996.
Instrument Business Group sales were up primarily due to sales to the
pharmaceutical industry, while Consumer Water Group sales grew as a result
of strong performance by the bottled water business. The bottled water
business was particularly strong in the U.K., where the Company benefited
from its market leadership position and warm summer temperatures.
Cost of Sales and Operating Expense Comparisons
Cost of sales as a percentage of revenues was 67.4%, 67.2% and 67.3% in
1998, 1997 and 1996, respectively.
Cost of sales as a percentage of revenues decreased during 1998 compared to
1997 for the Equipment Business Group and Consumer Water Group and
increased for the Ultrapure Water Group and Instrument Business Group. The
decrease in the Equipment Business Group primarily reflected an improvement
in its product mix. The Consumer Water Group decrease reflected an overall
improvement in prices in the home water business. The increase in the
Ultrapure Water Group resulted from the continued competitive environment
in the microelectronics industry for ultrapure water capital equipment. The
Instrument Business Group increase reflected increased spending associated
with manufacturing and service department operations.
Cost of sales as a percentage of revenues increased during 1997 compared to
1996 for the Equipment Business Group and decreased for the Ultrapure Water
Group, the Instrument Business Group, and the Consumer Water Group. The
/42
increase in the Equipment Business Group primarily reflected more
competitive market conditions in the equipment and supply businesses. The
decrease in the Ultrapure Water Group primarily reflected a more favorable
mix of ultrapure water supply contracts. The decrease in the Instrument
Business Group reflected lower material costs due to a change in the mix of
instruments sold. The decrease in the Consumer Water Group reflected
modest bottled water price increases and the improved absorption of fixed
overhead costs resulting from continued expansion of the bottled water
consumer base.
Operating expenses as a percentage of revenues were 23.6% in 1998, an
increase from 20.7% in 1997 and 20.9% in 1996. The increase in operating
expenses as a percentage of revenues in 1998 compared to 1997 was primarily
due to a decrease in Equipment Business Group revenues which historically
have disproportionately lower selling expenses as a percentage of such
revenues than do revenues from some of the other business groups.
Additionally, the Company experienced revenue growth in the Instrument
Business Group and Consumer Water Group which historically have
disproportionately higher selling costs as a percentage of revenues than do
some of the other business groups. Operating expenses also increased in
1998 due to expenses associated with the Company's Y2K program, increased
legal expenses, and expanded marketing initiatives, as well as the
Company's continued commitment to investment in its research and
development programs. Operating expenses as a percentage of revenues in
1997 of 20.7% were substantially consistent with the 20.9% experienced in
1996.
Interest and Taxes
Interest income was $1.1 million, $1.2 million and $1.4 million in 1998,
1997 and 1996, respectively. Interest expense was $0.3 million, $0.9
million and $0.9 million in 1998, 1997 and 1996, respectively.
The Company's effective tax rate was 32.5% in 1998, 33.0% in 1997 and 33.0%
in 1996. The reduction of the rate in 1998 compared to 1997 was due to the
Company's foreign sales corporation providing a proportionately larger
benefit than in prior years. While the effective tax rate for 1997 was
unchanged from 1996, the underlying changes in 1997 reflected improvement
in the mix of earnings and tax rates among the different tax jurisdictions,
and a lower state tax rate, resulting from a change in the composition of
domestic income by state. These reductions were offset by the loss of
benefit from tax-exempt interest and a smaller benefit from the Company's
foreign sales corporation.
Net income decreased 24.5% to $21.4 million in 1998 compared to $28.3
million in 1997. Net income in 1997 was 6.9% higher than 1996 net income
of $26.5 million.
FINANCIAL CONDITION
At December 31, 1998, the Company had total assets of $452.1 million
compared to total assets of $406.7 million at December 31, 1997 and $378.6
million at December 31, 1996. The increase in 1998 reflected an increase in
/43
property, plant and equipment which included expansion of the Company's
bottled water operations, manufacturing and "own and operate" facilities.
The increase in 1997 reflected an increase in total cash and cash
equivalents and in other assets, primarily reflecting goodwill arising from
the acquisitions of a majority interest in Ionics Enersave and the business
of Watertec Engineering Pty. Ltd. and related companies in Australia (now
Ionics Watertec). In addition, during both 1998 and 1997, accounts
receivable increased, reflecting higher revenues from capital equipment
projects in the latter parts of those years.
Working capital in 1998 increased by $1.3 million over 1997, and the
Company's current ratio decreased to 2.2 from 2.5 in 1997. Capital
expenditures totaled $42.2 million, $33.5 million, and $46.9 million in
1998, 1997 and 1996, respectively. In 1997, the Company spent approximately
$11.0 million to acquire Ionics Watertec and a majority interest in Ionics
Enersave. Funds for these expenditures were provided in each year by cash
from operations, issuance of current debt and proceeds from stock option
exercises. In 1997, funds were also provided through the sale of certain
fixed assets, including bleach manufacturing equipment in the U.K.
Net cash provided by operating activities decreased by $1.9 million in 1998
compared to 1997, due primarily to lower net income and an increase in
accounts receivable partially offset by an increase in accounts payable.
Net cash provided by operating activities increased by $6.3 million in 1997
over 1996, due primarily to higher net income and depreciation, a smaller
increase in accounts receivable and inventories, and a smaller decrease in
accounts payable and accrued expenses.
Net cash used by investing activities increased by $5.8 million in 1998
over 1997 after having decreased by $11.6 million in 1997 from 1996.
In 1998, net cash used by financing activities totaled $2.8 million, a
change of $4.1 million from the $1.4 million that was provided by financing
activities in 1997. In 1997, net cash provided by financing activities
decreased by $6.0 million as compared to 1996. The change in both 1998 and
1997 was primarily due to a reduction in cash obtained from short-term
borrowings.
Significant expenditures in 1999 are anticipated to include investments in
additional "own and operate" facilities and in the continued expansion of
bottled water operations.
The Company maintains several lines of credit, including domestic lines
totaling $35 million, which are available to meet working capital needs.
In addition, the Company has several facilities to accommodate its foreign
trade and exchange requirements. The Company believes that its cash of
$28.8 million at the beginning of 1999, cash from operations, lines of
credit and foreign exchange facilities are adequate to meet its currently
anticipated needs.
/44
Inflationary increases in material and labor costs remained moderate during
the last three years. The Company has worked to offset such cost increases
by redesigning its equipment to reduce costs. To the extent permitted by
the competitive environment, the Company has raised prices where
appropriate.
YEAR 2000 READINESS DISCLOSURE AND RELATED INFORMATION
The Company's State of Readiness
The Company has undertaken a program to assure that its computer software
and systems (including information technology (IT) and manufacturing
systems), facilities and products will be able to distinguish 21st century
dates from 20th century dates (so-called "Year 2000 (Y2K) Compliance or
Compliant"). The Company's program is divided into the following three
phases:
Phase One - Inventory and Planning
The Company completed this phase in July 1998. In this phase, the Company
inventoried all hardware and software that potentially is susceptible to
Y2K problems, prepared plans for assessing compliance and completing
remediation, and prepared vendor compliance letters.
Phase Two - Assessment
In this phase, the Company is assessing which of its systems and products
are Y2K Compliant. The Company has requested compliance statements from
hardware and software vendors, supply manufacturers and service trading
partners and has received responses from many vendors and has not
discovered any significant compliance problems. This phase also includes
the planning for remediation of non-compliant systems. The Company
anticipates the completion of this phase by the end of the first quarter of
1999.
Phase Three - Remediation and Testing
In this phase, the Company will deploy plans for elimination, upgrade,
replacement or modification of non-compliant systems and products and test
compliance. The Company has scheduled completion of this phase by the
third quarter of 1999.
The Company's core operating (IT and manufacturing) system for its
headquarters operations is not yet Y2K Compliant. The Company is currently
pursuing a remediation plan for this system, has made significant progress,
and expects to have it completed by mid-1999. The Company's bottled water
accounting system in the United States is not yet fully Y2K Compliant. The
Company has purchased a new integrated distribution and accounting system,
which management believes will significantly enhance its bottled water
operations. This new system is Y2K Compliant and implementation is
scheduled for completion by the third quarter of 1999. Individual bottled
water business locations are running this new system as it is implemented,
which the Company believes may reduce the risks associated with potential
Y2K non-compliance should implementation not be fully completed by the end
of 1999.
/45
The Company's other IT systems are not uniform across all operations and
locations. The systems for all non-headquarters operations have been
reviewed. The Company is currently implementing new Y2K Compliant IT
systems at two major locations in the U.S. Completion of implementation of
these systems is expected by mid-1999. The Company has either completed
remediation or implemented new IT systems which are Y2K Compliant at its
other significant non-headquarters operations.
Remediation or replacement of IT systems at other locations is under way
and is expected to be completed by mid-1999. The Company believes that
failure of these systems to become Y2K Compliant would be unlikely to have
a material impact on the Company due to the relatively small size of these
operations and the opportunity to perform relevant tasks manually.
The Company's assessment plan includes assessment of Y2K Compliance of non-
information technology (non-IT) components including the Company's
membrane-related equipment, "own and operate" equipment, other products,
manufacturing equipment and facilities. Substantial progress has been made
in these areas and completion of such assessment is expected in the first
quarter of 1999.
The Company is obtaining compliance statements from vendors of both IT and
non-IT systems and is revising its vendors' status on an on-going basis
based upon information it is receiving. The Company is working with its
most important vendors to resolve remediation and compliance problems as
they are identified.
Costs to Address Y2K Issues
The Company's assessment and remediation of Y2K Compliance issues is
anticipated to cost approximately $1.5 million, excluding the cost of new
systems implementation. Expenses to date of approximately $750,000 are
consistent with such expectations. The Company does not currently expect
that actual Y2K expenses finally incurred 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 system-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.
/46
Contingency Plans
The Company plans to complete contingency plans by mid-1999 to deal with
possible failures in systems which it determines may not achieve Y2K
Compliance on a timely basis.
FORWARD-LOOKING INFORMATION
Derivative Instruments
The Company had $318,000 of foreign exchange contracts outstanding at
December 31, 1998. These contracts are immaterial to the Company and as
they were used to hedge foreign currency denominated transactions, any
change in the fair value of the contracts would be offset by changes in the
underlying value of the transactions. The Company has no other derivative
financial instruments, or other financial and commodity instruments for
which fair value disclosure would be required under SFAS No. 119. The
Company holds no investment securities which would require disclosure of
market risk.
Market Risk
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's
investment portfolio of cash equivalents is subject to interest rate
fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. At December 31, 1998, the Company
had $6.9 million of short-term debt and $1.5 million of long-term debt
outstanding. The short-term debt was issued under various working capital
lines and due to its short-term maturities, a hypothetical 10% decrease in
the Company's weighted average short-term borrowing rate at December 31,
1998 would not have materially affected the year-end carrying value of the
debt. The Company's exposure to currency exchange rate fluctuations has
been and is expected to remain modest due to the fact that the operations
of its international subsidiaries are primarily conducted in their
respective local currencies.
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
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.
/47
Report of Independent Accountants
To the Board of Directors and Stockholders of Ionics, Incorporated:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, consolidated statements of
stockholders' equity, and consolidated statements of cash flows, present
fairly, in all material respects, the financial position of Ionics,
Incorporated (the "Company") at December 31, 1998 and December 31, 1997,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 generally
accepted auditing standards 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 the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
February 19, 1999
/48
<TABLE>
Consolidated Statements of Operations
_____________________________________
For the years ended December 31
_______________________________
<CAPTION>
Amounts in Thousands, Except Per Share Amounts 1998 1997 1996
____ ____ ____
<S> <C> <C> <C>
Revenues:
Equipment Business Group $129,751 $145,844 $144,652
Ultrapure Water Group 111,349 108,601 94,846
Consumer Water Group 80,884 73,046 66,144
Instrument Business Group 29,342 24,978 21,020
________ ________ ________
351,326 352,469 326,662
________ ________ ________
Costs and expenses:
Cost of sales of Equipment Business Group 92,826 104,638 100,889
Cost of sales of Ultrapure Water Group 87,039 80,964 71,981
Cost of sales of Consumer Water Group 45,261 41,510 37,956
Cost of sales of Instrument Business Group 11,716 9,908 9,022
Research and development 6,635 5,410 5,108
Selling, general and administrative 76,299 67,593 63,118
________ ________ ________
319,776 310,023 288,074
________ ________ ________
Income from operations 31,550 42,446 38,588
Interest income 1,058 1,197 1,396
Interest expense (331) (947) (869)
Equity income 606 526 441
________ ________ ________
Income before income taxes and minority interest 32,883 43,222 39,556
Provision for income taxes 10,680 14,280 13,053
________ ________ ________
Income before minority interest 22,203 28,942 26,503
Minority interest expense 817 613 -
________ ________ ________
Net income $ 21,386 $ 28,329 $ 26,503
======== ======== ========
Earnings per basic share $ 1.33 $ 1.78 $ 1.71
======== ======== ========
Earnings per diluted share $ 1.31 $ 1.73 $ 1.65
======== ======== ========
Shares used in basic earnings per share calculations 16,077 15,936 15,542
Shares used in diluted earnings per share calculations 16,357 16,409 16,106
The accompanying notes are an integral part of these financial statements.
</TABLE>
/49
<TABLE>
Consolidated Balance Sheets
___________________________
December 31
___________
<CAPTION>
Dollars in Thousands, Except Share Amounts 1998 1997
__________________________________________ ____ ____
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 28,770 $ 25,787
Short-term investments 359 107
Notes receivable, current 4,144 3,856
Accounts receivable 111,844 98,275
Receivables from affiliated companies 2,329 2,624
Inventories 31,549 28,910
Other current assets 8,098 6,291
________ ________
Total current assets 187,093 165,850
Notes receivable, long-term 8,824 8,349
Investments in affiliated companies 7,057 3,983
Property, plant and equipment, net 195,683 179,957
Other assets 53,466 48,597
________ ________
Total assets $452,123 $406,736
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt $ 6,873 $ 12,084
Accounts payable 37,361 27,099
Other current liabilities 38,052 26,227
Taxes on income 3,648 602
________ ________
Total current liabilities 85,934 66,012
Long-term debt and notes payable 1,519 804
Deferred income taxes 17,036 17,783
Other liabilities 2,036 2,478
Commitments - -
Stockholders' equity:
Common stock, par value $1, authorized shares: 55,000,000 in 1998 and 30,000,000 in 1997;
issued and outstanding: 16,116,649 in 1998 and 16,001,285 in 1997 16,117 16,001
Additional paid-in capital 157,571 154,479
Retained earnings 179,943 158,557
Accumulated other comprehensive income (7,889) (9,126)
Unearned compensation (144) (252)
________ ________
Total stockholders' equity 345,598 319,659
________ ________
Total liabilities and stockholders' equity $452,123 $406,736
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
/50
<TABLE>
Consolidated Statements of Cash Flows
_____________________________________
<CAPTION>
For the years ended December 31
Dollars in Thousands 1998 1997 1996
________ ________ ________
<S> <C> <C> <C>
Operating activities:
Net income $ 21,386 $ 28,329 $ 26,503
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 27,214 27,047 26,162
Provision for losses on accounts and notes receivable 1,319 1,408 1,011
Deferred income tax provision 2,478 5,571 4,085
Compensation expense on restricted stock awards 108 108 108
Changes in assets and liabilities, net of effects of businesses acquired:
Notes receivable (168) (2,264) (1,557)
Accounts receivable (14,695) (7,865) (10,863)
Inventories (2,773) (2,395) (3,259)
Other current assets (1,461) 2,594 449
Investments in affiliates (2,815) (1,106) 758
Accounts payable and accrued expenses 20,267 (5,219) (7,011)
Income taxes (218) 2,470 4,678
Other (4,851) (988) 296
________ ________ ________
Net cash provided by operating activities 45,791 47,690 41,360
________ ________ ________
Investing activities:
Additions to property, plant and equipment (42,196) (33,510) (46,890)
Disposals of property, plant and equipment 1,882 10,114 887
Sale and maturity of short-term investments 137 - -
Acquisitions, net of cash acquired - (11,016) -
________ ________ ________
Net cash used by investing activities (40,177) (34,412) (46,003)
________ ________ ________
Financing activities:
Principal payments on current debt (15,339) (17,077) (22,259)
Proceeds from issuance of current debt 9,716 14,937 27,149
Principal payments on long-term debt (8) (31) (3,236)
Proceeds from issuance of long-term debt 419 363 -
Proceeds from stock option plans 2,447 3,188 5,731
________ ________ ________
Net cash (used)/ provided by financing activities (2,765) 1,380 7,385
________ ________ ________
Effect of exchange rate changes on cash 134 (1,140) 48
________ ________ ________
Net change in cash and cash equivalents 2,983 13,518 2,790
Cash and cash equivalents at end of prior year 25,787 12,269 9,479
________ ________ ________
Cash and cash equivalents at end of current year $ 28,770 $ 25,787 $ 12,269
======== ======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
/51
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
_______________________________________________
Accumulated
Common Stock Additional Other Total
Par Paid-in Retained Comprehensive Unearned Stockholders'
Dollars in Thousands Shares Value Capital Earnings Income Compensation Equity
______ _____ __________ ________ _____________ ____________ ____________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 14,801,230 $14,801 $137,587 $104,795 $(3,671) $(468) $253,044
Restatement for poolings 554,544 555 (460) (1,070) - - (975)
__________ _______ ________ ________ _______ _____ ________
Balance January 1, 1996 15,355,774 15,356 137,127 103,725 (3,671) (468) 252,069
Comprehensive income:
Net income - - - 26,503 - - 26,503
Translation adjustments, net of tax of $(93) - - - - 860 - 860
________
Total comprehensive income 27,363
________
Stock options exercised 406,956 407 5,324 - - - 5,731
Tax benefit of stock option activity - - 4,390 - - - 4,390
Issuance for acquisitions 60,475 60 2,496 - - - 2,556
Amortization of unearned compensation - - - - - 108 108
__________ _______ ________ ________ _______ _____ ________
Balance December 31, 1996 15,823,205 15,823 149,337 130,228 (2,811) (360) 292,217
Comprehensive income:
Net income - - - 28,329 - - 28,329
Translation adjustments, net of tax of $2,690 - - - - (6,315) - (6,315)
________
Total comprehensive income 22,014
________
Stock options exercised 163,214 163 3,025 - - - 3,188
Tax benefit of stock option activity - - 1,421 - - - 1,421
Other activity 14,866 15 696 - - - 711
Amortization of unearned compensation - - - - - 108 108
__________ _______ ________ ________ _______ _____ ________
Balance December 31, 1997 16,001,285 16,001 154,479 158,557 (9,126) (252) 319,659
Comprehensive income:
Net income - - - 21,386 - - 21,386
Translation adjustments, net of tax of $(619) - - - - 1,237 - 1,237
________
Total comprehensive income 22,623
________
Stock options exercised 115,364 116 2,331 - - - 2,447
Tax benefit of stock option activity - - 761 - - - 761
Amortization of unearned compensation - - - - - 108 108
__________ _______ ________ ________ _______ _____ ________
Balance December 31, 1998 16,116,649 $16,117 $157,571 $179,943 $(7,889) $(144) $345,598
========== ======= ======== ======== ======= ===== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
/52
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
and related 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 bottled water and home water
purifiers. Principal markets include the United States and Europe 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly and majority owned subsidiaries and Aqua Cool Enterprises, Inc.,
a controlled affiliate. All significant intercompany accounts and
transactions have been eliminated.
Investments in affiliated companies, representing non-majority ownership
interests, are accounted for under the equity method.
Revenue Recognition
Product revenues are recorded upon shipment, and service revenues are
recorded as the services are performed. Interest revenues on consumer water
equipment loans are recognized over the life of the loans. Interest earned
on customer notes receivable, totaling $1,470,000, $1,380,000 and
$1,181,000 in 1998, 1997 and 1996, respectively, is included in revenues.
Most equipment leases to customers are accounted for as operating leases
wherein rental revenues are recognized over the life of the lease and the
cost of the equipment is depreciated over its useful life. Some leases are
accounted for as sales-type leases wherein the present value of the lease
revenues and costs are recognized at the time of shipment of the product.
Revenues from large contracts are recognized using the percentage
completion method of accounting in the proportion that costs incurred bear
to total estimated costs at completion. Losses, if any, are provided for in
the period in which the loss is determined.
Cash Equivalents
Short-term investments with a maturity of 90 days or less from the date of
acquisition are classified as cash equivalents.
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 cost. All other investments are classified as
available for sale and carried at fair value with unrealized gains and
losses, net of tax, reported in a separate component of stockholders'
equity. The Company is not involved in activities classified as the trading
of investments.
/53
Notes Receivable
Notes receivable have been reported at their estimated realizable value.
The allowance for uncollectible notes receivable totaled $363,000 and
$462,000 at December 31, 1998 and 1997, respectively.
Inventories
Inventories are carried at the lower of cost or market, principally on the
first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. When an asset is retired
or sold, any resulting gain or loss is included in the results of
operations. Interest capitalized as property, plant and equipment amounted
to $616,000, $238,000 and $1,169,000 in 1998, 1997 and 1996, respectively.
In general, depreciation is computed on a straight-line basis over the
expected lives of the assets, as follows:
<TABLE>
<CAPTION>
Classification Depreciation Lives
______________ __________________
<C> <S>
Buildings and improvements 10 - 40 years
Machinery and equipment, including supply equipment 3 - 25 years
Other 3 - 12 years
</TABLE>
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.
Asset Impairment
Impairment losses resulting from an excess of carrying value of long-term
assets over their fair values are recognized as such losses are identified.
Goodwill
Goodwill is included in other assets and represents the unamortized
difference between acquisition cost and the fair value of net assets
acquired in the purchase of various entities. Goodwill is amortized on a
straight-line basis over its estimated useful life, which generally is a
period ranging from 10 to 40 years. The Company continually evaluates the
realizability of goodwill based upon expectations of non-discounted cash
flows and operating income for each subsidiary having a material goodwill
balance.
Foreign Exchange
Assets and liabilities of foreign affiliates and subsidiaries are
translated 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.
/54
Some transactions of the Company and its subsidiaries are made in
currencies different from their own. Gains and losses from these
transactions are included in income as they occur. Net foreign currency
transaction (losses)/gains included in income before income taxes and
minority interest totaled $(28,000), $100,000 and $548,000 for 1998, 1997
and 1996, respectively.
Income Taxes
Income tax expense is based on pretax financial accounting income. Deferred
tax assets and liabilities are recognized for the expected tax consequences
of temporary differences between the tax basis of assets and liabilities
and their reported amounts using enacted rates in effect for the year in
which the differences are expected to reverse.
Earnings Per Share
Basic earnings per share is computed based on the weighted-average number
of shares outstanding. Diluted earnings per share is computed based on the
weighted-average number of common shares outstanding while giving effect to
all potentially dilutive common shares that were outstanding during the
period.
Use of Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, 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.
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards, for disclosure purposes only, for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements.
Segment Information
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise," replacing the "industry segment"
approach with the "management" approach. The management approach utilizes
the Company's internal management and reporting structure as the basis for
determining the Company's reportable segments.
Pensions and Other Post-Retirement Benefits
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
132, "Employers' Disclosures About Pensions and Other Post-Retirement
Benefits," in 1998. SFAS No. 132 is for disclosure purposes only and does
not change benefit plan accounting. It standardizes the disclosure
requirements for pensions and post-retirement benefits to the extent
practicable and requires additional information on changes in benefit
obligations and the fair value of plan assets.
/55
Derivative Instruments and Hedging Activities
In 1998, the Financial Accounting Standards Board (FASB) released Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 standardizes
accounting for derivative instruments and for hedging activities. This
Statement is effective for fiscal years beginning after June 15, 1999. The
Company intends to adopt this Statement for interim periods beginning in
the first quarter of 2000. This Statement should not have a material
effect on the Company's financial statements.
<TABLE>
Note 2. Consolidated Balance
Sheet Details
<CAPTION>
Dollars in Thousands 1998 1997
____ ____
<S> <C> <C>
Raw materials $ 19,164 $ 17,183
Work in process 8,523 8,773
Finished goods 3,862 2,954
__________ _________
Inventories $ 31,549 $ 28,910
========== =========
Land $ 8,194 $ 6,767
Buildings 41,594 34,239
Machinery and equipment 259,885 236,526
Other, including furniture,
fixtures and vehicles 44,267 41,397
__________ _________
353,940 318,929
Accumulated depreciation (158,257) (138,972)
__________ _________
Property, plant and equipment, net $ 195,683 $ 179,957
========== =========
Goodwill $ 53,377 $ 46,565
Accumulated amortization (6,831) (5,136)
Other 6,920 7,168
__________ _________
Other assets $ 53,466 $ 48,597
========== =========
Customer deposits $ 3,965 $ 3,685
Accrued commissions 2,203 2,370
Accrued expenses 31,884 20,172
__________ _________
Other current liabilities $ 38,052 $ 26,227
========== =========
</TABLE>
/56
<TABLE>
Note 3. Supplemental Schedule of
Cash and Non-Cash Flow Information
<CAPTION>
Dollars in Thousands 1998 1997 1996
____ ____ ____
<S> <C> <C> <C>
Cash payments for interest
and income taxes:
Interest $ 685 $ 634 $ 1,338
Taxes $ 8,481 $ 2,860 $ 4,264
Liabilities assumed in
conjunction with acquisitions:
Fair value of assets purchased $ - $ 19,352 $ 8,452
Book value of assets pooled - - 8,592
Retained deficit pooled - - 1,070
Net cash (paid)/received - (11,016) 89
Value of common stock issued - - (2,530)
________ ________ ________
Liabilities assumed $ - $ 8,336 $ 15,673
======== ======== ========
</TABLE>
<TABLE>
Note 4. Accounts Receivable
<CAPTION>
Dollars in Thousands 1998 1997
_______ _______
<S> <C> <C>
Billed receivables $ 74,059 $69,157
Unbilled receivables 40,313 30,945
Allowance for doubtful accounts (2,528) (1,827)
________ _______
Accounts receivable $111,844 $98,275
======== =======
</TABLE>
Unbilled receivables represent the excess of revenues recognized on
percentage completion contracts over amounts billed. These amounts will
become billable as the Company achieves contractual milestones.
Substantially all of the unbilled amounts at December 31, 1998 are
expected to be billed during 1999.
Billed receivables include retainage amounts of $3,654,000 and $4,233,000
at December 31, 1998 and 1997, respectively. Substantially all of the
retainage amounts are collectible within one year.
Note 5. Investments in
Affiliated Companies
The Company's investments in the following foreign affiliates are
accounted for under the equity method. The principal business activities
of these foreign affiliates involve the production, sale and distribution
of bottled or treated water and the sale of equipment and replacement
parts.
/57
<TABLE>
<CAPTION>
Ownership
Affiliate Percentage
_________ __________
<S> <C>
Agrinord S.r.l. - Italy 50%
Aguas Tratadas de Cadereyta S.A. de C.V. - Mexico 20%
Aguas Tratadas de Madero, S.A. de C.V. - Mexico 20%
Aqua Cool Kuwait - Kuwait 49%
Aqua Cool Saudi Arabia - Saudi Arabia 40%
Aqua Design Ltd. - Cayman Islands 39%
Jalal-Ionics, Ltd. - Bahrain 40%
Watlington Waterworks, Ltd. - Bermuda 20%
Yuasa-Ionics Co., Ltd. - Japan 50%
</TABLE>
The Company's percentage ownership interest in a foreign affiliate may
vary from its interest in the earnings of such affiliate.
<TABLE>
Activity in investments in affiliated companies:
<CAPTION>
Dollars in Thousands 1998 1997 1996
_______ _______ ________
<S> <C> <C> <C>
Investments at end
of prior year $3,983 $2,908 $ 4,874
Equity in earnings 606 526 441
Distributions received (396) (575) (1,254)
Cumulative translation
adjustments 172 (7) -
Reclassification of Watlington
Waterworks from/(to) other
assets resulting from change in
ownership interest 1,208 - (1,208)
Additional investments 1,484 1,131 55
______ ______ _______
Investments at end of
current year $7,057 $3,983 $ 2,908
====== ====== =======
</TABLE>
At December 31, 1998, the Company's equity in the total assets and in the
total liabilities of its foreign affiliates was $10,133,000 and $3,076,000,
respectively. The Company's equity in the 1998 total revenues of these
affiliates was $5,570,000.
Note 6. Contingent Liabilities
The Company is involved in the normal course of its business in various
litigation matters, some of which are in the early stages of pre-trial
discovery. The Company believes generally that it has meritorious defenses
and that none of the pending matters will have an outcome material to the
financial condition or business of the Company.
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 (the "SRS Site"). Ionics' share of assessments to
date for site work totals approximately $60,000. The ultimate site clean-up
cost is currently not expected to exceed $59 million, of which the
/58
Company's share would not exceed $308,000 including the amounts already
assessed against the Company. While it is too soon to predict the scope and
cost of the final remedy that the EPA will select, 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.
The Attorney General of the Commonwealth of Massachusetts is conducting an
investigation into certain former operations of a division of the Company
during portions of the years 1991 through 1995. The Company is cooperating
with this investigation of possible violations of environmental statutes
and regulations that relate to one facility that ceased operations in 1995.
The Company cannot predict the outcome of this matter, but it may result in
administrative, civil or criminal charges and/or monetary payments.
On March 27, 1998, the Company was served with a summons and complaint in
connection with a lawsuit now captioned United States Filter Corporation,
U.S. Filter/Ionpure, Inc., IP Holding Company, Millipore Corporation and
Millipore Investment Holdings Limited v. Ionics, Incorporated, filed in the
U.S. District Court, District of Massachusetts (Boston). Plaintiffs allege
that the Company is infringing a certain reissue patent, 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 was recently notified that plaintiffs are seeking to add to their
complaint claims of infringement of certain earlier-issued patents. 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 and intends
vigorously to defend itself in this litigation, which is in the early
discovery stages.
<TABLE>
Note 7. Long-Term Debt
and Notes Payable
<CAPTION>
Dollars in Thousands 1998 1997
______ _______
<S> <C> <C>
Borrowings outstanding $8,392 $12,888
Less installments due within one year 6,873 12,084
______ _______
Long-term debt and notes payable $1,519 $ 804
====== =======
</TABLE>
Maturities of borrowings outstanding for the five years ending December 31,
1999 through 2003 are approximately $6,873,000, $659,000, $149,000,
$125,000 and $98,000, respectively.
The Company has domestic credit arrangements with various banks under which
it can borrow up to an aggregate of approximately $35 million, at the prime
rate (7.75% at December 31, 1998), the money market rate (5.5% at December
31, 1998) or the London Interbank Offered Rate plus 1/2% (5.56% at December
31, 1998), at the Company's option. The Company had no outstanding
borrowings against these lines of credit at December 31, 1998 and 1997.
Included in the credit lines is a $25 million credit line with a commercial
bank which includes a commitment fee of 1/8 of 1% per annum on the unused
average daily amount.
/59
The Company utilizes other short-term bank loans to finance working capital
requirements for certain business units. The Company's various loan and
note agreements contain certain financial covenants typical to such
agreements relating to working capital and to consolidated tangible net
worth. The weighted-average interest rate on these borrowings at December
31, 1998 and 1997 was approximately 10% and 8%, respectively.
Note 8. Income Taxes
The components of domestic and foreign income before income taxes and
minority interest were as follows:
<TABLE>
<CAPTION>
Dollars in Thousands 1998 1997 1996
_______ _______ _______
<S> <C> <C> <C>
U.S. $21,468 $27,450 $29,017
Non-U.S. 11,415 15,772 10,539
_______ _______ ________
Income before income taxes
and minority interest $32,883 $43,222 $39,556
======= ======= =======
</TABLE>
<TABLE>
The provision for income taxes consisted of the following:
<CAPTION>
Dollars in Thousands 1998 1997 1996
_______ _______ _______
<S> <C> <C> <C>
Federal $ 4,925 $ 5,891 $ 7,919
Foreign 2,386 2,276 793
State 891 542 256
_______ _______ _______
Current provision 8,202 8,709 8,968
_______ _______ _______
Federal 2,317 3,599 1,671
Foreign (116) 996 1,047
State 277 976 1,367
_______ _______ _______
Deferred provision 2,478 5,571 4,085
_______ _______ _______
Provision for income taxes $10,680 $14,280 $13,053
======= ======= =======
</TABLE>
/60
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, 1998, the tax effects of the temporary differences were:
<TABLE>
<CAPTION>
Deferred Deferred Tax
Dollars in Thousands Tax Assets Liabilities
__________ ____________
<S> <C> <C>
Depreciation $ - $14,683
Goodwill amortization - 673
Inventory valuation 1,764 -
Bad debt reserves 351 -
Accrued commissions 570 -
Profit on sales to foreign subsidiaries 870 -
Insurance accruals 765 -
U.S. tax on unrepatriated earnings - 5,252
Alternative minimum tax 1,526 -
Foreign withholding taxes on
undistributed earnings - 2,070
Foreign deferred liabilities, net - 3,208
Tax effect of currency translation loss 3,104 -
Net operating loss carryforwards 4,845 -
Miscellaneous 1,936 1,953
_______ _______
15,731 27,839
Valuation allowance for deferred tax assets (1,800) -
_______ _______
Deferred income taxes $13,931 $27,839
======= =======
</TABLE>
<TABLE>
The United States statutory corporate tax rate is reconciled to the Company's effective tax
rate as follows:
<CAPTION>
1998 1997 1996
______ ______ ______
<S> <C> <C> <C>
U.S. Federal statutory rate 35.0% 35.0% 35.0%
Foreign Sales Corporation (2.1) (1.5) (1.6)
Tax-exempt interest income - - (.5)
State income taxes, net of
federal tax benefit 2.3 2.3 2.7
Foreign income taxed at
different rates (3.0) (3.3) (2.0)
Other, net .3 .5 (.6)
_____ ______ ______
Effective tax rate 32.5% 33.0% 33.0%
===== ====== ======
</TABLE>
At December 31, 1998, the Company had unused tax loss carryforward
benefits of $4,845,000 (expiring in fiscal years 2004 to 2009). Because
certain provisions of the tax law may limit the utilization of these
benefits, the Company has established $1,800,000 as a valuation allowance
at December 31, 1998 and 1997. The remaining unreserved portion is
considered to be realizable. $3,045,000 of the net unused tax loss
carryforward benefit has been included in other assets at December 31,
1998.
/61
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 $3,932,000, $2,843,000 and $1,538,000 as of December 31,
1998, 1997 and 1996, respectively.
Note 9. Stockholders' Equity
During 1996, the Company issued 1,062,277 shares (including shares for
Sievers Instruments, Inc.) in conjunction with acquisition-related
activity (Note 14).
The Company adopted the disclosure-only provision of SFAS No. 123
"Accounting for Stock-Based Compensation" in 1996. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants in
1998, 1997 and 1996: expected volatility of 27.3% in 1998, 23.4% in 1997
and 23.1% in 1996; weighted-average risk-free interest rates of 5.41%,
6.33% and 6.69% in 1998, 1997 and 1996, respectively; and expected lives
of five years. No dividends are assumed. The weighted-average fair value
of options granted during 1998, 1997 and 1996 was $10.43, $15.88 and
$15.17, respectively.
At December 31, 1998, the Company had the stock-based compensation plans
described below. The Company applies Accounting Principles Board Opinion
25 in accounting for its 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. Had compensation cost for the Company's plans been determined
based on the fair value of the options at the grant dates for awards under
those plans consistent with the method of SFAS No. 123, the Company's net
income and earnings per share would have been adjusted. On a pro forma
basis, net income as reported for 1998 of $21.4 million would have been
$19.3 million, 1997 net income of $28.3 million would have been $26.7
million and 1996 net income of $26.5 million would have been $25.9
million. Diluted earnings per share as reported for 1998 of $1.31 would
have been $1.18, 1997 diluted earnings per share of $1.73 would have been
$1.63 and 1996 diluted earnings per share of $1.65 would have been $1.61.
Basic earnings per share as reported for 1998 of $1.33 would have been
$1.20, 1997 basic earnings per share of $1.78 would have been $1.67 and
1996 basic earnings per share of $1.71 would have been $1.66. The effects
of applying SFAS No. 123 in this pro forma disclosure are not indicative
of future awards, which are anticipated. SFAS No. 123 does not apply to
awards prior to 1995.
Under the 1979 Stock Option Plan (the "1979 Plan"), stock options (only
non-qualified stock options after February 1989) were granted to officers
and other key employees of the Company. Options granted under the 1979
Plan are immediately exercisable, are subject to repurchase rights that
lapse over a five-year period, and have a term of ten years and one day.
Effective May 8, 1997, the 1979 Plan was replaced by the 1997 Stock
Incentive Plan (the "1997 Plan"), and no additional options will be
granted under the 1979 Plan. At December 31, 1998 and 1997, respectively,
no shares were reserved for issuance of additional options under the 1979
Plan.
/62
Under the 1997 Plan, incentive stock options, non-qualified stock options,
and long-term performance awards may be awarded to officers and other key
employees as well as 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 will be added to the 1997 Plan at
the end of each of the four fiscal year-ends of the Company following
adoption of the 1997 Plan, commencing December 31, 1997. At December 31,
1998 and 1997, there were 526,373 and 1,060,276 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 vest over a five-year period and have a term of ten years.
Under the 1986 Stock Option Plan for Non-Employee Directors (the "1986
Plan"), options are granted automatically 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, 1998 and 1997, 62,500 and 82,500 shares, respectively, were
reserved for issuance of additional options under the 1986 Plan.
The Company has adopted a restricted stock plan (the "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 issued
under the 1994 Plan in 1998, 1997 or 1996. A total of 280,178 shares
remain reserved for issuance.
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 cash or in common
stock. 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 summary of the status of the Company's stock option plans as of December
31, 1998, 1997 and 1996 and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
____________________ ____________________ ____________________
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options in Thousands Options Price Options Price Options Price
_______ _________ _______ _________ _______ _________
<S> <C> <C> <C> <C> <C> <C>
Outstanding at end of prior year 2,035 $29.31 2,200 $28.39 1,989 $20.30
Granted 956 29.81 55 45.99 744 42.51
Exercised (115) 21.25 (163) 19.56 (465) 17.15
Canceled (80) 33.48 (57) 37.80 (68) 23.06
_______ _________ _______ _________ _______ _________
Outstanding at end of current year 2,796 $29.70 2,035 $29.31 2,200 $28.39
Options exercisable at year-end 1,814 1,964 2,137
</TABLE>
/63
<TABLE>
The following table summarizes the information about stock options outstanding at December 31, 1998:
<CAPTION>
Options in Thousands Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contract Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Years Price at 12/31/98 Price
___________ ________ ________ ___________ ________
<S> <C> <C> <C> <C> <C>
$ 4.29 3 0.6 $ 4.29 3 $ 4.29
11.88 - 15.25 132 1.5 12.16 114 12.14
19.75 - 29.50 1,932 7.1 25.75 984 22.18
30.38 - 44.38 671 7.8 43.09 655 43.11
45.63 - 48.25 58 8.0 47.65 58 47.65
________________ _____ ___ ______ _____ ______
$ 4.29 - $48.25 2,796 7.0 $29.70 1,814 $29.89
</TABLE>
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, 1998, 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.
/64
<TABLE>
Note 10. Earnings Per Share Calculations (EPS)
<CAPTION>
Dollars in Thousands,
Except Per Share Amounts For the Year Ended 1998 For the Year Ended 1997 For the Year Ended 1996
_____________________________ _____________________________ _____________________________
Net Per Share Net Per Share Net Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
_______ ______ _________ _______ ______ _________ _______ ______ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common stockholders $21,386 16,077 $1.33 $28,329 15,936 $1.78 $26,503 15,542 $1.71
Effect of dilutive stock options - 280 - 473 - 564
_______ ______ _____ _______ ______ _____ _______ ______ _____
Diluted EPS $21,386 16,357 $1.31 $28,329 16,409 $1.73 $26,503 16,106 $1.65
======= ====== ===== ======= ====== ===== ======= ====== =====
</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 December 31, 1998
and 1997 were 729,000 and 743,000, respectively. There were no
antidilutive options at December 31, 1996.
Note 11. Operating Leases
The Company leases equipment, primarily for industrial water purification
and bottled water coolers, to customers through operating leases. The
original cost of this equipment was $102,498,000 and $96,048,000 at
December 31, 1998 and 1997, respectively. The accumulated depreciation for
such equipment was $42,539,000 and $35,195,000 at December 31, 1998 and
1997, respectively.
At December 31, 1998, future minimum rentals receivable under noncancelable
operating leases in the years 1999 through 2003 and later were
approximately $19,555,000, $16,648,000, $14,124,000, $11,574,000,
$9,282,000 and $42,005,000, respectively.
The Company leases facilities and personal property under various operating
leases. Future minimum payments due under lease arrangements are as
follows: $3,017,000 in 1999, $2,313,000 in 2000, $1,682,000 in 2001,
$1,225,000 in 2002 and $1,168,000 in 2003. Rent expense under these leases
was approximately $4,428,000, $3,928,000 and $4,188,000 for 1998, 1997 and
1996, respectively.
Note 12. 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
Bridgeville, Pennsylvania Fabricated Products division. Company
contributions to the defined contribution plan are made from pretax
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 $254,000, $253,000 and
$249,000 in 1998, 1997 and 1996, respectively.
The Company also has a contributory defined benefit pension plan for its
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.
/65
The following table sets forth the defined benefit plan's funded status and
amounts recognized in the Company's balance sheets at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
Dollars in Thousands 1998 1997
____________________ ________ ________
<S> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation as of prior year-end $ 13,591 $ 10,883
Service cost 1,347 1,172
Interest cost 987 932
Actuarial (gain)/loss (161) 1,449
Expenses paid (117) (114)
Benefits paid (351) (731)
________ ________
Projected benefit obligation as of year-end $ 15,296 $ 13,591
======== ========
Change in Plan Assets
Fair value of plan assets as of prior year-end $ 12,731 $ 8,577
Actual return on plan assets 1,132 1,314
Employer contributions 750 3,685
Expenses paid (117) (114)
Benefits paid (351) (731)
________ ________
Fair value of plan assets as of year-end $ 14,145 $ 12,731
======== ========
Funded Status
Funded status as of year-end $ (1,151) $ (860)
Unrecognized transition asset (256) (309)
Unrecognized prior service cost 449 485
Unrecognized net actuarial loss 1,817 1,959
________ ________
Prepaid benefit cost as of year-end $ 859 $ 1,275
======== ========
</TABLE>
<TABLE>
The expense of the defined benefit plan was as follows:
<CAPTION>
Dollars in Thousands 1998 1997 1996
________ _________ ________
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost
Service cost $ 1,347 $ 1,172 $ 1,026
Interest cost 987 932 780
Expected return on plan assets (1,153) (879) (654)
Amortization of transition asset (53) (53) (53)
Amortization of prior service cost 37 37 37
Recognized net actuarial loss 1 48 27
________ _________ ________
Net periodic benefit cost $ 1,166 $ 1,257 $ 1,163
======== ========= ========
</TABLE>
/66
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 9.0% in 1998, 1997 and 1996; rate of compensation increase of
4.75% in 1998 and of 5.0% in 1997 and 1996; and discount rate of 6.75% in
1998, 7.0% in 1997 and 7.25% in 1996.
The Ionics Section 401(k) Stock Savings Plan is available to substantially
all U.S. employees of the Company. 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 $778,000, $749,000 and
$655,000 in 1998, 1997 and 1996, respectively, under this plan.
The Company does not provide post-retirement health care to its employees
or any other significant post-retirement benefits other than those
described above.
Note 13. Financial Instruments
Off-Balance-Sheet Risk
The Company issues letters of credit as guarantees for various performance
and bid obligations. Approximately $30.1 million and $27.9 million of these
letters were outstanding at December 31, 1998 and 1997, respectively.
Approximately 83% of the letters of credit outstanding at December 31, 1998
are scheduled to expire in 1999. These instruments were executed with
creditworthy institutions. The Company periodically enters into foreign
exchange contracts to hedge certain operational and balance sheet exposures
against changes in foreign currency exchange 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. The Company had $318,000 of foreign
exchange contracts outstanding at December 31, 1998 and no foreign exchange
contracts outstanding at December 31, 1997.
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 U.S. 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 guaranteed letters of credit for many
of its foreign orders.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents and investments 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 Securities
Realized gains and losses from the sale of debt and equity securities
during fiscal 1998 and 1997 were not significant.
/67
Long-term investments, maturing in 2001 and 2003, which the Company intends
to hold to maturity have been recorded at a net cost of $1,640,000 and
$603,000 at December 31, 1998 and 1997, respectively. At December 31, 1998
and 1997, the Company also had short-term investments of $359,000 and
$107,000, respectively, which the Company intends to hold to maturity. The
cost of these investments approximates fair value.
Note 14. Acquisitions
Prior Years' Purchases
Enersave Engineering Systems Sdn Bhd
In September 1997, the Company acquired a 55% ownership interest in
Enersave Engineering Systems Sdn Bhd (now Ionics Enersave) for
approximately $9.6 million. An additional payment of up to $2 million may
be required depending upon the achievement of certain future operating
results.
The acquisition was accounted for under the purchase method with the
results of Ionics Enersave included from September 1, 1997. Goodwill of
approximately $11.8 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 financial statements was not
material. Fiscal 1997 revenues for the period prior to September 1997 were
approximately $10 million. Ionics Enersave, a Malaysian company with
operations in Malaysia, China and Indonesia, is a supplier of water and
wastewater treatment systems and services in Southeast Asia.
Watertec Engineering Pty. Ltd.
Effective September 1, 1997, the Company acquired 100% of the assets and
liabilities of Watertec Engineering Pty. Ltd., as Trustee of Watertec
Engineering Unit Trust and two related corporations (together Ionics
Watertec) for an initial payment of $1.9 million. An additional payment of
$305,000 was made in 1998 based upon the achievement of certain operating
results.
The acquisition was accounted for under the purchase method with the
results of Ionics Watertec included from September 1, 1997. Goodwill of
approximately $1.7 million is being amortized over 30 years. Pro forma
results of operations have not been presented as the effect of this
acquisition on the financial statements was not material. Fiscal 1997
revenues for the period prior to September 1, 1997 were approximately $2.3
million. Ionics Watertec is involved in the manufacture and supply of
ozonation systems for water disinfection and systems for chemical metering.
Separation Technology, Inc.
In July 1996, the Company purchased 100% of the stock of Separation
Technology, Inc. (STI) for approximately $2.4 million through the issuance
of 58,000 shares of common stock. The results of STI have been included in
the Company's financial statements from July 1, 1996. Goodwill of
approximately $4.4 million is being amortized on a straight-line basis over
20 years. Pro forma results of operations have not been presented, as the
effect of this acquisition on the financial statements was not material.
STI is a supplier of membrane-based purification equipment and related
services to the food industry with particular emphasis on dairy and
beverage applications.
/68
Prior Years' Poolings
During 1996, the Company completed pooling transactions with Aqua Design,
Inc. (Ionics Aqua Design), Apollo Ultrapure Water Systems, Inc. (Ionics
Apollo) and Sievers Instruments, Inc. (Ionics Sievers) under which 222,977,
331,567 and 447,258 shares of common stock, respectively, were issued in
exchange for more than 90% of the outstanding common stock of each company.
Because the operating results from prior years for Ionics Aqua Design and
Ionics Apollo were not material, both individually and in the aggregate,
compared to those of the Company, these transactions were recorded by
restatement of retained earnings as of January 1, 1996 and no restatement
of prior-period financial statements was made. Ionics Aqua Design owns and
operates membrane-based seawater desalination systems used to produce
drinking and process water primarily for hotels and municipalities in the
Caribbean. Ionics Apollo sells ultrapure water and related services to a
variety of industrial and commercial users primarily in southern
California. Ionics Sievers manufactures instruments designed to measure
extremely low levels of organic contaminants in ultrapure water.
Subsequent Business Combinations
In separate transactions subsequent to December 31, 1998, the Company
acquired M2 Innovative Solutions, Inc. (M2), Aquarelle SA (Aquarelle), and
Agar Technologies Process and Environmental Control, Ltd. (Agar). The
Company paid cash for the stock of these companies. The operating results
and purchase prices of these companies were not material individually or in
the aggregate relative to the assets and operations of the Company. These
transactions will be accounted for as purchases.
M2, now called Ionics Life Sciences, is a supplier of ultrapure water
products and services, including validated pharmaceutical systems, to the
life sciences industry. Aquarelle is a French company in the five-gallon
bottled water market. Agar is an Israeli company which produces
instruments that monitor, detect and measure oil on water surfaces.
Note 15. Segment Information
In 1998, the Company adopted SFAS No. 131. At the end of 1998, the Company
changed from three reportable segments to four reportable "business group"
segments corresponding to a "business group" structure, summarized below,
which was put into place in the latter part of 1998. Segment information
for prior years has been restated to reflect this change.
Equipment Business Group - equipment, supply, "own and operate" and related
services for seawater desalination, brackish water desalination, water and
wastewater treatment and food and chemical processing, for municipalities
and communities, and for the petrochemical, nuclear and electric utilities,
pulp and paper, chemical processing and related industries.
Ultrapure Water Group - equipment, supply, "own and operate" and related
services for the production of ultrapure water for the semiconductor, power
and pharmaceutical industries.
/69
Consumer Water Group - equipment and supply services for the consumer
market including bottled water, over and under-the-sink point-of-use
devices, carbon filtering media, point-of-entry systems for treating the
entire home water supply, household bleach, and other cleaning products.
Instrument Business Group - instruments for the analysis and on-line
monitoring of certain constituents, impurities or contaminants in water for
industrial and municipal customers.
The accounting policies of the four business group segments are the same as
those described in "Significant Accounting Policies." The Company
evaluates the performance of each business group segment and considers
allocation of resources to it based on earnings before interest, taxes, and
minority interest (EBIT), and the evaluation of EBIT with respect to
capital employed.
The business group structure reflects the segmentation of the product
lines, services, and markets within defined areas of management
responsibility. Four business group managers, one for each of the
reportable segments, are directly accountable to, and maintain regular
contact with, the chief operating decision maker, the Chief Executive
Officer, to discuss operating activities, financial results, forecasts and
plans.
The table on the following page summarizes the Company's operations by the
four business group segments and "Corporate." Corporate includes research
and development expenses not allocated to the business groups and certain
corporate administrative and insurance costs.
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 to unaffiliated customers or long-lived assets
were material.
Included in the United States segment are export sales of approximately
23%, 22% and 18% for 1998, 1997 and 1996, respectively. Including these
U.S. export sales, the percentages of total revenues attributable to
activities outside the U.S. were 47%, 41% and 36% in 1998,1997 and 1996,
respectively.
<TABLE>
Information about the Company's operations by geographic area follows:
<CAPTION>
United
Dollars in Thousands States International Total
_____________________________________________________________________________
<S> <C> <C> <C>
1998
Revenue - unaffiliated customers $242,363 $108,963 $351,326
Long-lived assets 170,528 85,678 256,206
_____________________________________________________________________________
1997
Revenue - unaffiliated customers $264,604 $ 87,865 $352,469
Long-lived assets 156,020 76,517 232,537
_____________________________________________________________________________
1996
Revenue - unaffiliated customers $256,486 $ 70,176 $326,662
Long-lived assets 153,420 73,010 226,430
_____________________________________________________________________________
</TABLE>
/70<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 $ 129,751 $ 111,349 $ 80,884 $ 29,342 $ - $ 351,326
Inter-segment transfers 3,916 437 - 1,673 (6,026) -
Income from operations 11,129 7,668 10,686 5,408 (3,341) 31,550
Equity income 78 - 528 - - 606
Earnings before interest, taxes and minority interest (EBIT) 11,207 7,668 11,214 5,408 (3,341) 32,156
Interest income - - - - - 1,058
Interest expense - - - - - (331)
Income before income taxes and minority interest - - - - - 32,883
Capital employed 158,189 88,715 122,382 26,879 (42,175) 353,990
Identifiable assets 178,197 102,292 135,880 12,587 16,110 445,066
Investments in affiliated companies 4,081 - 2,976 - - 7,057
Depreciation and amortization 12,604 6,117 7,701 524 268 27,214
Capital expenditures 17,685 14,536 8,369 1,310 296 42,196
==============================================================================================================================
1997
Revenue - unaffiliated customers $ 145,844 $ 108,601 $ 73,046 $ 24,978 $ - $ 352,469
Inter-segment transfers 3,086 804 - 685 (4,575) -
Income from operations 17,811 13,649 9,045 4,570 (2,629) 42,446
Equity income (loss) 85 (95) 536 - - 526
Earnings before interest, taxes and minority interest (EBIT) 17,896 13,554 9,581 4,570 (2,629) 42,972
Interest income - - - - - 1,197
Interest expense - - - - - (947)
Income before income taxes and minority interest - - - - - 43,222
Capital employed 147,791 89,111 106,617 26,643 (37,615) 332,547
Identifiable assets 157,207 90,649 132,305 12,101 10,491 402,753
Investments in affiliated companies 1,201 - 2,782 - - 3,983
Depreciation and amortization 12,208 5,250 8,960 415 214 27,047
Capital expenditures 11,386 11,532 9,787 563 242 33,510
==============================================================================================================================
1996
Revenue - unaffiliated customers $ 144,652 $ 94,846 $ 66,144 $ 21,020 $ - $ 326,662
Inter-segment transfers 923 425 - 568 (1,916) -
Income from operations 18,135 12,431 6,636 3,527 (2,141) 38,588
Equity income 22 - 419 - - 441
Earnings before interest, taxes and minority interest (EBIT) 18,157 12,431 7,055 3,527 (2,141) 39,029
Interest income - - - - - 1,396
Interest expense - - - - - (869)
Income before income taxes and minority interest - - - - - 39,556
Capital employed 157,275 68,569 101,248 26,075 (47,305) 305,862
Identifiable assets 167,906 66,809 119,164 11,849 9,953 375,681
Investments in affiliated companies 87 - 2,821 - - 2,908
Depreciation and amortization 13,945 4,245 6,995 312 665 26,162
Capital expenditures 16,120 7,699 22,316 587 168 46,890
==============================================================================================================================
</TABLE>
/71
<TABLE>
SELECTED FINANCIAL DATA
_______________________
Statement of Operations Data
<CAPTION>
Dollars in Thousands,
Except Per Share Amounts 1998 % 1997 % 1996 % 1995 % 1994 %
_________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $351,326 100.0 $352,469 100.0 $326,662 100.0 $257,293 100.0 $222,376 100.0
Income before income taxes
and minority interest 32,883 9.4 43,222 12.3 39,556 12.1 31,609 12.3 22,717 10.2
Net income 21,386 6.1 28,329 8.0 26,503 8.1 21,025 8.2 15,448 6.9
Earnings per basic share 1.33 1.78 1.71 1.45 1.11
Earnings per diluted share 1.31 1.73 1.65 1.39 1.09
</TABLE>
<TABLE>
Balance Sheet Data
<CAPTION>
Dollars in Thousands 1998 1997 1996 1995 1994
_____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Current assets $187,093 $165,850 $144,422 $122,387 $113,477
Current liabilities 85,934 66,012 68,173 60,279 54,877
Working capital 101,159 99,838 76,249 62,108 58,600
Total assets 452,123 406,736 378,589 322,044 277,164
Long-term debt and notes payable 1,519 804 2,132 182 99
Stockholders' equity 345,598 319,659 292,217 253,044 218,610
</TABLE>
<TABLE>
Selected Quarterly Financial Data (Unaudited)
<CAPTION>
Earnings Earnings Earnings Earnings
Dollars in Thousands, Per Per Per Per
Except Per Gross Net Basic Diluted Gross Net Basic Diluted
Share Amounts Revenues Profit Income Share Share Revenues Profit Income Share Share
________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997
First Quarter $ 78,974 $ 28,285 $ 6,008 $ .37 $ .37 First Quarter $ 87,102 $ 28,055 $ 6,972 $ .44 $ .43
Second Quarter 80,267 26,821 4,620 .29 .28 Second Quarter 87,111 28,612 7,269 .46 .44
Third Quarter 88,876 27,999 5,183 .32 .32 Third Quarter 85,113 28,067 7,196 .45 .44
Fourth Quarter 103,209 31,379 5,575 .35 .34 Fourth Quarter 93,143 30,715 6,892 .43 .42
________________________________________________________________________________________________________________________________
$351,326 $114,484 $21,386 $ 1.33 $ 1.31 $352,469 $115,449 $28,329 $1.78 $1.73
================================================================================================================================
</TABLE>
<TABLE>
Common Stock Price Range
<CAPTION>
1998 High Low 1997 High Low
_____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
First Quarter $45 13/16 $37 7/8 First Quarter $53 $45 1/4
Second Quarter 45 1/2 34 13/16 Second Quarter 50 1/2 44 5/8
Third Quarter 37 22 1/2 Third Quarter 46 3/8 40 3/4
Fourth Quarter 35 1/8 22 1/2 Fourth Quarter 44 3/4 33 1/2
/72
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL U.S. OFFICES,
BOARD OF DIRECTORS CORPORATE OFFICERS AFFILIATES & SUBSIDIARIES
<S> <C> <C>
ARTHUR L. GOLDSTEIN + ARTHUR L. GOLDSTEIN Aqua Cool Pure Bottled
Chairman of the Board, Chairman of the Board, Watertown, Massachusetts
President and President and
Chief Executive Officer Chief Executive Officer Elite New England
Ionics, Incorporated Ludlow, Massachusetts
WILLIAM E. KATZ
DOUGLAS R. BROWN * Executive Vice President General Ionics
President and Chief Cuyahoga Falls, Ohio
Executive Officer, John P. Bergeron
Advent International Vice President and Ionics Ahlfinger Water Company
Corp. Treasurer Dallas, Texas
WILLIAM L. BROWN * Edward J. Cichon Ionics Apollo Ultrapure
Retired Chairman Vice President, Water Systems, Inc.
of the Board Equipment Business Group Pico Rivera, California
The First National
Bank of Boston ROBERT J. HALLIDAY Ionics Aqua Design, Inc.
Vice President, Finance Tampa, Florida
ARNAUD DE VITRY and Chief Financial
D'AVAUCOURT * Officer Ionics, Incorporated
Engineering Consultant Bridgeville, Pennsylvania
STEPHEN KORN
WILLIAM E. KATZ Vice President, Ionics Life Sciences, Inc.
Executive Vice General Counsel and North Wales, Pennsylvania
President Clerk
Ionics, Incorporated Ionics Pure Solutions
THEODORE G. PAPASTAVROS Phoenix, Arizona
KATHLEEN F. FELDSTEIN* Vice President,
President Strategic Planning Ionics Resources Conservation Company
Economic Studies, Inc. Bellevue, Washington
JOHN J. SHIELDS #+ Ionics Sievers Instruments,
General Partner Boulder, Colorado
Boston Capital Ventures
Ionics Ultrapure Water Corporation
CARL S. SLOANE #+ San Jose, California
Ernest L. Arbuckle
Professor of Business
Administration,
Harvard University
Graduate School of
Business Administration
MARK S. WRIGHTON #
Chancellor
Washington University CORPORATE HEADQUARTERS
ALLEN S. WYETT # [LOGO] COVERING THE Ionics, Incorporated
President, Wyett WATERFRONT 65 Grove Street
Consulting Group, Inc. 50 YEARS Watertown, Massachusetts 02472-2882
IONICS
+ Member of Executive Committee
* Member of Audit Committee
# Member of Compensation Committee
</TABLE>
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<TABLE>
<CAPTION>
PRINCIPAL OVERSEAS OFFICES, AFFILIATES & SUBSIDIARIES
<S> <C> <C>
Aqua Cool Pure Bottled Water Ionics Asia-Pacific Pte Ltd. Ionics Italba, S.p.A. Ionics Watertec Pty. Ltd.
London, England Singapore Milan, Italy Brisbane, Australia
Ionics France Ionics (Bermuda) Ltd. Ionics Korea, Inc. Ionics Enersave Engineering
Paris, France Hamilton, Bermuda Seoul, Korea Kuala Lumpur, Malaysia
Elite Chemicals Pty. Ltd. Ionics Iberica, S.A. Ionics (UK) Ltd. Yuasa-Ionics Co., Ltd.
Brisbane, Australia Grand Canary, Spain London, England Tokyo, Japan
</TABLE>
<TABLE>
<CAPTION>
INVESTOR INFORMATION TRANSFER AGENT & REGISTRAR
<S> <C>
The Annual Meeting of Ionics' shareholders will be held State Street Bank and Trust Company
Thursday, May 6, 1999 at 9:30 A.M. at BankBoston, Boston, Massachusetts
100 Federal Street, Boston, Massachusetts
Ionics' common stock is traded on the New York Stock
Exchange under the symbol ION. As of March 19, 1999
there were approximately 1,400 shareholders of record. AUDITORS
No cash dividends were paid in either 1998 or 1997
pursuant to Ionics' current policy to retain earnings for PricewaterhouseCoopers L.L.P.
use in its business. Boston, Massachusetts
For information or assistance regarding individual stock
records, transactions or certificates, please
call the Transfer Agent's Telephone Response Center:
1-800-426-5523 between 9 A.M. and 5 P.M.
Ionics' Annual Report on Form 10-K, which
is filed with the Securities and Exchange Commission,
will be sent to any shareholder upon request directed to
Investor Relations, Ionics, Incorporated. P.O. Box 9131,
Watertown, Massachusetts 02471-9131, or by calling
(617) 926-2510 ext. 874.
The Ionics Toolbox and Ionics Total Water Management
are registered service marks; The Ionics Brand is an
unregistered service mark; Aqua Cool, Cloromat,
HYgene, Ionics, Ozgen, and Sievers are registered
trademarks; and Ionics EDR 2020 is an unregistered
trademark of Ionics, Incorporated.
</TABLE>
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EXHIBIT 21
IONICS, INCORPORATED
SUBSIDIARIES OF THE REGISTRANT
State or Other Jurisdiction
Name of Incorporation
Agar Technologies Process and Environmental
Control Ltd. Israel
Apollo Ultrapure Water Systems, Inc. California
Aqua Design, Inc.* California
Aquarelle S.A. + France
Elite Chemicals Pty. Ltd. Australia
Global Water Services, S.A.++ Panama
Ionics Asia-Pacific Pte. Ltd. Singapore
Ionics (Bermuda) Ltd.* Bermuda
Ionics Enersave Engineering Sdn Bhd** Malaysia
Ionics Foreign Sales Corporation Limited Jamaica
Ionics France S.A. France
Ionics Iberica, S.A. Spain
Ionics Italba, S.p.A. Italy
Ionics (Korea) Ltd. Delaware
Ionics Life Sciences, Inc. New Jersey
Ionics Nederland B.V. The Netherlands
Ionics Ultrapure Water Corporation California
Ionics (U.K.) Limited United Kingdom
Ionics Watertec Pty. Ltd. Australia
Resources Conservation Co. International Delaware
Separation Technology, Inc.*** Minnesota
Sievers Instruments, Inc. Colorado
Springfield Elite Technologies, Inc. Massachusetts
* The Registrant, either directly, through Aqua Design, Inc. or
through Ionics (Bermuda) Ltd., wholly owns nine subsidiary
corporations incorporated in various Caribbean jurisdictions.
These subsidiary corporations own and operate, or operate and
maintain, desalination plants for the supply of potable water
to resorts, hotels and municipalities.
** Registrant through Ionics Iberica, S.A. owns 55% of this
entity.
*** Owns a U.K. subsidiary, SeparaTech Limited.
+ This entity is wholly owned by Ionics France S.A.
++ This entity is wholly owned by Ionics (U.K.) Ltd.
E-2
/75
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements for the Ionics 1997 Stock Incentive Plan on Form S-8
(registration no. 333-29135); the 1979 Stock Option Plan on Form S-8
(registration nos. 333-05225, 33-54293, 33-41598, 33-5814, 33-14194, 2-
64255, 2-72936 and 2-82780); in the registration statement for the Ionics
Section 401(k) Stock Savings Plan on Form S-8 (registration no. 33-2092);
in the registration statement for the Ionics 1994 Restricted Stock Plan
(No. 33-59051); and in the registration statement for the Ionics 1986
Stock Option Plan for Non-Employee Directors (registration no. 33-54400),
of our reports, dated February 19, 1999, on our audits of the consolidated
financial statements and the financial statement schedule of Ionics,
Incorporated as of December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, which are included or
incorporated by reference in this Annual Report on Form 10-K.
/s/PRICEWATERHOUSECOOPERS, LLP
Boston, Massachusetts
March 29, 1999
E-3
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EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned officers and directors of Ionics, Incorporated (the
"Company"), hereby severally constitute Arthur L. Goldstein and Stephen
Korn, and each of them, to sign for us, and in our names in the capacities
indicated below, the Annual Report on Form 10-K of the Company for the
fiscal year ended December 31, 1998, and any and all amendments to such
Annual Report, hereby ratifying and confirming our signatures as they may be
signed by our attorneys to such Annual Report and any and all amendments
thereto.
Witness our hands on the respective dates set forth below.
Signature Title Date
/s/Douglas R. Brown Director March 29, 1999
Douglas R. Brown
/s/William L. Brown Director March 29, 1999
William L. Brown
/s/Arnaud de Vitry d'Avaucourt Director March 29, 1999
Arnaud de Vitry d'Avaucourt
/s/Kathleen F. Feldstein Director March 29, 1999
Kathleen F. Feldstein
/s/Arthur L. Goldstein Chairman of the Board March 29, 1999
Arthur L. Goldstein of Directors, Chief
Executive Officer and
President (Principal
Executive Officer)
/s/William E. Katz Director March 29, 1999
William E. Katz
/s/John J. Shields Director March 29, 1999
John J. Shields
/s/Carl S. Sloane Director March 29, 1999
Carl S. Sloane
/s/Daniel I.C. Wang Director March 29, 1999
Daniel I.C. Wang
/s/Mark S. Wrighton Director March 29, 1999
Mark S. Wrighton
/s/Allen S. Wyett Director March 29, 1999
Allen S. Wyett
/77
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,770
<SECURITIES> 359
<RECEIVABLES> 118,848
<ALLOWANCES> (2,860)
<INVENTORY> 31,549
<CURRENT-ASSETS> 187,093
<PP&E> 353,940
<DEPRECIATION> (158,257)
<TOTAL-ASSETS> 452,123
<CURRENT-LIABILITIES> 85,934
<BONDS> 0
<COMMON> 16,117
0
0
<OTHER-SE> 329,481
<TOTAL-LIABILITY-AND-EQUITY> 452,123
<SALES> 351,326
<TOTAL-REVENUES> 351,326
<CGS> 236,842
<TOTAL-COSTS> 236,842
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,319
<INTEREST-EXPENSE> 331
<INCOME-PRETAX> 32,277
<INCOME-TAX> 10,680
<INCOME-CONTINUING> 21,386
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,386
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.31
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