UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 02549
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, 2002
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 of incorporation) (IRS Employer Identification Number)
65 Grove Street 02472-2882
Watertown, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (617)926-2500
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
$1.00 par value
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No ___
The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of June 28, 2002 was $415,244,560 (17,123,487 shares at $24.25
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).
As of March 21, 2003, 17,555,046 shares of Common Stock, $1.00 par value, were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2002. Portions of such proxy statement are incorporated by reference into Item 5
and Part III of this Annual Report on Form 10-K.
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IONICS, INCORPORATED
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PART I............................................................................................................. 3
ITEM 1. BUSINESS....................................................................................3
ITEM 2. PROPERTIES.................................................................................14
ITEM 3. LEGAL PROCEEDINGS..........................................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................15
PART II............................................................................................................15
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.......................................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..................................36
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........
71
PART III...........................................................................................................71
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................71
ITEM 11. EXECUTIVE COMPENSATION.....................................................................71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................
72
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................72
ITEM 14. CONTROLS AND PROCEDURES....................................................................72
PART IV............................................................................................................73
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...........................73
SIGNATURES.........................................................................................................77
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.........................................................................37
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PART I
Except for historical information, the matters discussed in this Annual Report
on Form 10-K are forward-looking statements that involve risks and
uncertainties. The Company makes such forward-looking statements under the
provision of the "Safe Harbor" section of the Private Securities Litigation
Reform Act of 1995. Actual future results may vary materially from those
projected, anticipated, or indicated in any forward-looking statements as a
result of certain risk factors. Readers should pay particular attention to the
considerations described in the section of this report entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risks
and Uncertainties and Forward Looking Information." Readers should also
carefully review the risk factors described in the other documents that we file
from time to time with the Securities and Exchange Commission. In this Annual
Report on Form 10-K, the words "anticipates," "believes," "expects," "intends,"
"future," "could," and similar words or expressions (as well as other words or
expressions referencing future events, conditions or circumstances) identify
forward-looking statements.
ITEM 1. BUSINESS
General
Ionics, Incorporated ("Ionics," or the "Company") is a leading water
purification company engaged worldwide in the supply of water and related
activities and the supply 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,
recycle and reclaim process water and wastewater, treat water in the home,
manufacture and supply water treatment chemicals and ultrapure water, process
food products, and measure levels of waterborne 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.
Over 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 Toolbox(R). These separations processes include electrodialysis reversal
(EDR), reverse osmosis (RO), ultrafiltration (UF), microfiltration (MF),
electrodeionization (EDI), electrolysis, ion exchange, ozonation, carbon
adsorption, and thermal processes such as evaporation and crystallization. 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.
The Company's business activities are reported in four business group segments,
which the Company put into place in 1998. The business group structure is based
upon defined areas of management responsibility with respect to markets,
applications and products. The Company believes that each business group segment
comprises, and represents, a class of similar products or product lines used in
particular water treatment applications. These business group segments are the
Equipment Business Group, Ultrapure Water Group, Consumer Water Group, and
Instrument Business Group. In 2002, these segments accounted for approximately
49.5%, 30.5%, 11.6% and 8.4%, respectively, of the Company's total revenues. See
Note 17 to the Consolidated Financial Statements for additional information
regarding the Company's four business segments. On December 31, 2001, the
Company sold its Aqua Cool Pure Bottled Water division, constituting the major
portion of the assets of the Consumer Water Group. Approximately 40% of the
Company's 2002 revenues were derived from foreign sales or operations.
Within the existing business group structure, the Company has instituted a
matrix-type organization which became effective at the beginning of 2002. Within
each business group, the Company has begun to focus on "centers of excellence,"
which represent the application of treatment or separation technologies
contained in The Ionics Toolbox(R) to solve certain application problems. The
Company utilizes its water treatment and liquids separation expertise by
employing its own proprietary products and other commodity products in the best
integrated combination to solve customers' application problems. These centers
of excellence include desalination, reuse, surface water, microelectronics,
pharmaceuticals and instruments, among others, and each represents a range of
technology solutions to solve a related applications problem. In 2002, no center
of excellence accounted for 10% or more of the Company's total revenues. The
Company will continue to report its results under the current "business group"
segment structure. Starting in 2002, as part of the matrix organization, the
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lease of trailers for the production of ultrapure water is included in the
results of the Ultrapure Water Group, rather than the Equipment Business Group,
where such results had been included through 2001. In addition, the Company's
non-consumer bleach-based chemical supply business, which through 2001 had been
included in the results of the Equipment Business Group, is included in the
results of the Ultrapure Water Group starting in 2002. The discussion and
financial results contained in this Annual Report on Form 10-K reflect these
changes for all periods presented.
The Company was incorporated in Massachusetts in 1948. The Company's principal
executive offices are located at 65 Grove Street, Watertown, Massachusetts
02472.
Information about Business Segments
Equipment Business Group
- ------------------------
The Equipment Business Group accounted for approximately 49.5% of revenues in
2002. This segment provides technologies, treatment systems and services for
seawater desalination, surface water treatment, 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
processing activities, neither of which are significant activities on which the
Company's business, results of operations or cash flows have relied.
Desalination and Related Water Treatment Equipment and Processes
- ----------------------------------------------------------------
Opportunities for the sale of desalination and related water treatment equipment
and processes 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.
As examples of the Company's activities in this market, during 2002 the Company
received an order from Mason City, Iowa for the sale of EDR-based equipment to
desalinate ground water used by the municipality for drinking water. In
addition, the Company booked an order from the Foss Reservoir Conservancy
District in Oklahoma for the sale of EDR-based equipment to desalinate surface
water used by the District for drinking water.
The Company has also been participating in a growing market for surface water
treatment equipment as municipalities are being required to meet increasingly
stringent regulations for ensuring safe drinking water quality. For example, in
late 2001 the Company received an order for equipment from the City of
Minneapolis for the sale of UF-based water treatment equipment to treat surface
water used by the city for drinking water, and construction of this facility was
well underway by the end of 2002. The Company believes that this facility will
be the largest ultrafiltration water treatment plant in the United States.
Wastewater Treatment Equipment and Processes
- --------------------------------------------
The market for the treatment, recycle and reuse of wastewater 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 what Ionics calls "Ionics Total Water Management(R)," which involves the
recognition that the water streams which enter, leave or become part of a
process can be treated for use, recycle or discharge to achieve overall economic
efficiencies. Ionics services the wastewater market with proprietary brine
concentrators and crystallizers, traditional wastewater treatment equipment, and
special EDR membrane-based concentrators for recycle and reuse.
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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" (ZLD) industrial uses. Such systems may
also incorporate EDR membrane systems as preconcentrators, and EDI membrane
systems for further treatment of wastewater. A representative example in 2002
was the selection of the Company by the Orlando Utilities Commission in Florida
to supply a brine concentrator and crystallizer ZLD system for the Stanton
Energy Combined Cycle Unit A Power Plant.
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 EDR, RO, UF and MF. Typical industrial
customers are power stations, chemical and petrochemical plants, manufacturers
and a variety of other industrial applications. The Company also provides custom
and packaged sewage treatment systems for municipalities and advanced membrane
systems that treat waste from conventional sewage treatment plants so that the
treated wastewater can be recycled and reused for irrigation and process water
needs.
As an example of the Company's activities in membrane-based wastewater
treatment, during 2002, Utilities Development Company W.L.L. (UDC), a Kuwaiti
project company in which the Company has a 25% ownership interest, commenced
activities under a contract to construct, own and operate the largest
membrane-based water reuse facility in the world. The Company is also serving as
a membrane equipment supplier to UDC under an $85 million supply contract
awarded in 2002. For further discussion regarding UDC, see Item 7 of this Annual
Report on Form 10-K under the caption "Financial Condition" and Note 8 to the
Consolidated Financial Statements contained in Item 8 of this Annual Report on
Form 10-K.
Water Supply for Drinking and Industrial Use
- --------------------------------------------
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 supply the water
itself through the ownership and operation of the water purification facility.
In these situations, the Company is responsible for the financing, construction,
operation and maintenance of the water treatment facilities. For large-scale
water treatment projects, the Company has been utilizing a business model for
participating in such projects using a project company in which the Company
typically will hold a minority equity interest.
As an example, during 2002, a three-member team, including the Company, was
selected by the Ministry of Finance and the Ministry of Infrastructure in Israel
to supply 30 million cubic meters per year of potable water under a 24 year and
11 month build-own-operate (BOO) contract. The team has formed a project company
which is currently seeking financing for the project. For further discussion
regarding this project see Item 7 of this Annual Report on Form 10-K under the
caption "Financial Condition" and Note 8 to the Consolidated Financial
Statements contained in Item 8 of this Annual Report on Form 10-K.
Ionics, through its wholly-owned subsidiary, Ionics Iberica, S.A., owns and
operates an EDR facility with capacity to treat 5.5 million gallons per day of
brackish water and an RO seawater facility with capacity to treat 3.6 million
gallons per day on Grand Canary Island, Spain. Under long-term contracts, the
Company sells the desalted water from both facilities to the local water utility
for distribution.
The Company's wholly owned subsidiary, Ionics (Bermuda) Ltd., owns and operates
an EDR brackish water plant with capacity to treat 600,000 gallons per day 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.
In the second quarter of 2002, construction was completed with respect to the
first four out of five phases of what the Company believes will be the largest
membrane-based seawater desalination plant in the Western Hemisphere, which is
located in Trinidad. The seawater reverse osmosis (SWRO) desalination plant
provides the Water and Sewerage Authority of Trinidad and Tobago (WASA) and the
industries of the Point Lisas Industrial Estate with a high quality water supply
for industrial requirements. This $120 million project is owned and operated by
a joint venture between the Company (which has a 40% equity ownership interest
in the venture) and its local partner, Hafeez Karamath Engineering Services Ltd.
The plant began to produce and deliver water during 2002 and has a current
design capacity of 26.4 million gallons per day, which will be expanded to 28.7
million gallons per day. For further discussion regarding the Trinidad project
see Item 7 of this Annual Report on Form 10-K under the caption "Financial
Condition" and Note 8 to the Consolidated Financial Statements contained in Item
8 of this Annual Report on Form 10-K.
-5-
The Company also owns and operates more than 40 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. On
the island of Barbados, a 7.9 million gallon per day brackish water RO plant
which started up successfully in the first quarter of 2000, is providing fresh
potable drinking water to about one-fifth of the island's population.
Desalinated water is being provided to the Barbados Water Authority on a build,
own, operate (BOO) basis by a joint venture (in which the Company has a
controlling ownership interest) between Ionics and its local partner, Williams
Industries.
The Equipment Business Group also carries out the following business activities:
a) Fabricated Products
At its Bridgeville and Canonsburg, Pennsylvania facilities, the Company
fabricates products for industrial and defense-related applications.
b) 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 earns revenue based on the production of demineralized
whey for its services. Included in the equipment being utilized at
these plants are its Electromat(R) electrodialysis systems.
Ultrapure Water Group
- ---------------------
The Ultrapure Water Group accounted for approximately 30.5% of the Company's
2002 revenues. This segment provides equipment and other related products for
specialized industrial users of ultrapure water, such as companies in the life
sciences, chemical, microelectronics and power industries. With the Company's
acquisition of Enchem(R) wastewater treatment technology in July 2002, the
Ultrapure Water Group is now able to provide equipment that treats certain
semiconductor industry wastewater streams. Ultrapure water is purified by a
series of processes to the degree that remaining impurities are measured in
parts per billion or trillion. The microelectronics industry has historically
been a significant source of the revenues of the Ultrapure Water Group, and
softness in the microelectronics industry negatively affected the performance of
the Ultrapure Water Group in 2002 and 2001.
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 and as such requirements have
become more stringent. 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.
The Company has been pursuing customers in the developing microelectronics
market in the Far East. For example, during 2002, Ionics was awarded contracts
with Corning and Chungwa Picture Tube (CPT) for supply of water systems to
manufacturing companies in the flat panel market. In addition, Ionics has
supplied new systems to Taiwan Semiconductor Mfg. Corp. (TSMC) for wastewater
reuse. Ionics has established a subsidiary in China for the manufacture of water
systems to serve the China market and for export.
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 and biotechnology markets. In 2002, Ionics has developed and
supplied systems in the U.S., Singapore, and Europe. In addition, Ionics has
introduced standardized systems for these markets.
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Ultrapure Water Supply
- ----------------------
In industries such as power generation, semiconductors, pharmaceuticals and
biotechnology, ultrapure water is critical to product volume, 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 (TMT) 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 (until 2002, this activity had been included in the Equipment Business
Group).
The Company's EDI technology is becoming increasingly utilized 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 2002, Company-owned or operated equipment for the production of
ultrapure water and other purified process water under contracts with companies
in various industries had a total capacity of approximately 29,000 gallons per
minute.
One of the Company's important ultrapure water activities is ion-exchange
regeneration, which is provided at four U.S. locations and two foreign
locations. The Company also provides system sanitization and high-flow
deionization services at customer sites.
The Company has been expanding its ultrapure water activities in the Asian
market. The Company established an ultrapure water sales, service and
regeneration facility in Singapore in 1998, opened an office in Taiwan in 1999,
and commenced operation of the first resin regeneration facility in Taiwan in
2002.
Chemical Supply
- ---------------
The Company uses its Cloromat(R) electrolytic membrane-based technology to
produce sodium hypochlorite and related chlor-alkali chemicals for industrial,
commercial and other non-consumer applications. These activities are carried out
by the Company's wholly owned Australian subsidiary, Elite Chemicals Pty. Ltd.
(Elite), and the Company's wholly-owned Mexican subsidiary, Ionics Acapulco Ltd.
(until 2002, this activity had been included in the Equipment Business Group).
Consumer Water Group
- --------------------
This business group segment accounted for approximately 11.6% of the Company's
2002 revenues. The Company's consumer water products currently serve the home
water purification and consumer bleach-based product market. On December 31,
2001, the Company completed the sale of its Aqua Cool Pure Bottled Water
business conducted in the United States, United Kingdom, and France, to
affiliates of Perrier Vittel S.A., a subsidiary of Nestle S.A. In this
transaction, the Company received total proceeds of approximately $207 million,
following finalization of contractual purchase price adjustments in the first
quarter of 2003. See Note 16 to the Consolidated Financial Statements contained
in Item 8 of this Annual Report on Form 10-K. The Company retains equity
ownership interests in certain joint venture entities in Bahrain, Kuwait and
Saudi Arabia which are engaged in the bottled water business.
Home Water Purification Systems
- -------------------------------
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.
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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 RO and activated carbon-based
filtering devices, and through the manufacture and sale of HYgene(R), 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.
Other Products
The Company's Elite Consumer Products division operates a Cloromat(R) facility
in Ludlow, Massachusetts 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 "Elite(R)", "Super ValueTM" and "UltraPureTM" brands,
and methanol-based automobile windshield wash solution.
Instrument Business Group
- -------------------------
The Company's Instrument Business Group accounted for approximately 8.4% of the
Company's 2002 revenues. This segment designs and manufactures analytical
instruments that serve the pharmaceutical, microelectronic, chemical, power
generation, environmental, municipal water, food and beverage, and medical
research industries. The Instrument Business Group derives more than 40% of its
revenues from service, consumables, spare parts, and training products from its
installed base of more than 8,000 units. During 2000, the Ionics Instrument
Division, which was located in Watertown, Massachusetts, was moved and
consolidated with Ionics Sievers Instruments, located in Boulder, Colorado. This
business group also includes Ionics Agar Environmental, located in Herzlia,
Israel. The Company is a leading manufacturer of instruments that measure total
organic carbon (TOC) across the water "spectrum" from ultrapure water to
wastewater. The Sievers(R) Model 400ES TOC analyzer, introduced at the end of
2001, is designed specifically to comply with United States Pharmacopoeia (USP)
and European Pharmacopoeia (EP) requirements for determining water quality in
the pharmaceutical industry. Ionics' Instrument Business Group offers TOC
analyzers sensitive to the parts-per-trillion range, designed specifically for
ultrapure water measurement in the semiconductor and power generation
industries. In the fourth quarter of 2001, the Company introduced the first
on-line boron analyzer designed specifically for continuous measurement of trace
boron contamination, a capability particularly important in the semiconductor
and power industries.
In 2002 the Company introduced enhancements to its Model 400ES TOC Analyzer that
facilitates pharmaceutical company compliance with FDA electronic record-keeping
requirements. Additionally, the Company expanded its consumables and service
business capability with a new range of products and services, and an expanded
production facility for the manufacture of calibration standards for its
pharmaceutical customers.
In addition to the Sievers product line, the Company offers a full line of TOC
monitors for process water and wastewater applications, as well as other
instruments.
The Company's Ionics Agar Environmental division, acquired in 1999, offers a
line of instruments for the detection of thin layers of oil on water. The
Company's Leakwise(R) oil-on-water detection systems are used by a range of
industries from oil refining to power generation. In 2002, the Company
introduced its Leakwise ID-227WL wireless system for remote sensing and
satellite/cellular communication of environmental oil spills.
Other Information Concerning the Business of the Company
Foreign Operations
- ------------------
The Company has significant operations outside the United States. The Company's
sales to customers in foreign countries primarily involve desalination systems,
ultrapure water systems, water and wastewater treatment systems, Cloromat
systems, instruments and related products and services. The Company believes
that this geographic diversity provides stability to its operations and revenue
streams to offset geographic economic trends and offers it an opportunity to
expand into new markets for its products. The Company conducts operations
outside the United States directly or through its wholly-owned subsidiaries
located in Australia, China, Bermuda, the Caribbean, England, France, Ireland,
Israel, Italy, Korea, Mexico, Singapore, Spain and Taiwan. In addition, the
Company also conducts operations outside the United States through affiliated
-8-
companies and joint venture relationships in the Caribbean (including Trinidad),
Bahrain, Israel, Japan, Kuwait, Mexico and Saudi Arabia. Of these affiliated
company and joint venture operations, the Company believes that the Kuwait,
Trinidad and Mexico ventures are material to its business on a consolidated
basis.
Revenues from operations outside the United States totaled $122.6 million in
2002, $146.2 million in 2001 and $151.5 million in 2000, accounting for
approximately 36.6%, 31.3% and 31.9% respectively, of the Company's total
revenues. No single country outside the United States contributed more than 10%
in 2002, 2001 or 2000 of the Company's total revenues.
For a discussion of risks attendant to the Company's foreign operations, see
Item 7 of this Annual Report on Form 10-K. In addition, further geographical and
financial information concerning the Company's foreign operations appears in
Notes 1, 5, 8, 9, 10, 14, 15, 16 and 17 of the Company's Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K.
Raw Materials and Sources of Supply
- -----------------------------------
All raw materials and parts and supplies essential to the business of the
Company can normally be obtained from more than one source. The Company produces
the membranes required for its equipment and systems that use the ED, EDR, MF,
UF, RO and EDI processes. Membranes used for the MF, UF and RO processes are at
times also purchased from outside suppliers and are normally available from
multiple sources. During 2000, the Company formed a joint venture with Toray
Industries, Inc. and Mitsui & Co. to manufacture and market RO membrane modules
for the desalination of seawater and brackish water using Toray's proprietary RO
manufacturing technology. Ionics has a 43% interest in the joint venture
company, Toray Membrane America, Inc. (TMA). In 2001, TMA commenced the
manufacture of RO membrane modules in space leased from the Company in
Watertown, MA.
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 87 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, EDI and
instrumentation technology. 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 sales of bleach products for swimming pool use which tend to increase
during the summer months, and sales of automobile windshield wash solution which
tend to increase in the winter months. Together, these products represent less
than 5.0% of the Company's total revenues.
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 accounted for 10% or more of the revenues of
any business segment and whose loss would have a material adverse effect on the
Company and its subsidiaries taken as a whole.
-9-
Backlog
- -------
The Company's backlog of firm orders was $377.2 million at December 31, 2002 and
$258.9 million at December 31, 2001. 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 42% of its December 31, 2002 backlog during 2003.
The Company does not believe that there are any seasonal aspects to its backlog
figures.
The Company has entered into a number of large contracts, which are generally
categorized as either "equipment sale" contracts or build, own and operate
("BOO") contracts. The Company believes that the remaining duration on its
existing equipment sale contracts ranges from less than one year to three years
and the remaining duration on its existing BOO contracts ranges from one year to
25 years. The time to completion of any of these contracts, however, is subject
to a number of variables, including the nature and provisions of the contract
and the industry being served. Historically, as contracts are completed, the
Company has entered into new contracts with the same or other customers. In the
past, the completion of any one particular contract has not had a material
effect on the Company's business, results of operations or cash flows.
Government Contracts
- --------------------
The Company does not believe that any of its sales under U.S. Government
contracts or subcontracts during 2002 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's research and development activities are directed toward developing
new products for use in water and wastewater purification, processing and
measurement, and separations technology. The Company's research and development
expenses were approximately $6.5 million in 2002, $6.4 million in 2001 and $8.0
million in 2000.
Competition
- -----------
The Company experiences competition from a variety of sources with respect to
virtually all of its products, systems and services, however 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. 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.
With respect to the Company's Equipment Business Group, there are a number of
companies, including several sizable chemical companies that manufacture and
sell membranes, but not water treatment equipment. There are numerous smaller
companies, primarily fabricators, that sell water treatment and desalination
equipment, but which generally do not have proprietary membrane technology. A
limited number of companies, some of which are larger than the Company,
manufacture both membranes and water treatment equipment. The Company has
numerous competitors in its conventional water treatment, instrument and
fabricated products business lines.
In 2002, 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, 2001, 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 number of such plants sold from 1992 to 2001,
having sold more than the next three manufacturers combined. In addition, the
report indicated that the Company ranked first in the total capacity of such
plants sold.
With respect to the Ultrapure Water Group business segment, the Company competes
with suppliers of ultrapure water services and with other manufacturers of
membrane-related equipment on an international, national and regional basis.
-10-
With respect to the Company's Consumer Water Group business segment, most of the
Company's competitors in point-of-entry and point-of-use products for use in the
home or office are small assemblers, serving local or regional markets. However,
there are also several large companies competing nationally in these markets.
Environmental Matters
- ---------------------
The Company continues to fully comply with federal, state and local government
rules and regulations relating to the discharge of materials into the
environment or otherwise relating to the protection of the environment. 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 ("SRS Site"). Ionics' share of assessments to date for site work and
administrative costs totals approximately $77,000. The United States
Environmental Protection Agency ("EPA") has not yet issued a decision regarding
clean-up methods and costs. However, based upon the large number of PRPs
identified, the Company's small volumetric ranking (approximately 0.5%) and the
identities of the larger PRPs, the Company believes that its liability in this
matter will not have a material effect on the Company or its financial position,
results of operations or cash flows.
By letter dated March 29, 2000, the Company and other PRPs for the SRS Site were
notified that they may also have potential liability with respect to the
Angelillo Property Superfund Site, also in Southington, Connecticut ("Angelillo
Site"), because hazardous materials were allegedly shipped from the SRS Site to
the Angelillo Site. In April 2001, the Company and certain other PRPs entered
into a settlement agreement with the EPA with respect to the Angelillo Site,
under which the Company made a final settlement payment of approximately $3,300.
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 1,900 persons
on a full-time basis. 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.
-11-
Executive Officers of the Registrant
- ------------------------------------
The names, ages and positions of the Company's Executive Officers are as
follows:
Age as of Positions
Name March 1, 2003 Presently Held
---- ------------- --------------
Arthur L. Goldstein 67 President, Chief Executive Officer
and Director since 1971; Chairman
of the Board since 1990
Edward J. Cichon 48 Vice President, Equipment Business Group since July
1998
Alan M. Crosby 50 Vice President, Consumer Water Group since March
2000; previously Vice President and General Manager,
Elite; and Vice President, Operations
Anthony Di Paola 36 Vice President and Corporate Controller
since May 2000
Stephen Korn 57 Vice President, General Counsel and Clerk since 1989
Daniel M. Kuzmak 50 Vice President, Finance and Chief
Financial Officer since January 2001
William J. McMahon 47 Vice President, Ultrapure Water Group
since November 2000
Theodore G. Papastavros 69 Executive Vice President since May 2002; Treasurer
since August 2002; Vice President since 1975
Michael W. Routh 55 Vice President, Instrument Business Group since April
2000
There are no family relationships between any of the officers or directors.
Executive officers of the Company are appointed each year at the meeting of
directors held on the date of the annual meeting of shareholders. There are no
arrangements or understandings pursuant to which any executive officer was
selected.
Except for Messrs. Cichon, Di Paola, Kuzmak, McMahon and Routh, all of the
current 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.
Mr. Di Paola served in various finance and accounting positions with
Thyssen-Dover Elevator Company North America from 1997 until he joined the
Company, including as Corporate Controller from 1998 to 2000. Prior to 1997, he
served as Assistant Controller for Vector Health Systems, Incorporated.
Mr. Kuzmak joined the Company after 15 years with ABB and its U.S. subsidiary,
including serving as Chief Financial Officer of ABB Inc. (US) from 1998 to 2000,
and Vice President, Finance of ABB Nuclear Operations and ABB Nuclear Business
from 1995 to 1998.
Mr. McMahon served as President and Chief Executive Officer of Stone &
Webster/Sonat Energy Resources LLC from 1998 until he joined the Company;
President of Stone & Webster Energy Services from 1997 to 1998; and General
Manager/Environmental Systems of DB Riley Consolidated, Inc. from 1995 to 1997.
Mr. Routh served as President of the Baird Division of Thermo Instrument
Systems, Inc. from 1995 to 1997, and General Manager of the Spectroscopy
Division of BioRad Laboratories, Inc., from 1998 to March, 2000.
-12-
Available Information
- ---------------------
The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports are available,
without charge, on our website at www.ionics.com, as soon as reasonably
practicable after they are filed electronically with the Securities and Exchange
Commission.
-13-
ITEM 2. PROPERTIES
The Company's executive offices are located in a Company-owned facility at 65
Grove Street, Watertown, Massachusetts. Manufacturing, assembly, engineering and
other operations are carried out in a number of domestic and international
locations. The following table provides certain information as to the Company's
principal general offices and manufacturing facilities:
Business Segment Approximate Square Feet
Location Utilizing the Location Property Interest of Floor Space
-------- ---------------------- ----------------- -----------------------
Watertown, MA* Equipment Business Group Owned 134,000
(headquarters) Instrument Business Group
Consumer Water Group
Ultrapure Water Group
Watertown, MA Equipment Business Group Owned 127,000
Bridgeville, PA Equipment Business Group Owned 77,000
Consumer Water Group
Canonsburg, PA Equipment Business Group Leased 88,000
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
Pico Rivera, CA Ultrapure Water Group Owned 68,000
Phoenix, AZ Ultrapure Water Group Leased 34,000
Bellevue, WA Equipment Business Group Leased 21,000
Brisbane, Australia Equipment Business Group Owned 38,000
Brisbane, Australia Ultrapure Water Group Leased 62,000
Milan, Italy Equipment Business Group Leased 18,000
Dallas, TX Ultrapure Water Group Owned 12,000
Dallas, TX Ultrapure Water Group Leased 9,000
Singapore Ultrapure Water Group Leased 9,000
- --------------------
* Approximately 22,000 square feet of this facility are leased to a joint
venture entity engaged in membrane manufacture.
The Company also owns or leases smaller facilities in which its business
segments conduct business.
The Company considers the business facilities that it utilizes to be adequate
for their intended business purpose.
-14-
ITEM 3. LEGAL PROCEEDINGS
The Company and its Chief Executive Officer and Chief Financial Officer have
been named as defendants in a class action lawsuit captioned Jerome Deckler v.
Ionics, Inc., et al., filed in the U.S. District Court, District of
Massachusetts in March 2003. Plaintiff alleges violations of the federal
securities laws relating to the restatement of the Company's financial
statements for the first and second quarters of 2002 announced in November 2002.
The Company believes the allegations in the lawsuit are without merit and
intends vigorously to defend the litigation. While the Company believes that the
litigation will have no material adverse impact on its financial condition,
results of operations or cash flows, the litigation process is inherently
uncertain and the Company can make no assurances as to the ultimate outcome of
this matter.
The Company is involved in the normal course of its business in various other
litigation matters, some of which are in the pre-trial discovery stages. The
Company believes that none of the other pending matters will have an outcome
material to the Company's financial position, results of operations or cash
flows.
The Company was notified in 1992 that it is a potentially responsible party
(PRP) at a Superfund Site, Solvent Recovery Services of New England in
Southington, Connecticut. Ionics' share of assessments to date for site work and
administrative costs totals approximately $77,000. The United States
Environmental Protection Agency ("EPA") has not yet issued a decision regarding
clean-up methods and costs. However, based upon the large number of PRPs
identified, the Company's small volumetric ranking (approximately 0.5%) and the
identities of the larger PRPs, the Company believes that its liability in this
matter will not have a material effect on the Company or its financial position,
results of operations or cash flows.
In 2002, Sievers Instruments, Inc. ("Sievers"), a wholly owned subsidiary of the
Company, filed a patent infringement suit in the United States District Court
for the District of Colorado against Anatel Corporation and against Anatel's
acquiring company, Hach Company ("Anatel"). The suit alleges that Anatel's
manufacture and sale of its Model 643 organic carbon analyzer unlawfully copied
and interfered with sales of Sievers' TOC 400 total organic carbon analyzer in
that the Model 643 infringes certain claims of Sievers' U.S. patents No.
5,976,468 and No. 6,271,043. The suit further asserts that the continuing sale
of calibration standards by Anatel constitutes infringement. The defendants have
raised certain defenses, withdrawn the accused product from the market, and
introduced a redesigned analyzer. Defendants have asked the Court to rule that
their redesigned analyzer does not infringe, and the Court has not yet issued
its decision. The case is in early stages of discovery.
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
symbol ION. As of March 21, 2003, there were approximately 1,100 shareholders of
record. No cash dividends were paid in either 2002 or 2001 pursuant to the
Company's current policy to retain earnings for use in its business. The Company
currently intends to continue to retain future earnings, if any, for use in its
business and does not expect to pay any cash dividends in the foreseeable
future.
-15-
During the period January 1, 2001 to December 31, 2002, the range of high and
low sales prices of the common stock for each quarterly period was as follows:
2002 2001
----------------------------- ---------------------------
High Low High Low
-------------- -------------- ------------- -------------
First Quarter $33.90 $28.86 $30.94 $23.98
Second Quarter 32.22 24.00 31.57 23.40
Third Quarter 25.21 18.90 31.50 19.27
Fourth Quarter 25.15 17.64 31.85 21.44
The information referenced by this item with respect to the Company's
stockholder approved plans and non-stockholder approved plans is hereby
incorporated by reference from the Company's definitive Proxy Statement for the
2003 Annual Meeting (which will be filed with the Securities and Exchange
Commission within 120 days of the close of the Company's fiscal year) under the
caption "Equity Compensation Plan Information."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five years
ended December 31, 2002, 2001, 2000, 1999 and 1998 are derived from the
Company's Consolidated Financial Statements. This data should be read in
conjunction with the Company's audited financial statements and related notes,
and with Item 7 of this Annual Report on Form 10-K.
Consolidated Statement of Operations Data
For the years ended December 31,
-------------------------------------------------------------------------------------------
Dollars in Thousands
Except Per Share Amounts 2002 % 2001 % 2000 % 1999 % 1998 %
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $335,371 100.0 $466,732 100.0 $474,551 100.0 $358,217 100.0 $351,326 100.0
Income (loss) before income taxes,
minority interest, and gain on sale 2,509 0.7 (16,631) (3.6) (2,224) (0.5) 29,731 8.3 32,883 9.4
Net income (loss)* 4,792 1.4 44,701 9.6 (1,870) (0.4) 19,361 5.4 21,386 6.1
Earnings (loss) per basic share 0.27 2.61 (0.12) 1.20 1.33
Earnings (loss) per diluted share 0.27 2.59 (0.12) 1.18 1.31
*Includes a pre-tax gain on the sale of the Aqua Cool Pure Bottled Water
business of $8.2 million and $102.8million in 2002 and 2001, respectively.
Consolidated Balance Sheet Data
December 31,
------------------------------------------------------------------------------
Dollars in Thousands 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Current assets $328,740 $378,791 $ 252,862 $ 193,802 $ 187,093
Current liabilities 114,168 156,866 173,363 99,475 85,934
- --------------------------------------------------------------------------------------------------------------------
Working capital 214,572 221,925 79,499 94,327 101,159
Total assets 608,013 633,313 585,813 500,906 452,123
Long-term debt and notes payable 9,670 10,126 10,911 8,351 1,519
Stockholders' equity 438,153 423,353 356,861 361,852 345,598
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a leading water purification company engaged worldwide in the
supply of water and related activities and the supply of water treatment
equipment through the use of proprietary separations technologies and systems.
The Company's products and services are used by the Company or its customers to
desalt brackish water and seawater, recycle and reclaim process water and
wastewater, to treat water in the home, to manufacture and supply water
treatment chemicals and ultrapure water, to process food products, and to
measure levels of waterborne contaminants and pollutants. The Company's
-16-
customers include industrial companies, consumers, municipalities and other
governmental entities and utilities. The following discussion and analysis of
financial condition and results of operations refers to the activities of the
Company's four business groups, which comprise the Company's reportable
operating segments. These groups are the Equipment Business Group (EBG),
Ultrapure Water Group (UWG), Consumer Water Group (CWG) and Instrument Business
Group (IBG). See Note 17 to the Consolidated Financial Statements contained in
Item 8 of Part II of this Annual Report on Form 10-K for additional information
regarding its four business segments. Within the existing business group
structure, the Company has instituted a matrix-type organization which became
effective at the beginning of 2002. Within each business group, the Company has
begun to focus on "centers of excellence," which represent the application of
treatment or separation technologies contained in The Ionics Toolbox(R) to solve
certain application problems. The Company utilizes its water treatment and
liquids separation expertise by employing its own proprietary products and other
commodity products in the best integrated combination to solve customers'
application problems. These centers of excellence include desalination, reuse,
surface water, microelectronics, pharmaceuticals and instruments, among others,
and each represents a range of technology solutions to solve a related
applications problem.
The EBG segment provides products and services for seawater and brackish water
desalination, water reuse and recycle, surface water treatment, and zero liquid
discharge. Significant factors influencing the desalination market include
worldwide water shortages, the need for better quality water in many parts of
the world, and the reduced cost of operating of modern desalination facilities.
These factors have driven a trend toward larger plants, and toward the purchase
of water supply and operating and maintenance contracts. Trends impacting the
water reuse and recycle market are similar, with membrane technology becoming
proven in reuse and recycling applications. The surface water market has been
influenced primarily by regulatory pressures to reduce contaminants in water
supplies. The use of membrane technology is also becoming more accepted in
surface water applications. The zero liquid discharge market, which consists of
equipment and services for the minimization of liquid waste through such
techniques as evaporation, concentration and crystallization, has been
influenced by regulatory pressures on utilities to eliminate discharge of
process water. The Company believes that it is positioned to be able to compete
successfully in these applications, although it frequently faces substantially
larger competitors.
The UWG segment provides equipment and services for the microelectronics, power,
and pharmaceutical industries, where high quality ultrapure (i.e. very highly
purified) water is required for use in production processes, and is critical to
ultimate product quality and yield. The UWG segment has historically been
heavily reliant upon the microelectronics industry, and the continued softness
in that industry has adversely impacted both revenue and profitability. The UWG
segment has been pursuing applications in other markets, such as power,
pharmaceuticals and flat panel display, to lessen its reliance upon the
microelectronics market.
The CWG segment provides home water units for the treatment of residential
water. Prior to the divestiture of the Aqua Cool Pure Bottled Water business in
the U.S., U.K. and France on December 31, 2001, it was also engaged in the home
and office delivery market for bottled water. The CWG segment also produces
bleach-based cleaning products and automobile windshield wash solution. Trends
in the consumer water market include increased consumer awareness of and the
need for improved water quality, and reduced confidence in the quality of
existing water supplies.
The IBG segment manufactures and sells instruments and related products for the
measurement of impurities in water. The segment serves the pharmaceutical,
microelectronics and power markets where the measurement of water quality,
including levels and types of contaminants in process water, is critical to
production processes. The IBG segment has established a strong position in the
pharmaceutical industry, providing products and services that facilitate
compliance with both domestic and foreign regulatory requirements. Like the UWG
segment, the performance of the IBG segment has been impacted by the downturn in
the microelectronics industry, although to a lesser extent than the UWG segment.
The EBG and UWG segments have historically supplied equipment and related
membranes. Starting in the mid-1980's, these groups also began to own and
operate facilities that sell desalted or otherwise treated water directly to
customers under water supply agreements. The revenues and cost of sales
associated with equipment sales are recorded in the revenue and cost of sales
lines on the Company's Consolidated Statement of Operations in the periods in
which the revenues are realized. Equipment contracts are generally accounted for
under the percentage completion accounting method, and the period of time over
which costs are incurred and revenues are realized may vary between six months
-17-
and two years, depending on the nature and amount of equipment being supplied.
For water supply agreements, with respect to smaller projects, of which the
Company is the sole owner, the initial cost of the equipment becomes part of the
Company's depreciable fixed asset base, and the revenues and cost of sales
recorded by the Company are those that are associated with the supply of water
under the water supply agreement. These contracts typically vary in length
between 5 and 15 years.
In the EBG segment, which more recently has begun to pursue large-scale,
long-term water treatment projects, the Company has been utilizing a business
model for participating in such projects typically through joint venture project
companies in which the Company will hold a minority ownership interest. Such
project companies are formed to own and operate larger scale desalination,
reuse, or other projects in which the Company may participate in several ways,
including: having an ownership interest (typically a minority interest) in the
project company; selling the desalination, reuse, or other treatment system to
the project company; and providing operating and maintenance services to the
project company once the project facility commences operations. These projects
often exceed $100 million in total cost and may involve multiple equity
participants in the project company. The Company's participation in major
projects through a minority interest in a project company structure mitigates
the risks of engaging in such activities, and also provides the Company with
potential long-term equity income from such investments, because these project
companies typically enter into long-term concession agreements with the customer
entity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Discussion and Analysis of Financial Condition and Results of
Operations is based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of consolidated financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent liabilities. On an ongoing basis, the Company evaluates
its accounting policies and estimates, including those related to revenue
recognition, allowance for doubtful accounts, investments in affiliated
entities, income taxes, goodwill and other long-lived assets, pension plans,
loss contingencies and derivative instruments. The Company bases its estimates
on historical experience and other relevant information and on appropriate
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. The Company's significant accounting policies are described in Note
1 to the Consolidated Financial Statements included in Item 8 of this Annual
Report on Form 10-K. The Company has identified the policies discussed below as
critical to understanding its business and its results of operations.
Revenue Recognition
For certain contracts involving customized equipment eligible for contract
accounting under American Institute of Certified Public Accountants ("AICPA")
Statement of Position No. 81-1, "Accounting for Performance of Construction-Type
and Certain Construction-Type Contracts" (SOP 81-1), revenue is recognized using
the percentage of completion accounting method based upon an efforts-expended
method. The nature of these contracts and the types of products and services
provided are considered in determining the proper accounting for a given
contract. Long-term, fixed-price and cost plus fixed-fee contracts are recorded
on a percentage of completion basis using the cost-to-cost method of accounting
where revenue is recognized based on the ratio of costs incurred to estimated
total costs at completion. The Company follows this method since reasonably
dependable estimates of the costs of the total contract can be made. As a
general rule, sales and profits are recognized earlier under the cost-to-cost
method of percentage of completion accounting compared to the completed contract
method. Contract accounting requires significant judgment relative to assessing
risks, estimating contract costs and making related assumptions regarding
schedules and technical issues. Due to the size and nature of the Company's
long-term contracts, the estimation of cost at completion is complicated and
subject to numerous variables. Contract costs include material, labor,
subcontracting and other related costs. Assumptions must be made relative to the
length of time to complete the contract. With respect to contract change orders,
claims or similar items, judgment must be used in estimating related amounts and
assessing the potential for realization. Such amounts are only included in the
contract value when they can be reliably estimated and realization is reasonably
assured, generally upon receipt of a customer-approved change order. Given the
significance of the judgments and estimation processes described above, it is
likely that materially different amounts could be recorded if different
-18-
assumptions were used or if underlying circumstances were to change. The Company
closely monitors compliance and consistency of application of its critical
accounting policies related to contract accounting. In addition, reviews of the
status of contracts are performed periodically. In all cases, changes to total
estimated costs and anticipated losses, if any, are recognized in the period in
which determined.
For contracts involving the sale of equipment to a joint venture or other
unconsolidated affiliated entity in which the Company has an ownership interest,
the extent of revenue and profit recognized while the contract is being
performed varies based on the level of equity interest held by the Company.
Generally, when the Company's equity ownership in the affiliated customer is
less than 20%, and accounts for such interest on a cost basis, no revenue or
profit is eliminated as the contract is being performed. When the Company's
equity ownership is between 20% and 50%, provided that the Company does not
exercise effective control over the affiliated entity, the Company recognizes
revenue as the contract is being performed but eliminates a portion of the
profit equal to the Company's equity ownership percentage in the entity. After
construction has been completed and commercial operations have commenced, the
resulting eliminated intercompany profit is amortized over the estimated useful
life of the equipment owned by the affiliated entity. When the Company's equity
ownership exceeds 50%, or in instances where the Company effectively controls
the affiliated entity, no revenue or profit is recognized on the sale of
equipment as the contract is executed, and all of the profit on the contract is
eliminated and amortized over the estimated useful life of the equipment after
construction has been completed and commercial operations have commenced.
With respect to the Company's sale of equipment to Desalcott (the project
company) in connection with the Trinidad project (discussed in this Item under
"Financial Condition"), where the Company is a 40% equity owner of Desalcott,
since the Company is considered to have provided all of the cash equity funding
for the project either directly or through a loan to the Company's local
majority partner, equipment revenue earned has been recognized to the extent of
costs incurred as the contract is executed; however, all of the profit has been
eliminated, and will be amortized over the estimated useful life of the
equipment after construction has been completed and commercial operations have
commenced.
The revenues and cost of sales to affiliated companies included in the Company's
Consolidated Statements of Operations reflect the revenue and costs recorded
from the sales of equipment to joint ventures or other unconsolidated entities.
Revenue is recognized in accordance with SOP 81-1 or with Securities and
Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101), as appropriate, less the amount of intercompany
profit eliminated equal to the Company's ownership interest in the affiliated
company. Eliminated intercompany profit, as described above, is amortized over
the useful life of the equipment placed in service by the affiliated company
(e.g. 23 years of the Trinidad project, and 27 years for the Kuwait project).
The Company believes that the amortization of the intercompany profits is not
material to the Company's financial statements. The amount of deferred profit at
December 31, 2002 was approximately $4.5 million.
In addition to the construction and sale of customized equipment to its
customers, the Company also enters into water and other concession agreements
under which the Company "owns and operates" desalination or water treatment
facilities to produce and supply water to its customers. Under these contracts,
where the Company remains the owner of the facility or equipment, revenue and
profit is recognized as water quantities are sold to the customer (or,
alternatively, pursuant to a "take or pay" arrangement if minimum quantities are
not purchased). More specifically, the revenue derived from these contracts is
generally recognized based on actual meter readings and agreed-upon rates in
effect during the term of the contract. The constructed equipment is capitalized
by the Company, included in property, plant and equipment, and amortized to cost
of sales over the shorter of the estimated useful life of the equipment or the
contract term.
For sales of standard products and equipment not governed by SOP 81-1, such as
the sale of instruments and consumer water products, the Company follows the
guidance provided by SAB 101. The Company does not recognize revenue unless
there is persuasive evidence of an arrangement, title and risk of loss has
passed to the customer, delivery has occurred or the services have been
rendered, the sales price is fixed or determinable and collection of the related
receivable is reasonably assured. It is the Company's policy to require an
arrangement with its customers, either in the form of a written contract or
purchase order containing all of the terms and conditions governing the
arrangement, prior to the recognition of revenue. Title and risk of loss
generally pass to the customer at the time of delivery of the product to a
common carrier. At the time of the transaction, the Company assesses whether the
sale price is fixed or determinable and whether or not collection is reasonably
-19-
assured. The Company assesses whether the sale price is fixed or determinable
based upon the payment terms of the arrangement. If the sales price is not
deemed to be fixed or determinable, revenue is recognized as the amounts become
due from the customer. The Company does not generally offer a right of return on
its products and the products are generally not subject to customer acceptance
rights. The Company assesses collectibility based on a number of factors,
including past transaction and collection history with a customer and the
credit-worthiness of the customer. The Company performs ongoing credit
evaluations of its customers' financial condition but generally does not require
collateral from its customers. If the Company determines that collectibility of
the sales price is not reasonably assured, revenue is deferred until such time
as collection becomes reasonably assured, which is generally upon receipt of
payment from the customer. The Company includes shipping and handling costs in
revenue and cost of sales.
The Company's products are generally subject to warranty, and related costs are
provided for in cost of sales when revenue is recognized. While the Company
engages in extensive product quality programs and processes, the Company's
warranty obligation is based upon historical product failure rates and costs
incurred in correcting a product failure. If actual product failure rates or the
costs associated with fixing failures differ from historical rates, adjustments
to the warranty liability may be required in the period in which determined.
The Company provides lease financing to consumers for the purchase of certain
home water treatment systems. Prior to entering into the lease agreement, the
Company evaluates the creditworthiness of its customer and generally
collateralizes the lease receivable with a security interest in the customer's
personal residence. At the time the lease transaction is consummated, the
Company recognizes revenue for the full amount of the sales value of the
equipment and records a lease receivable on its balance sheet. Interest income
is recognized by the Company over the term of the lease based on the interest
rate stated in the lease. The Company evaluates the collectibility of its lease
receivables based on its historical loss experience and assessment of
prospective risk, and does so through ongoing reviews of its receivables
portfolio.
The Company provides support services to customers primarily through service
contracts and the Company primarily recognizes support service revenue ratably
over the term of the service contract or as services are rendered.
The Company also rents equipment to customers under short-term rental
agreements. The Company generally invoices customers monthly and recognizes
revenue over the rental period based on amounts billed. The rental equipment is
capitalized and depreciated to cost of sales over its estimated useful life.
Allowance for Doubtful Accounts
The Company evaluates the adequacy of its reserve for doubtful accounts on an
ongoing basis through detailed reviews of its receivables portfolio. Estimates
are used in determining the Company's allowance for bad debts and are based on
historical collection experience, current trends including prevailing economic
conditions and adverse events that may affect a customer's ability to repay,
percentage of accounts receivable by aging category, and other factors such as
the financial condition of large customers. The Company makes adjustments to its
reserve if the evaluation of reserve requirements differs from the actual
aggregate reserve. This evaluation is inherently subjective because estimates
may be revised as more information becomes available. Reserves for doubtful
accounts are established through a charge to operations included in selling,
general and administrative expenses.
Investments in Affiliated Companies
The Company consolidates the balance sheet and results of operations of all
wholly and majority owned subsidiaries and controlled affiliates. The Company
also holds minority investments in certain private companies having
complementary or strategic operations in different geographical locations around
the world. These investments are included in investments in affiliates and
include investments accounted for under the equity method of accounting. Under
the equity method of accounting, which generally applies to investments that
represent a 20% to 50% ownership of the equity securities of the affiliates, the
Company's proportionate share of the earnings or losses of the affiliates is
included in equity income. With respect to the Company's investment in
Desalcott, the Company records 100% of any net loss and 40% of any net income
reported by Desalcott. In periods in which Desalcott has an accumulated loss (as
opposed to retained earnings), the Company records 100% of any net income of
Desalcott up to the amount of Desalcott's accumulated loss, and 40% of any net
income thereafter. Realization of the Company's investments in equity securities
may be affected by the affiliate's ability to obtain adequate funding and
execute its business plans, general market conditions, industry considerations
specific to the affiliate's business, and other factors. The inability of an
-20-
affiliate to obtain future funding or successfully execute its business plan
could adversely affect the Company's earnings in the periods affected by those
events. Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or in an inability to recover the
carrying value of the investments that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future. The Company records an impairment charge when it believes an investment
has experienced a decline in value that is other-than-temporary.
Goodwill and Other Long-Lived Assets
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). In accordance with SFAS 144, the Company assesses the
potential impairment of identifiable intangibles and other long-lived assets
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors the Company considers important which could indicate
an impairment include significant underperformance relative to historical or
projected future operating results, significant changes in the manner of the
Company's use of the acquired asset or the strategy for its overall business and
significant negative industry or economic trends. When the Company determines
that the carrying value of intangible and other long-lived assets may not be
recoverable, the related estimated future undiscounted cash flows expected to
result from the use of the asset and its eventual disposition are compared to
the carrying amount of the asset. If the sum of the estimated future cash flows
is less than the carrying amount, the Company records an impairment based on the
estimated discounted cash flows using a discount rate determined by Company
management to be commensurate with the associated risks. Any resulting
impairment loss could have a material adverse impact on the Company's results of
operations, depending on the magnitude of the impairment.
In 2001, as summarized in Note 6 to the Company's Consolidated Financial
Statements, the Company recognized impairment losses of approximately $13.1
million, which included approximately $9.2 million to reduce the carrying value
of assets held for sale in Malaysia, $3.1 million of goodwill write-downs, and
$0.7 million associated with the residual value of bleach manufacturing
equipment.
Goodwill represents the excess acquisition cost over the fair value of the net
assets acquired in the purchase of various entities. On January 1, 2002, the
Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142)
that requires, among other things, the discontinuance of goodwill amortization.
In accordance with SFAS 142, amortization of goodwill was discontinued as of
January 1, 2002. Prior to the adoption of SFAS 142, goodwill was amortized on a
straight-line basis over its estimated useful life, which generally was a period
ranging from 10 to 40 years. SFAS 142 requires the Company to evaluate goodwill
for impairment on an annual basis. The Company evaluates the recoverability of
goodwill annually in the fourth quarter, or more frequently if events or changes
in circumstances, such as declines in sales, earnings or cash flows or material
adverse changes in the business climate, indicate that the carrying value of an
asset might be impaired. Goodwill is considered to be impaired when the net book
value of a reporting unit exceeds its estimated fair value. Fair values are
primarily determined using a discounted cash flow methodology. The determination
of discounted cash flows is based on the businesses' strategic plans and future
forecasts. The revenue growth rates included in the plans are management's best
estimates based on current and forecasted market conditions and the profit
margin assumptions are projected by each reporting unit based on the current
cost structure, as well as any anticipated cost reductions. The Company
completed its annual impairment test in the fourth quarter of 2002 using its
best estimate of forecasts for future periods. No adjustment was required to the
carrying value of goodwill based on the analysis performed. If different
assumptions were used in these plans, the related undiscounted cash flows used
in measuring impairment could be different potentially resulting in an
impairment charge.
Income Taxes
The Company estimates its income tax liability in each of the jurisdictions in
which it operates and which involves an assessment of permanent and temporary
differences resulting from differing treatment of items for tax and book
accounting purposes. Temporary differences result in deferred tax assets and
liabilities, which are included within the consolidated balance sheets. The
Company must also assess the likelihood that any deferred tax assets will be
recovered, and must establish a valuation allowance to the extent that it
believes that it is more likely than not any deferred tax asset will not be
utilized from future taxable income. To the extent the Company has established a
valuation allowance, income tax expense is recorded in the Company's
-21-
Consolidated Statements of Operations. Taxable income in future periods
significantly different from that projected may cause adjustments to the
valuation allowance that could materially increase or decrease future income tax
expense. At any time, the Company's income tax expense could be impacted by
changes in tax laws, or by administrative actions or court rulings.
The Company has taken tax positions in its worldwide corporate income tax
filings based on careful interpretations of global statutes, rules, regulations
and court decisions that may be applied and interpreted differently by various
taxing jurisdictions. These taxing jurisdictions may or may not challenge the
Company's application and interpretation of a wide body of tax jurisprudence.
However, the Company does not anticipate that any sustained challenge by any
taxing jurisdiction could have a material adverse effect on its financial
position or net income.
The Company has elected not to provide tax on certain undistributed earnings of
its foreign subsidiaries which it considers to be permanently reinvested. The
cumulative amount of such unprovided U.S. taxes was approximately $9.7 million,
$8.2 million and $5.1 million as of December 31, 2002, 2001 and 2000,
respectively.
Pension Plans
The Company has a qualified defined benefit pension plan covering most of its
domestic employees. The Company accounts for its pension plan using Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions"
(SFAS 87). The Company's calculation of pension expense are sensitive to changes
in several key economic assumptions and in the demographics of its workforce.
The Company's pension income or expense for the plan is computed using actuarial
valuations. The assumptions made by the Company relate to financial market and
other economic conditions. Changes in key economic indicators can result in
changes in the assumptions the Company uses. The assumptions made at year-end
used to estimate pension income or expense for the following year are the
discount rate and the expected long-term rate of return on plan assets. The
discount rate states the expected future cash flows necessary to satisfy the
pension obligations at a present value. The Company uses judgment in selecting
these assumptions giving consideration to current market conditions, future
market trends, changes in interest rates and equity market performance. The
Company also considers factors such as the timing and amounts of expected
contributions to the plans and benefit payments to plan participants. The
Company's selection of a discount rate represents the market rate of return on
high-quality fixed income investments. A lower discount rate would increase the
present value of the pension obligation and increase pension expense.
During 2002, the Company's review of market trends, actual returns on plan
assets, and other factors resulted in reducing the expected long-term rate of
return on plan assets for its year-end 2002 actuarial calculations from 9.0% to
7.0% at December 31, 2002. This rate is applied to a calculated value of plan
assets which results in an amount that is included in pension income or expense
in 2003. The Company also reduced the discount rate assumption from 7.0% to 6.5%
at December 31, 2002. These changes, together with other factors such as the
effects of the actual return on plan assets, results in the Company projecting
an increase in pension expense for 2003 of approximately $1.3 million compared
with 2002.
During 2002 and 2001, the Company recorded an adjustment in the stockholders'
equity section of its Consolidated Balance Sheets to reflect a minimum pension
liability for its pension plan. This adjustment is determined by comparing the
accumulated benefit obligation (ABO) for the plan to the fair value of the
plan's assets. The amount by which the ABO exceeds the fair value of the plan
assets, after adjusting for previously recorded accrued or prepaid pension cost
for the plan, must be recorded as a minimum pension liability, with a
corresponding increase in an intangible asset, if appropriate, and a reduction
to stockholders' equity, consistent with SFAS 87. The after-tax adjustment
related to the Company's recording a minimum pension liability in 2002 did not
impact earnings, but reduced stockholders' equity by $1.8 million. This
adjustment is computed each year at December 31 and could potentially reverse in
the future if financial markets improve and interest rates increase, or could
potentially increase if financial market performance and interest rates continue
to decline.
Loss Contingencies
The Company is subject to certain claims and litigation including proceedings
under government laws and regulations and commercial disputes relating to its
operations, including ordinary routine litigation incidental to its business.
(See "Note 8. Commitments and Contingencies to the Consolidated Financial
Statements"). Management reviews and determines which liabilities, if any,
arising from these claims and litigations could have a material adverse effect
on the Company's consolidated financial position, liquidity or results of
operations. Management assesses the likelihood of any adverse judgments or
-22-
outcomes as well as potential ranges of probable losses. Loss contingency
liabilities are recorded for these contingencies based on careful analysis of
each matter with the assistance of outside counsel when it is probable that a
liability has been incurred and the amount of the loss is reasonably estimable.
These liabilities may change in the future due to new developments relating to
each matter or changes in approach such as a change in settlement strategy.
Derivative Instruments
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 137 and SFAS 138 in the first quarter of
2001. SFAS 133 requires all derivatives to be recognized on the Consolidated
Balance Sheet at fair value. The adoption of SFAS 133 did not have a material
impact on the Company's financial position or results of operations. The Company
conducts business in a number of foreign countries, with certain transactions
denominated in local currencies. The purpose of the Company's foreign currency
management is to minimize the effect of exchange rate fluctuations on certain
foreign denominated monetary assets and anticipated cash flows. The terms of
currency instruments used for hedging purposes are consistent with the timing of
the transactions being hedged. The Company does not use derivative financial
instruments for trading or speculative purposes. For purposes of presentation
within the Consolidated Statement of Cash Flows, derivative gains and losses are
presented within cash provided by operating activities.
The Company enters into foreign currency forward contracts to hedge its
exposures associated with a portion of its forecasted revenue transactions.
These derivative instruments are designated as foreign currency cash flow
hedges. All outstanding derivatives are recognized on the Consolidated Balance
Sheet at fair value and changes in their fair value are recorded in accumulated
other comprehensive income (loss) until the underlying forecasted transaction
occurs. Once the underlying forecasted transaction is realized, the gain or loss
from the derivative designated as a hedge of the transaction is reclassified
from accumulated other comprehensive income (loss) to the statement of
operations in the related revenue caption. In the event the underlying
forecasted transaction does not occur, the amount recorded in accumulated other
comprehensive income (loss) will be reclassified to selling, general and
administrative expense in the statement of operations in the then-current
period. No amounts were reclassified from accumulated other comprehensive income
(loss) to selling, general and administrative expense during 2002, 2001 and
2000. The Company's cash flow hedges generally mature within two years or less.
The Company also enters into foreign exchange forward contracts to hedge its
exposures associated with foreign-currency denominated assets and liabilities.
These derivative instruments are designated as foreign currency fair value
hedges. The derivatives are recognized on the Consolidated Balance Sheet at fair
value and period-end changes in fair value are recorded in selling, general and
administrative expense in the statement of operations.
Since the Company is using foreign exchange derivative contracts to hedge
foreign exchange exposures, the changes in the value of the derivatives are
highly effective in offsetting changes in the cash flows of the hedged item.
Hedge effectiveness is assessed on a quarterly basis. Any ineffective portion of
the derivatives designated as cash flow hedges is recognized in current earnings
in "Selling, general and administrative expense." The ineffective portion of the
derivatives consists of discounts or premiums on forward contracts and gains or
losses associated with differences between actual and forecasted amounts. In any
instance in which the designated hedged item matures, is terminated, or, in the
case of an anticipated transaction, is deemed unlikely to occur, the related
derivative contract is closed and any gain or loss is immediately recognized in
the Consolidated Statement of Operations in "Selling, general and administrative
expense."
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 2002 and December 31, 2001
- -----------------------------------------------------------------
The Company reported consolidated revenues of $335.4 million and net income of
$4.8 million in 2002, compared to consolidated revenues of $466.7 million and
net income of $44.7 million in 2001. Results for 2001 included the operations of
the Aqua Cool Pure Bottled Water business ("Aqua Cool Business"), which was
divested on December 31, 2001, as well as the results of the Company's
majority-owned Malaysian subsidiary, Ionics Enersave ("Enersave") which was
divested in May 2002.
-23-
Revenues
- --------
Total Company revenues of $335.4 million for 2002 decreased $131.4 million or
28.1% from revenues of $466.7 million for 2001. The 2001 revenues of the Aqua
Cool Business represented $76.2 million, or 58.0% of the decrease, and the
revenues of the Company's majority-owned Malaysian subsidiary represented $14.8
million, or 11.3% of the decrease.
EBG revenues of $154.4 million in 2002 decreased $7.2 million, or 4.4%, compared
to revenues of $161.6 million in 2001. The decrease in revenues is primarily
attributable to reduced revenues from the Zero Liquid Discharge ("ZLD")
business, primarily as a result of the Company's business strategy to not pursue
the civil construction scope on ZLD projects. This decrease was partially offset
by increases in EBG's water supply business in Spain, as well as increases in
the revenues of the Company's Italian subsidiary.
UWG revenues of $102.4 million decreased $31.2 million, or 23.4%, compared to
revenues of $133.6 million for 2001. The revenues associated with the Company's
majority-owned Malaysian subsidiary, which was divested in May 2002, amounted to
$19.0 million in 2001 and $4.2 million in 2002, and accordingly represented
11.1% of the revenue decrease. The additional decrease in revenues relates
primarily to the continued downturn in the microelectronics sector.
CWG revenues totaled $38.7 million in 2002 compared to revenues of $123.7
million in 2001, representing a decrease of $85.1 million or 68.7%. The 2001
revenues of the Aqua Cool Business of $76.2 million represented 89.5% of the
decrease in revenues. CWG revenue levels were also adversely impacted by lower
sales of automobile windshield wash solution and consumer bleach products due to
the loss of several customers. Additionally, CWG experienced lower demand for
home water treatment equipment as a result of the general downturn in the
domestic economy.
IBG revenues of $27.7 million in 2002 increased $1.1 million, or 4.3%, compared
to revenues of $26.6 million in 2001. The increase in revenues primarily
resulted from increased sales volume to the pharmaceutical industry driven by
regulatory requirements in that industry, as well as continued growth in
recurring sales of the Company's after-market products.
Revenues from sales to affiliated companies of $12.2 million in 2002 decreased
$9.1 million or 42.7% compared to revenues from affiliated companies of $21.2
million in 2001. The decrease in revenues from affiliated companies primarily
resulted from lower equipment sales to the Trinidad joint venture company,
Desalination Company of Trinidad and Tobago Ltd. ("Desalcott"), as a result of
the substantial completion of the first four out of the five construction phases
of the desalination facility in early 2002. The decrease was partially offset by
an increase in sales of equipment in the second half of 2002 to the Kuwaiti
joint venture company, Utilities Development Company ("UDC"), for the Kuwait
reuse project.
The Company has entered into a number of large contracts, which are generally
categorized as either "equipment sale" contracts or "build, own and operate"
(BOO) contracts. The Company believes that the remaining duration on its
existing sale of equipment contracts ranges from less than one year to three
years and the remaining duration on its existing BOO contracts ranges from one
year to 25 years. The time to completion of any of these contracts, however, is
subject to a number of variables, including the nature and provisions of the
contract and the industry being served. Historically, as contracts are
completed, the Company has entered into new contracts with the same or other
customers. In the past, the completion of any one particular contract has not
had a material effect on the Company's business, results of operations or cash
flows.
Cost of Sales
- -------------
The Company's total cost of sales as a percentage of revenue was 71.6% in 2002
and 73.1% in 2001. The resulting gross margin increased to 28.4% in 2002
compared to 26.9% in 2001. Cost of sales as a percentage of revenue decreased in
the EBG, UWG, and IBG segments and increased in the CWG segment.
EBG's cost of sales as a percentage of revenue decreased to 74.0% in 2002 from
78.5% in 2001. The improvement in cost of sales as a percentage of revenue from
2001 to 2002 related to the elimination of losses incurred on the civil
construction portion of ZLD projects that were incurred in 2001. Additionally,
-24-
the improvement in cost of sales as a percentage of revenue is attributable to a
shift in product mix from lower margin capital equipment sales to higher margin
water supply and other products.
UWG's cost of sales as a percentage of revenue decreased to 76.6% in 2002 from
80.2% in 2001. The decrease in cost of goods sold as a percentage of revenue
primarily reflects the elimination of losses associated with projects in
Australia, improved operating results in the group's Asian operations, and the
reduction of losses associated with the Company's majority-owned Malaysian
subsidiary, which was divested in May 2002.
CWG's cost of sales as a percentage of revenue increased to 64.4% in 2002 from
59.8% in 2001. The increase in the 2001 cost of sales as a percentage of revenue
compared to 2002 cost of sales as a percentage of revenue was primarily
attributable to the divestiture of the Company's Aqua Cool Business on December
31, 2001, as well as lower margin levels in both the Home Water and Elite
Consumer product lines. The Elite Consumer products line continued to face
pricing pressure due to increased competition while Home Water product line
margins were negatively impacted by the continued decline in the domestic
economy.
IBG's cost of sales as a percentage of revenue decreased to 42.2% in 2002 from
48.0% in 2001, primarily reflecting absorption of manufacturing overhead as a
result of higher sales volume along with cost reductions in the service
businesses.
Cost of sales to affiliated companies as a percentage of revenue decreased to
90.1% in 2002 from 97.4% in 2001. The decrease in 2002 was primarily due to
lower revenues from sales to Desalcott, where, for accounting purposes, all
profit on sales to Desalcott is being deferred, and the increase in equipment
sales to UDC, where the Company defers profit equal to its 25% equity ownership
in UDC, and will subsequently recognize the deferred profit over the estimated
useful life of the equipment.
Operating Expenses
- ------------------
Research and development expenses as a percentage of revenue increased slightly
during 2002 compared to 2001. The Company currently expects to continue to
invest in new products and technologies at approximately the same level as in
prior years.
Selling, general and administrative expenses decreased $28.0 million to $91.8
million in 2002 from $119.8 million in 2001. The elimination of 2001 selling,
general and administrative expenses relating to the Aqua Cool Business resulting
from the divestiture of the business on December 31, 2001, as well as the
divestiture of the Company's majority-owned Malaysian subsidiary in the second
quarter of 2002, and the cessation of goodwill amortization amounted to
approximately $40.2 million. These decreases in 2002 selling, general and
administrative expenses were partially offset by increased operating expenses
associated with the Company's European operations, primarily France, higher than
normal professional service fees related primarily to the Company's restatement
of its interim financial statements for the first and second quarters of 2002,
increased provisions for doubtful accounts, and other general increases.
Interest Income and Interest Expense
- ------------------------------------
Interest income totaled $3.5 million in 2002 and $1.0 million in 2001. Interest
expense, net of capitalized interest of $0.3 million, was $1.2 million in 2002
and $5.2 million in 2001. The increase in interest income in 2002 compared to
2001 reflects the investment of proceeds resulting from the divestiture of the
Aqua Cool Business on December 31, 2001. Additionally, a portion of the proceeds
from the disposition of the Aqua Cool Business were utilized to reduce domestic
short-term borrowings which resulted in lower interest expense of $0.9 million
in 2002 compared to $5.2 million in 2001.
Equity Income
- -------------
The Company's proportionate share of the earnings and losses of affiliated
companies in which it holds a minority equity interest is included in equity
income.
-25-
Equity income amounted to $3.4 million in 2002 and $1.4 million in 2001. The
Company's equity income is derived primarily from its 20% equity interest in a
Mexican joint venture company which owns two water treatment plants in Mexico,
its 40% equity interest in Desalcott, its equity interests in several joint
ventures in the Middle East which engage in bottled water distribution, and to a
lesser extent from its other equity investments in affiliated companies. The
increase in equity income of $2.0 million in 2002 compared to 2001 reflects the
improved performance of Desalcott (the plant began commercial operation in May
2002) and the improved performance of the Company's investments in several joint
ventures in the Middle East.
Gain on Sale of Aqua Cool
- -------------------------
On December 31, 2001, the Company completed the sale of its Aqua Cool Business
in the United States, United Kingdom and France. Giving effect to reserves
established by the Company for purchase price adjustments and direct and
incremental costs, the Company recorded a pre-tax gain of $102.8 million in
2001. As a result of final purchase price adjustments based on the number of
customers and working capital levels, and the resolution of certain claims made
by Nestle, the Company and Nestle reached final agreement on a purchase price of
$207.0 million in the first quarter of 2003. As a result of such adjustments,
the Company realized an additional pre-tax gain of $8.2 million in 2002, net of
direct and incremental costs of the transaction, including approximately $3.4
million of non-recurring management and employee compensation.
Income Taxes
- ------------
The Company's effective tax rate for 2002 was 46% compared to 49% in 2001. The
Company's 2002 tax rate was primarily affected by losses in certain of its
foreign subsidiaries for which the Company may not be able to realize future tax
benefits. The 2001 tax rate was primarily impacted by the gain on the sale of
the Company's Aqua Cool Business, which included non-deductible goodwill, as
well as significant losses by the Company's majority-owned Malaysian subsidiary
that were not benefited since realization of those benefits was not likely.
Net Income
- ----------
Net income amounted to $4.8 million in 2002 compared to $44.7 million for 2001.
Net income in 2002 and 2001 included pre-tax gains of $8.2 million and $102.8
million, respectively, from the sale of the Company's Aqua Cool Business.
Comparison of Years Ended December 31, 2001 and December 31, 2000
- -----------------------------------------------------------------
The Company reported consolidated revenues of $466.7 million and net income of
$44.7 million in 2001, compared to consolidated revenues of $474.6 million and a
net loss of $1.9 million in 2000. The increase in net income resulted primarily
from a pre-tax gain of $102.8 million on the sale of the Aqua Cool Business in
the U.S., U.K. and France.
Revenues
- --------
Total Company revenues were $466.7 million in 2001, compared to $474.6 million
in 2000. Total revenues for 2001 and 2000 include revenues associated with the
Company's Aqua Cool Business which was divested on December 31, 2001, and the
Company's majority-owned Malaysian subsidiary which was divested in May 2002.
EBG revenues of $161.6 million in 2001 decreased slightly compared to 2000
revenues of $162.1 million. Total equipment revenues decreased slightly, while
supply business revenues increased over 2000.
UWG revenues of $133.6 million in 2001 decreased by $22.8 million or 14.6% from
2000 revenues of $156.4 million in 2000. This decrease is primarily the result
of continued deterioration, both domestically and internationally, in the
Company's microelectronics equipment business, which declined substantially from
2000 levels due to softness in the microelectronics industry generally.
CWG revenues of $123.7 million in 2001 increased by $15.8 million or 14.6% from
revenues of $108.0 million in 2000, reflecting increases in the Company's
bottled water, home water and bleach-based consumer product businesses.
-26-
IBG revenues of $26.6 million in 2001 decreased by 6.4% from 2000 revenues of
$28.4 million, also reflecting the further deterioration of the microelectronics
sector, which is an important customer for IBG products.
Revenues from affiliated companies of $21.2 million in 2001 increased $1.5
million compared to revenues from affiliated companies of $19.7 million in 2000.
The increase in revenues from affiliated companies primarily resulted from
increased equipment sales to Desalcott, which was engaged throughout 2001 in the
construction of the Trinidad desalination facility.
The Company has entered into a number of large contracts, which are generally
categorized as either "equipment sale" contracts or "build, own and operate"
(BOO) contracts. The Company believes that the remaining duration on its
existing sale of equipment contracts ranges from less than one year to three
years and the remaining duration on its existing BOO contracts ranges from one
year to 25 years. The time to completion of any of these contracts, however, is
subject to a number of variables, including the nature and provisions of the
contract and the industry being served. Historically, as contracts are
completed, the Company has entered into new contracts with the same or other
customers. In the past, the completion of any one particular contract has not
had a material effect on the Company's business, results of operations or cash
flows.
Cost of Sales
- -------------
Cost of sales as a percentage of revenues was 73.1% and 73.8% in 2001 and 2000,
respectively, and overall Company gross margin was 26.9% and 26.2% in 2001 and
2000, respectively. Cost of sales as a percentage of revenue decreased in the
EBG and CWG segments, and increased in the UWG and IBG segments.
Cost of sales as a percentage of revenue for the EBG segment was 78.5% in 2001
compared to 79.7% in 2000, reflecting a continued high level of equipment
revenues, which have lower gross margins than service revenues. The losses
incurred on several ZLD equipment contracts with civil construction scope had an
adverse impact on EBG's cost of sales as a percentage of revenue in 2001.
Cost of sales as a percentage of revenues for UWG increased to 80.2% in 2001
from 79.2% in 2000, reflecting cost increases incurred on projects executed by
the Company's majority-owned Malaysian subsidiary and one of the Company's
Australian subsidiaries. The continued downturn of the microelectronics industry
also had an adverse impact on both sales volume and profitability, as the
utilization of capacity decreased with reduced sales volume while certain
components of costs of sales remained fixed.
Cost of sales as a percentage of revenue for CWG decreased to 59.8% in 2001 from
61.3% in 2000. Numerous factors impacted the CWG cost of sales percentage in
2001, including the gain on the sale of certain bottled water assets realized
earlier in the year offset by costs associated with readying the Aqua Cool
Business for sale in the second half of 2001.
IBG cost of sales as a percentage of revenues increased to 48.0% in 2001 from
44.3% in 2000, primarily as a result of reduced sales volume levels caused by
the further deterioration of the microelectronics sector.
Cost of sales to affiliated companies as a percentage of revenue increased to
97.4% in 2001 from 93.1% in 2000. This increase in 2001 was primarily due to
higher revenues from sales to Desalcott, the joint venture company relating to
the Company's Trinidad project.
Operating Expenses
- ------------------
Research & development expenses decreased to $6.4 million in 2001 compared to
$8.0 million in 2000. Selling, general and administrative expenses increased
5.8% in 2001 to $119.8 million from $113.2 million in 2000. The increase is
primarily attributable to a significant shift in product mix between UWG, which
has a lower operating expense component, and CWG, which has a significantly
higher expense component.
Impairment of Long-Lived Assets
- -------------------------------
During 2001 and 2000, the Company wrote down approximately $13.1 million and
$3.4 million, respectively, of impaired long-lived assets. In 2001, the
write-downs included approximately $9.2 million to reduce the carrying value of
-27-
assets held for sale related to the Company's divestiture of its majority-owned
Malaysian subsidiary and $3.1 million of goodwill associated with previous
acquisitions.
In late 2001, the Company began negotiations to sell its majority-owned
Malaysian subsidiary to the subsidiary's minority shareholders. In early 2002,
the Company had signed a term sheet for the disposition of the Malaysian
subsidiary and the sale was completed in May 2002. Accordingly, at December 31,
2001, the Company recorded an impairment charge of approximately $9.2 million,
representing the difference between the Company's 55% ownership interest in the
net asset value of the Malaysian subsidiary (principally property, plant and
equipment and goodwill) and the anticipated net proceeds from the sale of the
subsidiary of approximately $1.0 million.
The Company recorded asset impairment charges related to its decision to abandon
plans to commence bleach-manufacturing operations in Elkton, Maryland. In 2001
and 2000, these impairment charges amounted to $0.7 million and $2.0 million,
respectively. The Elkton plant and equipment were part of a Company strategy to
expand bleach manufacturing in the mid-Atlantic market. This strategy included
the potential acquisition by the Company of a regional bleach manufacturer, but
negotiations relating to the potential acquisition ceased during the fourth
quarter of 2000. The impairment charge recorded in 2000 was consequently derived
by writing off the net book value of specific equipment for which there was no
salvage value or anticipated use within the Company. Due to overcapacity in the
bleach manufacturing industry (as evidenced by the exit of other bleach
manufacturers in the Northeast), the Company was subsequently unable during 2001
to utilize or otherwise sell the remaining equipment and consequently wrote off
the remaining $0.7 million net book value.
Additionally, $0.8 million of goodwill impairment was recognized in 2000
relating to an acquisition made by the Company in 1996.
Interest Income and Interest Expense
- ------------------------------------
Interest income was $1.0 million in 2001 compared to $1.3 million in 2000.
Interest expense totaled $5.2 million in 2001 and $4.9 million in 2000. Interest
expense in 2001 reflected higher average borrowings (although at lower
prevailing rates) compared to 2000. Increased borrowing levels in 2001 compared
to 2000 were primarily attributable to continued investment in, and working
capital requirements of, the Company's Trinidad project, as well as other
working capital requirements.
Equity Income
- -------------
Equity income amounted to $1.4 million in 2001 and $1.6 million in 2000. The
Company's equity income was derived primarily from its 20% equity interest in a
Mexican joint venture company which owns wastewater treatment plants in Mexico,
its 40% equity ownership in Desalcott, as well as several joint ventures in the
Middle East which engage in bottled water distribution, and to a lesser extent
from its other equity investments in affiliated companies.
Gain on Sale of Aqua Cool
- -------------------------
On December 31, 2001, the Company completed the sale of its Aqua Cool Business
in the United States, United Kingdom and France. Giving effect to reserves
established by the Company for purchase price adjustments and direct and
incremental costs, the Company recorded a pre-tax gain of $102.8 million in
2001.
Income Taxes
- ------------
The Company's effective tax rate for 2001 was 49% compared to 34% in 2000. The
2001 tax rate was primarily impacted by the gain on the sale of the Company's
Aqua Cool Business, which included non-deductible goodwill, as well as
significant losses by the Company's majority-owned Malaysian subsidiary that
were not benefited since realization of those benefits was not likely.
Net Income
- ----------
Net income was $44.7 million in 2001 compared to a net loss of $1.9 million in
2000. In 2001, net income included a net pre-tax gain of $102.8 million
-28-
resulting from the sale of the Company's Aqua Cool Pure Bottled Water
business in the U.S., U.K., and France.
FINANCIAL CONDITION
Net working capital decreased $7.4 million during 2002 to $214.6 million and the
Company's current ratio increased to 2.9 in 2002 from 2.4 in 2001.
At December 31, 2002, the Company had total assets of $608.0 million, compared
to total assets of $633.3 million at December 31, 2001. Cash and cash
equivalents decreased $42.2 million in 2002, primarily reflecting investments in
projects and property, plant and equipment, as well as the paydown of short-term
notes payable and current taxes payable. In addition, at December 31, 2002, the
Company had $4.3 million in restricted cash reflecting advance payments for work
to be performed on the Kuwait wastewater treatment facility. Net accounts
receivable decreased $15.9 million in 2002, reflecting the decreased revenue
levels during 2002 compared to 2001, as well as a reclassification of $10.0
million from current accounts receivable to receivables from affiliated
companies, long-term relating to the Trinidad project. The reclassification is
based on the expectation that the Company is obligated to contribute an
additional $10.0 million to Desalcott as an additional source of funds for
project completion costs once all bridge loan proceeds have been expended. Net
property, plant and equipment increased $12.9 million during 2002, reflecting
capital expenditures of $33.5 million, primarily for build, own and operate
facilities in the EBG and UWG segments, offset by depreciation charges of $23.8
million. Current income taxes payable decreased $20.0 million during 2002,
primarily reflecting the tax payments made on the gain from the sale of the Aqua
Cool Business.
Net cash used by operating activities amounted to $0.6 million during 2002,
reflecting cash used for payments of accounts payable, accrued expenses, and
current income taxes, offset by depreciation charges and a reduction in accounts
receivable. Net cash used in investing activities amounted to $33.8 million in
2002, reflecting additions to property, plant and equipment, primarily relating
to investments made in the UWG segment for a build, own and operate facility in
the power industry and in the EBG segment for the expansion of an existing
build, own and operate facility in Curacao. Net cash used by financing
activities totaled $13.9 million during 2002, primarily reflecting the repayment
of the Company's short-term borrowings.
From time to time, the Company enters into joint ventures with respect to
specific projects, including the projects in Trinidad, Kuwait and Israel
described below. Each joint venture arrangement is independently negotiated
based on the specific facts and circumstances of the project, the purpose of the
joint venture company related to the project, as well as the rights and
obligations of the other joint venture partners. Generally, the Company has
structured its project joint ventures so that the Company's obligation to
provide funding to the underlying project or to the joint venture entity is
limited to its proportional capital contribution, which can take the form of
equity or subordinated debt. Except in situations that are negotiated with a
specific joint venture entity as discussed below, the Company has no other
commitment to provide for the joint venture's working capital or other cash
needs. In addition, the joint venture entity typically obtains third-party debt
financing for a substantial portion of the project's total capital requirements.
In these situations, the Company is typically not responsible for the repayment
of the indebtedness incurred by the joint venture entity. In connection with
certain joint venture projects, the Company may also enter into contracts for
the supply and installation of the Company's equipment during the construction
of the project, for the operation and maintenance of the facility once it begins
operation, or both. These commercial arrangements do not require the Company to
commit to any funding for working capital or any other requirements of the joint
venture company. As a result, the Company's exposure with respect to its joint
ventures is typically limited to its debt and equity investments in the joint
venture entity, the fulfillment of any contractual obligations it has to the
joint venture entity and the accounts receivable owing to the Company from the
joint venture entity.
In the second quarter of 2002, construction was completed on the first four (out
of five) phases of the Trinidad desalination facility, in which the Company has
a 40% equity interest, and the facility commenced water deliveries to its
customer, the Water and Sewerage Authority of Trinidad and Tobago. In 2000, the
Company acquired 200 ordinary shares of Desalcott for $10 million and loaned $10
million to Hafeez Karamath Engineering Services Ltd. ("HKES"), the founder of
Desalcott and promoter of the Trinidad desalination project, to enable HKES to
acquire an additional 200 ordinary shares of Desalcott. Prior to those
investments, HKES owned 100 ordinary shares of Desalcott. As a result, the
Company currently owns a 40% equity interest in Desalcott, and HKES currently
owns a 60% equity interest in Desalcott.
-29-
The Company's $10 million loan to HKES is included in notes receivable,
long-term on the Company's Consolidated Balance Sheets. The loan bears interest
at a rate equal to 2% above the London Interbank Offered Rate (LIBOR), with
interest payable starting October 25, 2002 and every six months thereafter and
at maturity. Prior to maturity, however, accrued interest payments (as well as
principal payments) are payable only to the extent dividends or other
distributions are paid by Desalcott on the ordinary shares of Desalcott owned by
HKES and pledged to the Company. Principal repayment is due in 14 equal
installments commencing on April 25, 2004 and continuing semiannually
thereafter. The loan matures and is payable in full on April 25, 2011. The loan
is secured by a security interest in the shares of Desalcott owned by HKES and
purchased with the borrowed funds, which is subordinate to the security interest
in those shares in favor of the Trinidad bank that provided the construction
financing for Desalcott. In addition, any dividends or other distributions paid
by Desalcott to HKES must be applied to loan payments to the Company.
In 2000, Desalcott entered into a "bridge loan" agreement with a Trinidad bank
providing $60 million in construction financing. Effective November 8, 2001, the
loan agreement was amended to increase maximum borrowings to $79.9 million. The
Company is obligated to lend up to $10 million to Desalcott as an additional
source of funds for project completion costs once all bridge loan proceeds have
been expended. However, the bridge loan of $79.9 million and the $20 million
equity provided to Desalcott (together with the additional $10 million dollars
the Company is obligated to lend to Desalcott) have not provided sufficient
funds to pay all of Desalcott's obligations in completing construction and
commissioning of the project prior to receipt of long-term financing. Included
in Desalcott's obligations is approximately $30.1 million payable to the
Company's Trinidad subsidiary for equipment and services purchased in connection
with the construction of the facility. The Company currently intends to convert
$10 million of this amount into a loan to Desalcott to satisfy the Company's
loan commitment described above. The terms of this loan are currently being
negotiated with Desalcott. Although the Company currently anticipates that
Desalcott will pay its remaining outstanding obligations to the Company's
subsidiary partially out of cash flow from the sale of water and from the
proceeds from new long-term debt financing, Desalcott has disputed certain
amounts payable under the construction contract and this matter is now subject
to the dispute resolution procedures of the contract. The Company does not
believe resolution of these matters will have a material impact on its financial
position. Desalcott has received proposals for new long-term debt financing,
including a term sheet and a draft term loan agreement from the Trinidad bank
which provided the bridge loan, and is currently negotiating the terms of the
financing. Such new long-term debt financing may not be completed on terms
acceptable to Desalcott, or at all. Moreover, although the Trinidad bank that
made the bridge loan to Desalcott has not required repayment of the bridge loan,
which matured on September 1, 2002, pending completion of the long-term debt
financing, there can be no assurance that the bank will not exercise its rights
and foreclose on its collateral, in which event the Company's equity investment
in, and receivable from, Desalcott as well as the loan receivables from HKES
would all be at risk.
During 2001, the Company acquired a 25% equity interest in a Kuwaiti project
company, Utilities Development Company W.L.L. ("UDC"), which was awarded a
concession agreement by an agency of the Kuwaiti government for the
construction, ownership and operation of a wastewater reuse facility in Kuwait.
During the second quarter of 2002, UDC entered into agreements for the long-term
financing of the project, and accordingly the Company commenced recognizing
revenue in accordance with SOP 81-1. At December 31, 2002, the Company had
invested a total of $2.6 million in UDC as equity contributions and subordinated
debt. The Company is committed to make additional contributions of equity or
subordinated debt to UDC of $15.9 million over a two to three year period.
In 2001, the Company entered into agreements with an Israeli cooperative society
and an Israeli corporation for the establishment of Magan Desalination Ltd.
("MDL") as an Israeli project company in which the Company has a 49% equity
interest. In August 2002, MDL entered into a concession contract with a
state-sponsored water company for the construction, ownership and operation of a
brackish water desalination facility in Israel. At December 31, 2002, the
Company had not yet made an equity investment in MDL, and had deferred costs of
approximately $0.6 million relating to the design and development work on the
project. The Company currently anticipates that it will invest approximately a
total of $1.2 million in MDL for its 49% equity interest. MDL is currently
seeking approximately $7.2 million of debt financing for the project. If MDL is
unable to obtain such debt financing, the Company would expense all its deferred
costs relating to the project and any investment the Company may have made in
MDL, but would incur no other liability, inasmuch as no performance bond has
been issued for the project.
In January 2002, the Company entered into agreements with two Israeli
corporations giving the Company the right to a one-third ownership interest in
an Israeli project company, Carmel Desalination Ltd. ("CDL"). On October 28,
2002, CDL was awarded a concession agreement by the Israeli Water Desalination
-30-
Agency (established by the Ministry of Finance and the Ministry of
Infrastructure) for the construction, ownership and operation of a major
seawater desalination facility in Israel. At December 31, 2002, the Company made
an equity investment of $0.2 million in CDL, and had deferred costs of
approximately $0.4 million relating to the engineering design and development
work on the project. If CDL obtains long-term project financing, the Company's
total equity investment to be made in CDL would be approximately $8.0 million.
The timing of such investment will depend upon the terms of the long-term
financing agreement. The terms of the concession agreement require that
long-term financing be obtained by April 2003 and CDL has requested an extension
to October 2003 to obtain such financing. Although the Company currently
anticipates that CDL will obtain long-term financing for the project, if CDL is
unable to obtain such financing, the Company would expense all its deferred
costs relating to the project and any investment the Company may have made in
CDL (estimated to be approximately $0.8 million by the time of the closing of
the long-term financing). Additionally, the Company could incur its one-third
proportionate share ($2.5 million) of liability under a $7.5 million performance
bond issued on behalf of CDL.
On December 31, 2001, the Company completed the sale of its Aqua Cool Business
in the United States, United Kingdom and France to affiliates of Perrier-Vittel
S.A., a subsidiary of Nestle S.A. ("Nestle"). As a result of final purchase
price adjustments based on the number of customers and working capital levels,
and the resolution of certain claims made by Nestle, the Company and Nestle
reached final agreement on a purchase price of approximately $207.0 million. In
connection with the final resolution, the $10 million held in escrow pursuant to
the divestiture agreement and approximately $2.9 million in cash from the
Company were delivered to Nestle effective as of March 31, 2003.
The Company maintains several foreign lines of credit. The Company's primary
domestic credit facility, a $30 million line of credit with FleetBank, expired
on March 26, 2003. The Company is currently negotiating a new credit line with
FleetBank, which may provide for lower total borrowings in light of the
Company's current cash position. The Company also maintains other international
unsecured credit facilities under which the Company may borrow up to an
aggregate of $8.4 million. At December 31, 2002, the Company's total borrowings
outstanding under all of its existing credit facilities were $13.8 million,
including long-term debt.
The following table summarizes the Company's known contractual and contingent
obligations to make potential future payments or other consideration pursuant to
certain contracts as of December 31, 2002, as well as an estimate of the timing
in which these obligations are expected to be satisfied. In the normal course of
business, the Company issues letters of credit to customers, vendors and lending
institutions as guarantees for payment, performance or both under various
commercial contracts into which it enters. Bid bonds are also sometimes obtained
by the Company as security for the Company's commitment to proceed with a
project if it is the successful bidder. Performance bonds are typically issued
for the benefit of the Company's customers as financial security for the
completion or performance by the Company of its contractual obligations under
certain commercial contracts. These instruments are not reflected on the
Company's balance sheet as a liability because they will not result in a
liability to the Company unless the Company fails to perform the contractual
obligations which are secured by the corresponding instrument. In the past, the
Company has not incurred significant liabilities or expenses as a result of the
use of these instruments.
Less 1-3 4-5 After 5
(Dollars in Thousands) than 1 Year Years Years Years Total
- ---------------------------------------------------------------------------------------------------------------------------
Notes Payable and
Current Portion of Long-Term Debt $ 4,134 $ 2,802 $ 2,976 $ 3,892 $ 13,804
Letters of Credit, Letters of Guarantee 10,701 27,270 270 53 38,294
Performance and Bid Bonds 54,698 18,019 - 25,532 98,249
-------------------------------------------------------------------
Total Letters of Credit, Letters of Guarantee and Bonds $ 65,399 $ 45,289 $ 270 $ 25,585 $ 136,543
Future Minimum Payments Due Under Operating Leases 3,981 6,397 2,877 2,253 15,508
Other 1,500 1,500 - - 3,000
------------------------------------------------------------------
Total Contractual Obligations $ 75,014 $ 55,988 $ 6,123 $ 31,730 $ 168,855
===================================================================
The Company believes that its future capital requirements will depend on a
number of factors, including the amount of cash generated from operations and
-31-
its capital commitments to new "own and operate" projects, either directly or
through joint ventures, that the Company may be successful in obtaining. The
Company believes that its existing cash and cash equivalents, cash generated
from operations, lines of credit and foreign exchange facilities will be
sufficient to fund its capital expenditures, working capital requirements and
contractual obligations and commitments beyond the end of 2003, based on its
current business plans and projections.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS No. 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. The Company does not believe that SFAS No.
143 will have a material impact on its financial position or results of
operations.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of
April 2002." SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that statement. SFAS
No. 145 amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS No. 145 is effective for financial statements for fiscal years
beginning after May 15, 2002. The Company does not believe that SFAS No. 145
will have a material impact on the Company's financial position or results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company does not believe that SFAS No. 146 will have a material
impact on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). Along with new disclosure requirements, FIN 45
requires guarantors to recognize, at the inception of certain guarantees, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This differs from the current practice to record a liability only
when a loss is probable and reasonably estimable. FIN 45 also requires a
guarantor to provide enhanced disclosures concerning guarantees, even when the
likelihood of making a payment under the guarantee is remote. The recognition
and measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002 while the enhanced
disclosure requirements are effective for periods ending after December 15,
2002. The Company does not believe that the adoption of FIN 45 will have a
material impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which amended SFAS No. 123,
"Accounting for Stock-Based Compensation." This Statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. It also amends the disclosure
provisions to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. The provisions of this Statement are to be applied to
financial statements for fiscal years ending after December 15, 2002. The
adoption of SFAS 148 will not have a material impact on the Company's financial
position or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51 (FIN 46). This interpretation addresses the
consolidation of certain variable interest entities (VIEs) for which a
controlling financial interest exists. FIN 46 applies immediately to financial
-32-
interests obtained in VIEs after January 31, 2003. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to VIEs in which a
financial interest was obtained before February 1, 2003. FIN 46 may be applied
prospectively with a cumulative-effect adjustment or by restating previously
issued financial statements with a cumulative-effect adjustment as of the
beginning of the first year restated. The Company has a financial interest in
certain entities that may be considered VIEs under FIN 46 (See Notes 5 and 8 of
the Company's Consolidated Financial Statements contained in Item 8 of this
Annual Report on Form 10-K for additional information concerning Investments in
Affiliated Companies). The Company is currently evaluating the impact of FIN 46
on its Investments in Affiliated Companies and if the Company determines that it
has a controlling financial interest in any of these entities, consolidation may
be required. The ultimate effect of adopting FIN 46 on the Company's financial
position and results of operations has not yet been determined.
RISKS AND UNCERTAINTIES
The Company may face significant risks from its international operations
The Company derives a significant portion of its revenues from international
operations, which involve a number of additional risks, including the following:
o impact of possible recessionary environments in economies outside the United
States;
o longer receivables collection periods and greater difficulty in accounts
receivable collection;
o exposure to foreign taxation;
o tariffs and other trade barriers;
o transportation delays;
o foreign currency exchange rate fluctuations;
o difficulties in staffing and managing foreign operations;
o unexpected changes in regulatory requirements;
o the burdens of complying with a variety of foreign laws and regulations; and
o political and economic instability and acts of terrorism.
In addition, the Kuwait wastewater treatment project in which the Company is an
equity participant and equipment supplier, and will also be a participant in
plant operation, is subject to the risk of hostilities as a result of the
current war with Iraq. Although the Company has the protection of force majeure
provisions in its contracts which excuse the Company from performance
obligations in such circumstances, hostilities may damage or delay completion of
the project, delaying the Company's expected receipt of income from the project.
The Company may face significant risks from participating in large "own and
operate" projects
There has been a worldwide trend in the desalination and water treatment markets
towards large-scale own and operate projects. The Company has made bids on a
number of large-scale desalination and other water treatment projects in a
number of countries, under a business structure in which the Company (usually
through a subsidiary) will be an equity participant, together with one or more
local partners, in a project company which will own and operate the water
treatment facility that is the subject of the bid. The project company, if its
bid is successful, typically will enter into a concession agreement with a
government entity or utility for the provision of water or water treatment
services over a defined long period at a defined price, subject to escalation.
The project company is usually responsible for obtaining construction and
long-term financing for the project, and bears the risk of being able to do so
once the concession agreement is awarded. Under this project structure, the
Company may also sell water treatment equipment to the project company and in
addition may provide certain operation and maintenance services in connection
with the long-term operation of the facility. When these projects are located
overseas, such as the Trinidad desalination project, the Company either directly
or as a result of its equity interest in the project company, is exposed to the
risks inherent in international operations, described above. In addition, the
Company's equity investment in such projects is subject to risk that the entity
purchasing the water or the services being rendered will have the necessary
financial wherewithal over the term of the contract to continue to make payments
to the project company, and the risk that the project company's bid properly
reflected long-term operating costs so as to be able to operate at a profit over
the term of the concession agreement.
-33-
The Company has only limited protection for its proprietary technology
The Company relies on a combination of patent, trademark and trade secret laws
and restrictions on disclosure to protect its intellectual property rights. The
Company's success depends in part on its ability to obtain new patents and
licenses and to preserve other intellectual property rights covering its
products. The Company intends to continue to seek patents on its inventions when
appropriate. The process of seeking patent protection can be time-consuming and
expensive, and there is no assurance that any new patent applications will be
approved, that any patents that may issue will protect the Company's
intellectual property or that any issued patents will not be challenged by third
parties or will be sufficient in scope or strength to provide meaningful
protection or any commercial advantage to the Company. Other parties may
independently develop similar or competing technology or design around any
patents that may be issued to the Company. The Company cannot be certain that
the steps it has taken will prevent the misappropriation of its intellectual
property, particularly in foreign countries where the laws may not protect
proprietary rights as fully as in the United States.
The Company may become subject to infringement claims
Although the Company does not believe that its products infringe the proprietary
rights of any third parties, the Company has in the past been subject to
infringement claims and third parties might assert infringement claims against
the Company or its customers in the future. Furthermore, the Company may
initiate claims or litigation against third parties for infringement of its
proprietary rights or to establish the validity of its proprietary rights and
has one such suit pending (see Item 3 of this Annual Report on Form 10-K).
Litigation, either as plaintiff or defendant, would cause the Company to incur
substantial costs and divert management resources. Any litigation, regardless of
the outcome, could harm the Company's business.
The Company has many competitors and may not be able to compete effectively
The Company experiences competition from a variety of sources with respect to
virtually all of its products and services, although the Company does not know
of any single entity that competes with it across the full range of its
products, systems and services. Competition in the markets served by the Company
is based on a number of factors, including price, technology, applications
experience, know-how, availability of financing, reputation, product warranties,
reliability, service and distribution. Many of the Company's current and
potential competitors have greater name recognition and substantially greater
financial, marketing and other resources than does the Company, and there has
been a trend toward consolidation on the part of competitors in many of the
markets serviced by the Company. These greater resources could, for example,
allow the Company's competitors to develop technology, products and services
superior to those of the Company. As a result, the Company may not be able to
compete effectively with current or future competitors.
The Company may not be able to develop the new products or acquire the rights to
new products necessary to remain competitive
The water purification industry is characterized by ongoing technological
developments and changing customer requirements. As a result, the Company's
success and continued growth depend, in part, on its ability to develop or
acquire rights to, and successfully introduce into the marketplace, enhancements
of existing products or new products that incorporate technological advances,
meet customer requirements and respond to products developed by competitors.
There can be no assurance that the Company will be successful in developing or
acquiring such rights to products on a timely basis or that such products will
adequately address the changing needs of the marketplace.
The Company may not be able to adapt to changes in technology and government
regulation fast enough to remain competitive
The water purification industry is characterized by changing technology,
competitively imposed process standards and regulatory requirements, each of
which influences the demand for the Company's products and services. Changes in
legislative, regulatory or industrial requirements may render certain of the
Company's purification products and processes obsolete. Acceptance of new
products may also be affected by the adoption of new government regulations
requiring stricter standards. The Company's ability to anticipate changes in
technology and regulatory standards and to develop and introduce new and
enhanced products successfully on a timely basis will be a significant factor in
-34-
its ability to grow and to remain competitive. There can be no assurance that
the Company will be able to achieve the technological advances that may be
necessary to remain competitive or that certain of the Company's products will
not become obsolete. In addition, the Company is subject to the risks generally
associated with new product introductions and applications, including lack of
market acceptance, delays in development or failure of products to operate
properly.
A portion of the Company's sales is dependent upon its customers' spending
cycles for capital equipment
The sale of capital equipment within the water purification industry is cyclical
and influenced by various economic factors including interest rates and general
fluctuations of the business cycle. The Equipment Business Group and Ultrapure
Water Group each derive a significant portion of its revenue from the sale of
capital equipment. While the Company sells capital equipment to customers in
diverse industries and in domestic and international markets, cyclicality of
capital equipment sales and general economic conditions could have an adverse
effect on the Company's revenues and profitability. For example, in the past
several years, conditions in the microelectronics industry have negatively
affected sales of equipment by the Ultrapure Water Group to customers in that
industry.
The Company must comply with significant environmental regulations, which can be
difficult and expensive
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of hazardous
materials used in certain of its manufacturing processes. Although the Company
believes that its activities conform to presently applicable environmental
regulations, the failure to comply with present or future regulations could
result in fines being imposed, suspension of production or a cessation of
operations. Any failure to control the use of, or adequately restrict the
discharge of, hazardous substances, or otherwise comply with environmental
regulations, could subject the Company to significant future liabilities. In
addition, there is no assurance that past use or disposal of environmentally
sensitive materials in conformity with then existing environmental laws and
regulations will not result in remediation or other significant liabilities
under current or future environmental laws or regulations.
Higher interest rates may hurt the Company financially
The Company engages in short-term and long-term borrowing, some of which is
subject to interest rates that float with U.S. prime rates or foreign rates.
This borrowing subjects the Company to the risk that interest rates may increase
significantly and increase the cost of such borrowing.
If the Company is unable to continue to hire and retain skilled technical and
scientific personnel, it will have trouble developing products
The Company's success depends largely upon the continued service of its
management and scientific staff and its ability to attract, retain and motivate
highly skilled scientific, management and marketing personnel. The Company faces
significant competition for such personnel from other companies, research and
academic institutions, government and other organizations which may better be
able to attract such personnel. The loss of key personnel or the Company's
inability to hire and retain personnel who have technical and scientific
backgrounds could materially adversely affect its product development efforts
and business.
FORWARD-LOOKING INFORMATION
Safe Harbor Statement under Private Securities Litigation Reform Act of 1995
- ----------------------------------------------------------------------------
Certain statements contained in this report, including, without limitation,
statements regarding expectations as to the Company's future results of
operations, statements in the "Notes to the Consolidated Financial Statements"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" constitute forward-looking statements. Such statements are based on
management's current views and assumptions and are neither promises or
guarantees but involve risks, uncertainties and other factors that could cause
actual results to differ materially from management's current expectations as
described in such forward-looking statements. Among these factors are the
matters described under "Risks and Uncertainties" in this Item, as well as,
overall economic and business conditions; competitive factors, such as
acceptance of new products and pricing pressures and competition from companies
-35-
larger than the Company; risk of nonpayment of accounts receivable, including
those from affiliated companies; risks associated with foreign operations; risks
associated with joint venture entities, including their respective abilities to
arrange for necessary long-term project financing; risks involved in litigation;
regulations and laws affecting business in each of the Company's markets; market
risk factors, as described below under "Quantitative And Qualitative Disclosures
About Market Risk," fluctuations in the Company's quarterly results; and other
risks and uncertainties described from time to time in the Company's filings
with the Securities and Exchange Commission. Readers should not place undue
reliance on any such forward looking statements, which speak only as of the date
they are made, and the Company disclaims any obligation to update, supplement or
modify such statements in the event the facts, circumstances or assumptions
underlying the statements change, or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Derivative Instruments
- ----------------------
In certain instances, the Company enters into foreign exchange contracts
including forwards, options and swaps. The Company's policy is to enter into
such contracts only for the purpose of managing exposures and not for
speculative purposes. The U.S. dollar/euro options contracts previously held by
the Company's Italian subsidiary which did not qualify for hedge accounting
treatment were closed in the second quarter of 2002. On December 31, 2002, the
Company entered into a series of U.S.dollar/euro forward contracts with the
intent of offsetting the foreign exchange risk associated with forecasted cash
flows related to an ongoing project. Because the contracts were executed on the
last day of the year, the fair market value of the contracts is zero. In future
periods the fair market value of the contracts will be recorded in either the
current assets or current liabilities section of the Consolidated Balance
Sheets. End of period changes in the market value of the contracts will be
recorded as a component of other comprehensive income in the stockholders'
equity section of the Consolidated Balance Sheets. At December 31, 2002, the
notional amount of the outstanding foreign currency forward contracts to sell
U.S. dollars to hedge these currency exposures was $7.2 million. A hypothetical
change of 10% in exchange rates would change the fair value by approximately
$0.7 million.
In 2002 the Company also entered into a foreign exchange forward contract to
hedge the balance sheet exposure related to an intercompany loan. The fair
market value of the contract, which was immaterial, was recorded in the other
current assets section of the Consolidated Balance Sheets. The end of period
change in the fair market value of the contract which was immaterial, was
recorded in selling, general and administrative expenses.
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 risk fluctuations, but the
Company believes the risk is not material due to the short-term nature of these
investments. At December 31, 2002, the Company had $4.1 million of short-term
debt and $9.7 million of long-term debt outstanding. The major portion of this
debt has fixed interest rates and is not subject to risk arising from interest
rate variability. A hypothetical increase of 10% in interest rates for a one
year period would result in additional interest expense that would not be
material in the aggregate. The Company's net foreign exchange currency gain was
$2.8 million in 2002 compared with a loss of $0.6 million in 2001 and $0.8
million in 2000. The Company's exposure to foreign currency exchange rate
fluctuations is mitigated by the fact that the operations of its international
subsidiaries are primarily conducted in their respective local currencies. Also,
in certain situations, the Company enters into foreign exchange contracts to
mitigate the impact of foreign exchange fluctuations.
-36-
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IONICS, INCORPORATED
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
Report of Independent Accountants....................................................... 38
Financial Statements:
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001,
and 2000........................................................................... 39
Consolidated Balance Sheets at December 31, 2002 and 2001............................... 40
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001,
and 2000................................................................................ 41
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
2002, 2001, and 2000.................................................................... 42
Notes to Consolidated Financial Statements.............................................. 43
Supporting Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......................................... 71
-37-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Ionics, Incorporated:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Ionics, Incorporated and its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for goodwill upon adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
on January 1, 2002.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 26, 2003
-38-
Consolidated Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------------
For the years ended December 31
- ---------------------------------------------------------------------------------------------------------------------------
Amounts in Thousands, Except per Share Amounts 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Equipment Business Group $ 154,378 $ 161,565 $ 162,060
Ultrapure Water Group 102,407 133,605 156,396
Consumer Water Group 38,677 123,748 107,953
Instrument Business Group 27,741 26,595 28,418
Affiliated companies 12,168 21,219 19,724
- ---------------------------------------------------------------------------------------------------------------------------
335,371 466,732 474,551
-----------------------------------------------------
Costs and expenses:
Cost of sales of Equipment Business Group 114,251 126,757 129,160
Cost of sales of Ultrapure Water Group 78,423 107,148 123,904
Cost of sales of Consumer Water Group 24,891 73,942 66,141
Cost of sales of Instrument Business Group 11,719 12,756 12,598
Cost of sales to affiliated companies 10,965 20,677 18,372
Research and development 6,462 6,420 7,980
Selling, general and administrative 91,842 119,837 113,222
Impairment of long-lived assets - 13,069 3,398
- ---------------------------------------------------------------------------------------------------------------------------
338,553 480,606 474,775
-----------------------------------------------------
Loss from operations (3,182) (13,874) (224)
Interest income 3,463 1,013 1,286
Interest expense (1,215) (5,166) (4,909)
Equity income 3,443 1,396 1,623
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense,
minority interest and gain on sale 2,509 (16,631) (2,224)
Gain on sale of Aqua Cool 8,160 102,834 -
Income tax (expense) benefit (4,908) (42,239) 756
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest 5,761 43,964 (1,468)
Minority interest in earnings (losses) 969 (737) 402
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,792 $ 44,701 $ (1,870)
===========================================================================================================================
Earnings (loss) per basic share $ 0.27 $ 2.61 $ (0.12)
===========================================================================================================================
Earnings (loss) per diluted share $ 0.27 $ 2.59 $ (0.12)
===========================================================================================================================
Shares used in basic earnings (loss) per share calculations 17,541 17,106 16,243
Shares used in diluted earnings (loss) per share calculations 17,671 17,246 16,243
The accompanying notes are an integral part of these consolidated financial statements.
-39-
Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------------------------------
At December 31
- ---------------------------------------------------------------------------------------------------------------
Dollars in Thousands, Except Share Amounts 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 136,044 $ 178,283
Restricted cash 4,250 -
Short-term investments 958 21
Notes receivable, current 6,662 4,892
Accounts receivable, net 94,841 110,729
Receivables from affiliated companies 23,642 24,725
Inventories 34,847 32,813
Deferred income taxes 14,664 16,297
Other current assets 12,832 11,031
- ---------------------------------------------------------------------------------------------------------------
Total current assets 328,740 378,791
- ---------------------------------------------------------------------------------------------------------------
Receivables from affiliated companies, long-term 10,000 -
Notes receivable, long-term 26,458 23,210
Investments in affiliated companies 22,618 23,798
Property, plant and equipment, net 179,914 167,032
Goodwill, net 20,200 19,037
Deferred income taxes, long-term 12,591 12,643
Other assets 7,492 8,802
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 608,013 $ 633,313
===============================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt $ 4,134 $ 14,257
Accounts payable 36,039 34,640
Deferred revenue from affiliated companies 4,308 -
Income taxes payable 25,692 45,735
Other current liabilities 43,995 62,234
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 114,168 156,866
- ---------------------------------------------------------------------------------------------------------------
Long-term debt and notes payable 9,670 10,126
Deferred income taxes 35,337 34,199
Deferred revenue from affiliated companies 4,545 3,360
Other liabilities 6,140 5,409
Commitments and contingencies
Stockholders' equity:
Common stock, par value $1, authorized shares: 55,000,000
in 2002 and 2001; issued and outstanding: 17,555,046 in
2002 and 17,477,005 in 2001. 17,555 17,477
Additional paid-in capital 190,417 188,555
Retained earnings 247,109 242,317
Accumulated other comprehensive loss (16,928) (24,996)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 438,153 423,353
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 608,013 $ 633,313
===============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
-40-
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------------------------------------------
For the years ended December 31
- -------------------------------------------------------------------------------------------------------------------
Dollars in Thousands 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income (loss) $ 4,792 $44,701 $ (1,870)
Adjustments to reconcile net income (loss)
to net cash (used) provided by operating activities:
Depreciation 23,785 32,989 30,788
Amortization of goodwill - 2,787 2,847
Amortization of other intangibles 268 163 160
Impairment of long-lived assets - 13,069 3,398
Gain on sale of Aqua Cool business (8,160) (102,834) -
Provision for losses on accounts and notes receivable 4,641 4,632 5,204
Equity in earnings of affiliates (3,443) (1,396) (1,623)
Deferred income tax expense (benefit) 1,459 (5,690) (2,092)
Changes in assets and liabilities,
net of effects of businesses acquired:
Notes receivable (4,516) (6,538) (7,913)
Accounts receivable 15,838 22,202 (49,018)
Receivables from affiliated companies (8,917) (23,933) 439
Inventories (1,178) (2,084) (1,240)
Other current assets (1,270) 3,566 (905)
Investments in affiliated companies 4,861 782 3,443
Deferred income tax assets 1,685 (7,844) (16,366)
Accounts payable and accrued expenses (13,691) (8,294) 20,386
Customer deposits 1,363 (2,682) 2,372
Deferred revenue from affiliates 5,493 3,360 -
Income taxes payable (22,496) 51,425 15,260
Other (1,103) (5,536) 914
- -------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (589) 12,845 4,184
---------------------------------------------
Investing activities:
Additions to property, plant and equipment (33,455) (39,607) (41,211)
Disposals of property, plant and equipment 1,801 2,137 11,464
Additional investments in affiliated companies (230) (4,799) (9,515)
Proceeds from sale of Aqua Cool - 210,476 -
(Purchase) sale of short-term investments (836) 413 (931)
Acquisitions, net of cash acquired (1,035) - (4,491)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (33,755) 168,620 (44,684)
---------------------------------------------
Financing activities:
Restricted cash (4,250) - -
Principal payments on current debt (73,678) (171,343) (97,891)
Proceeds from borrowings of current debt 62,846 116,476 145,508
Principal payments on long-term debt (989) (1,390) (2,827)
Proceeds from borrowings of long-term debt 553 1,294 5,666
Proceeds from issuance of common stock - 21,814 -
Proceeds from stock option plans 1,661 4,990 2,734
- -------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (13,857) (28,159) 53,190
---------------------------------------------
Effect of exchange rate changes on cash 5,962 (520) (362)
---------------------------------------------
Net change in cash and cash equivalents (42,239) 152,786 12,328
Cash and cash equivalents at end of prior year 178,283 25,497 13,169
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of current year $136,044 $178,283 $25,497
===================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
-41-
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Stock Paid-In Retained Comprehensive Unearned Stockholders'
Dollars in Thousands Shares Par Value Capital Earnings (Loss) Income Compensation Equity
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 16,201,483 $ 16,201 $ 159,288 $ 199,304 $ (12,905) $ (36) $ 361,852
Comprehensive income:
Net income - - - (1,870) - - (1,870)
Translation adjustments, (tax $2,227) - - - - (6,333) - (6,333)
------------
(8,203)
------------
Stock options exercised 163,200 164 2,570 - - - 2,734
Tax benefit of stock option activity - - 156 - - - 156
Shares issued to directors 4,346 4 100 - - - 104
Restricted stock shares issued 17,937 18 - - - - 18
Restricted stock shares forfeited (17,937) (18) - - - - (18)
Adjustment of equity ownership - - - 182 - - 182
Amortization of unearned compensation - - - - - 36 36
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 16,369,029 16,369 162,114 197,616 (19,238) - 356,861
Comprehensive income:
Net income - - - 44,701 - - 44,701
Other comprehensive income, net of tax:
Translation adjustments, (tax $974) - - - - (4,112) - (4,112)
Minimum pension liability
adjustment, (tax $1,009) - - - - (1,646) - (1,646)
------------
38,943
------------
Stock options exercised 228,650 229 4,761 - - - 4,990
Tax benefit of stock option activity - - 641 - - - 641
Shares issued to directors 4,326 4 100 - - - 104
Shares issued for private placement 875,000 875 20,939 - - - 21,814
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 17,477,005 17,477 188,555 242,317 (24,996) - 423,353
Comprehensive income:
Net income - - - 4,792 - - 4,792
Other comprehensive income, net of tax:
Translation adjustments, (tax $2,195) - - - - 9,844 - 9,844
Minimum pension liability
adjustment, (tax $1,089) - - - - (1,776) - (1,776)
------------
12,860
------------
Stock options exercised 72,937 73 1,588 - - - 1,661
Tax benefit of stock option activity - - 159 - - - 159
Shares issued to directors 5,104 5 115 - - - 120
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2002 17,555,046 $ 17,555 $ 190,417 $ 247,109 $ (16,928) $ - $ 438,153
================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-42-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Operations
The Company is involved worldwide in the manufacture and sale of membranes,
equipment for the purification, concentration, treatment and analysis of water
and wastewater, in the supply of purified water, food and chemical products, and
in the sale of home water purification equipment. Principal markets include the
United States, Europe and Asia, as well as other international markets.
Basis of Presentation
Certain prior year amounts have been reclassified to conform to the current year
presentation with no impact on net income. As part of the Company's adoption of
a matrix business organization effective January 1, 2002, results associated
with the Company's trailer leasing and non-consumer bleach based chemical supply
businesses are included in the Ultrapure Water Group (UWG) segment, rather than
the Equipment Business Group (EBG) segment where they had historically been
presented. Segment information for all periods has been presented to reflect
these changes. (See Note 17.)
Revenue Recognition
For certain contracts involving customized equipment eligible for contract
accounting under American Institute of Certified Public Accountants ("AICPA")
Statement of Position No. 81-1, "Accounting for Performance of Construction-Type
and Certain Construction-Type Contracts" (SOP 81-1), revenue is recognized using
the percentage of completion accounting method based upon an efforts-expended
method. The nature of these contracts and the types of products and services
provided are considered in determining the proper accounting for a given
contract. Long-term, fixed-price and cost plus fixed-fee contracts are recorded
on a percentage of completion basis using the cost-to-cost method of accounting
where revenue is recognized based on the ratio of costs incurred to estimated
total costs at completion. The Company follows this method since reasonably
dependable estimates of the costs of the total contract can be made. As a
general rule, sales and profits are recognized earlier under the cost-to-cost
method of percentage of completion accounting compared to the completed contract
method. Contract accounting requires significant judgment relative to assessing
risks, estimating contract costs and making related assumptions regarding
schedules and technical issues. Due to the size and nature of the Company's
long-term contracts, the estimation of cost at completion is complicated and
subject to numerous variables. Contract costs include material, labor,
subcontracting and other related costs. Assumptions must be made relative to the
length of time to complete the contract. With respect to contract change orders,
claims or similar items, judgment must be used in estimating related amounts and
assessing the potential for realization. Such amounts are only included in the
contract value when they can be reliably estimated and realization is reasonably
assured, generally upon receipt of a customer-approved change order. Given the
significance of the judgments and estimation processes described above, it is
likely that materially different amounts could be recorded if different
assumptions were used or if underlying circumstances were to change. The Company
closely monitors compliance and consistency of application of its critical
accounting policies related to contract accounting. In addition, reviews of the
status of contracts are performed through periodic contract status and
performance reviews. In all cases, changes to total estimated costs and
anticipated losses, if any, are recognized in the period in which determined.
For contracts involving the sale of equipment to a joint venture or other
unconsolidated affiliated entity in which the Company has an ownership interest,
the extent of revenue and profit recognized while the contract is being
performed varies based on the level of equity interest held by the Company.
Generally, when the Company's equity ownership in the affiliated customer is
less than 20% and accounts for such interest on a cost basis, no revenue or
profit is eliminated as the contract is being performed. When the Company's
equity ownership is between 20% and 50%, provided that the Company does not
exercise effective control over the affiliated entity, the Company recognizes
revenue as the contract is being performed but eliminates a portion of the
profit equal to the Company's equity ownership percentage in the entity. After
construction has been completed and commercial operations have commenced, the
resulting eliminated intercompany profit is amortized into revenue over the
estimated useful life of the equipment owned by the affiliated entity. When the
Company's equity ownership exceeds 50%, or in instances where the Company
effectively controls the affiliated entity, no revenue or profit is recognized
on the sale of equipment as the contract is executed, and all of the profit on
the contract is eliminated and amortized over the estimated useful life of the
equipment after construction has been completed and commercial operations have
commenced.
-43-
With respect to the Company's sale of equipment to Desalcott (the project
company) in connection with the Trinidad project where the Company is a 40%
equity owner of Desalcott, since the Company is considered to have provided all
of the cash equity funding for the project either directly or through a loan to
the Company's local majority partner, equipment revenue earned has been
recognized to the extent of costs incurred as the contract is executed; however,
all of the profit has been eliminated, and will be amortized over the estimated
useful life of the equipment after construction has been completed and
commercial operations have commenced.
The "Revenues (Affiliated Companies)" and "Cost of sales to affiliated
companies" included in the Statement of Operations reflect the revenue and costs
recorded from the sales of equipment to joint ventures or other unconsolidated
entities. Revenue is recognized in accordance with SOP 81-1 or with Securities
and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101), as appropriate, less the amount
of intercompany profit eliminated equal to the Company's ownership interest in
the affiliated companies. Eliminated intercompany profit, as described above, is
amortized over the useful life of the equipment placed in service by the
affiliated company (e.g. 23 years of the Trinidad project, and 27 years for the
Kuwait project). The Company believes that the amortization of the intercompany
profits is not material to the Company's financial statements. The amount of
deferred profit at December 31, 2002 was approximately $4.5 million.
In addition to the construction and sale of customized equipment to its
customers, the Company also enters into water and other concession agreements
under which the Company "owns and operates" desalination or water treatment
facilities to produce and supply water to its customers. Under these contracts,
where the Company remains the owner of the facility or equipment, revenue and
profit is recognized as water quantities are sold to the customer (or,
alternatively, pursuant to a "take or pay" arrangement if minimum quantities are
not purchased). More specifically, the revenue derived from these contracts is
generally recognized based on actual meter readings and agreed-upon rates in
effect during the term of the contract. The constructed equipment is capitalized
by the Company, included in property, plant and equipment, and amortized to cost
of sales over the shorter of the estimated useful life of the equipment or the
contract term.
For sales of standard products and equipment not governed by SOP 81-1, such as
the sale of instruments and consumer water products, the Company follows the
guidance provided by SAB 101. The Company does not recognize revenue unless
there is persuasive evidence of an arrangement, title and risk of loss has
passed to the customer, delivery has occurred or the services have been
rendered, the sales price is fixed or determinable and collection of the related
receivable is reasonably assured. It is the Company's policy to require an
arrangement with its customers, either in the form of a written contract or
purchase order containing all of the terms and conditions governing the
arrangement, prior to the recognition of revenue. Title and risk of loss
generally pass to the customer at the time of delivery of the product to a
common carrier. At the time of the transaction, the Company assesses whether the
sale price is fixed or determinable and whether or not collection is reasonably
assured. The Company assesses whether the sale price is fixed or determinable
based upon the payment terms of the arrangement. If the sales price is not
deemed to be fixed or determinable, revenue is recognized as the amounts become
due from the customer. The Company does not generally offer a right of return on
its products and the products are generally not subject to customer acceptance
rights. The Company assesses collectibility based on a number of factors,
including past transaction and collection history with a customer and the
credit-worthiness of the customer. The Company performs ongoing credit
evaluations of its customers' financial condition but generally does not require
collateral from its customers. If the Company determines that collectibility of
the sales price is not reasonably assured, revenue is deferred until such time
as collection becomes reasonably assured, which is generally upon receipt of
payment from the customer. The Company includes shipping and handling costs in
revenue and cost of sales.
The Company provides lease financing to consumers for the purchase of certain
home water treatment systems. Prior to entering into the lease agreement, the
Company evaluates the creditworthiness of its customer and generally
collateralizes the lease receivable with a security interest in the customer's
personal residence. At the time the lease transaction is consummated, the
Company recognizes revenue for the full amount of the sales value of the
equipment and records a lease receivable on its balance sheet. Interest income
is recognized by the Company over the term of the lease based on the interest
rate stated in the lease. The Company evaluates the collectibility of its lease
receivables based on its historical loss experience and assessment of
prospective risk, and does so through ongoing reviews of its receivables
portfolio.
-44-
The Company provides support services to customers primarily through service
contracts, and the Company typically recognizes support service revenue ratably
over the term of the service contract or as services are rendered.
The Company also rents equipment to customers under short-term rental
agreements. The Company generally invoices customers monthly and recognizes
revenue over the rental period based on amounts billed. The rental equipment is
capitalized and depreciated to cost of sales over its estimated useful life.
Cash Equivalents
Short-term investments with an original maturity of 90 days or less from the
date of acquisition are classified as cash equivalents.
Restricted Cash
At December 31, 2002, the Company had $4.3 million in restricted cash. This
amount represents cash received from a customer that was pledged to decrease the
banking fees associated with a letter of credit the Company issued against an
advance payment it received for work to be performed on the Kuwait wastewater
treatment facility.
Investments
Management determines the appropriate classification of its investment in debt
securities at the time of purchase. Debt securities which the Company has the
ability and positive intent to hold to maturity are classified accordingly and
carried at amortized cost. The Company is not involved in activities classified
as the trading of investments.
Allowance for Doubtful Accounts
The Company evaluates the adequacy of its reserve for doubtful accounts on an
ongoing basis through detailed reviews of its receivables portfolio. Estimates
are used in determining the Company's allowance for bad debts and are based on
historical collection experience, current trends including prevailing economic
conditions and adverse events that may affect a customer's ability to repay,
percentage of accounts receivable by aging category, and other factors such as
the financial condition of large customers. The Company makes adjustments to its
reserve if the evaluation of reserve requirements differs from the actual
aggregate reserve. This evaluation is inherently subjective because estimates
may be revised as more information becomes available. Reserves for doubtful
accounts are established through a charge to operations included in selling,
general and administrative expenses.
Notes Receivable
Notes receivable have been reported at their estimated net realizable value. The
allowance for uncollectible notes receivable totaled $707,000 and $561,000 at
December 31, 2002 and 2001, respectively.
Inventories
Inventories are carried at the lower of cost (first-in, first-out basis) or
market.
Investments in Affiliated Companies
The Company consolidates the balance sheet and results of operations of all
wholly and majority owned subsidiaries and controlled affiliates. The Company
also holds minority investments in certain private companies having
complementary or strategic operations in different geographical locations around
the world. These investments are included in investments in affiliates and
include investments accounted for under the equity method of accounting. Under
the equity method of accounting, which generally applies to investments that
represent a 20% to 50% ownership of the equity securities of the affiliates, the
Company's proportionate share of the earnings or losses of the affiliates is
included in equity income. With respect to the Company's investment in
Desalcott, the Company records 100% of any net loss and 40% of any net income
reported by Desalcott. In periods in which Desalcott has an accumulated loss (as
opposed to retained earnings), the Company records 100% of any net income of
Desalcott up to the amount of Desalcott's accumulated loss, and 40% of any net
income thereafter. Realization of the Company's investments in equity securities
may be affected by the affiliate's ability to obtain adequate funding and
execute its business plans, general market conditions, industry considerations
specific to the affiliate's business, and other factors. The ability of an
affiliate to obtain future funding or successfully execute its business plan
could adversely affect the Company's earnings in the periods affected by those
events. Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or in an inability to recover the
carrying value of the investments that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future. The Company records an impairment charge when it believes an investment
has experienced a decline in value that is other-than-temporary.
-45-
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Maintenance and repair costs
are expensed as incurred. Significant additions and improvements are capitalized
and depreciated. When an asset is retired or sold, any resulting gain or loss is
included in the results of operations. Interest payments on debt capitalized as
property, plant and equipment amounted to $268,000, $81,000 and $320,000 in
2002, 2001 and 2000, respectively. In general, depreciation is computed on a
straight-line basis over the expected useful lives of the assets, as follows:
Classification Depreciation Lives
- -------------- ------------------
Buildings and improvements 10 - 40 years
Machinery and equipment, including supply equipment 3 - 25 years
Other 3 - 12 years
In certain situations the units of production method is utilized in order
to achieve a more appropriate matching of revenues and expenses.
The Company's policy is to depreciate processing plants, other than leased
equipment, over the shorter of their useful lives or the term of the
corresponding supply contracts.
Impairment of Long-Lived Assets
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). In accordance with SFAS 144, the Company assesses the
potential impairment of identifiable intangibles and other long-lived assets
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors the Company considers important which could indicate
an impairment include significant underperformance relative to historical or
projected future operating results, significant changes in the manner of the
Company's use of the acquired asset or the strategy for its overall business and
significant negative industry or economic trends. When the Company determines
that the carrying value of intangible and other long-lived assets may not be
recoverable, the related estimated future undiscounted cash flows expected to
result from the use of the asset and its eventual disposition are compared to
the carrying amount of the asset. If the sum of the estimated future cash flows
is less than the carrying amount, the Company records an impairment based on the
estimated discounted cash flows using a discount rate determined by Company
management to be commensurate with the associated risks
Goodwill
Goodwill represents the excess acquisition cost over the fair value of the net
assets acquired in the purchase of various entities. On January 1, 2002, the
Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142)
that requires, among other things, the discontinuance of goodwill amortization.
In accordance with SFAS 142, amortization of goodwill was discontinued as of
January 1, 2002. Prior to the adoption of SFAS 142, goodwill was amortized on a
straight-line basis over its estimated useful life, which generally was a period
ranging from 10 to 40 years. SFAS 142 requires the Company to evaluate goodwill
for impairment on an annual basis. The Company evaluates the recoverability of
goodwill annually in the fourth quarter, or more frequently if events or changes
in circumstances, such as declines in sales, earnings or cash flows or material
adverse changes in the business climate, indicate that the carrying value of an
asset might be impaired. Goodwill is considered to be impaired when the net book
value of a reporting unit exceeds its estimated fair value. Fair values are
primarily determined using a discounted cash flow methodology. The determination
of discounted cash flows is based on the businesses' strategic plans and future
forecasts. The revenue growth rates included in the plans are management's best
estimates based on current and forecasted market conditions and the profit
margin assumptions are projected by each reporting unit based on the current
cost structure, as well as any anticipated cost reductions. The Company
completed its annual impairment test in the fourth quarter of 2002 using its
best estimate of forecasts for future periods. No adjustment was required to the
carrying value of goodwill based on the analysis performed
Warranty Obligations
The Company's products are generally subject to warranty and related costs are
provided for in cost of revenues when revenue is recognized. While the Company
engages in extensive product quality programs and processes, the Company's
warranty obligation is based upon historical product failure rates and costs
incurred in correcting a product failure. If actual product failure rates or the
-46-
costs associated with fixing failures differ from historical rates, adjustments
to the warranty liability may be required in the period in which determined. The
changes in the carrying amount of product warranties for the year ended December
31, 2002 are as follows:
Dollars in thousands 2002
- -------------------------- -------------
Balance at end of prior year $ 844
Accruals for warranties issued during the period 934
Accruals related to pre-existing warranties 15
Settlements made (in cash or in kind) during the period (1,168)
-------------
Balance at end of year $ 625
=============
Research and Development
All research and development costs are expensed as incurred.
Foreign Exchange
Assets and liabilities of foreign affiliates and subsidiaries, for which the
local currency is the functional currency, are translated into U.S. dollars at
year-end exchange rates, and the related statements of operations are translated
at average exchange rates during the year. Translation gains and losses are
accumulated net of income tax as a separate component of stockholders' equity.
Some transactions of the Company and its subsidiaries are made in currencies
different from their functional currency. Gains (losses) on these transactions
or balances are included in selling, general and administrative expense as they
occur. Net foreign currency transaction gains (losses) included in income before
income taxes and minority interest totaled $2.8 million, $(0.6) million and
$(0.8) million for 2002, 2001 and 2000, respectively.
Income Taxes
The Company estimates income taxes in each of the jurisdictions in which it
operates and involves an assessment of permanent and temporary differences
resulting from differing treatment of items for tax and book accounting
purposes. Temporary differences result in deferred tax assets and liabilities,
which are included within the consolidated balance sheet. The Company must also
assess the likelihood that any deferred tax assets will be recovered, and must
establish a valuation allowance to the extent that it believes that it is more
likely than not any deferred tax asset will not be utilized from future taxable
income. To the extent the Company has established a valuation allowance, income
tax expense is recorded in the statement of operations. At any time, the
Company's income tax expense could be impacted by changes in tax laws, or by
administrative actions or court rulings.
The Company has taken tax positions in its worldwide corporate income tax
filings based on careful interpretations of global statutes, rules, regulations
and court decisions that may be applied and interpreted differently by various
taxing jurisdictions. These taxing jurisdictions may or may not challenge the
Company's application and interpretation of a wide body of tax jurisprudence.
However, the Company does not anticipate that any sustained challenge by any
taxing jurisdiction could have a material adverse effect on its financial
position or net income.
The Company has elected not to provide tax on certain undistributed earnings of
its foreign subsidiaries which it considers to be permanently reinvested. The
cumulative amount of such unprovided taxes was approximately $9.7 million, $8.2
million and $5.1 million as of December 31, 2002, 2001 and 2000, respectively.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
during the reporting period. Diluted earnings (loss) per share is computed by
dividing net income available to common shareholders by the weighted-average
number of common shares outstanding while giving effect to all potentially
dilutive common shares that were outstanding during the period calculated using
the treasury stock method which determines the additional common shares that are
issuable upon the exercise of outstanding stock options.
-47-
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in the Statements of
Stockholders' Equity. For 2002, comprehensive income was $12.9 million and
consisted of net income, foreign currency translation adjustments and minimum
pension liability adjustment, net of tax effect. In 2001 and 2000, comprehensive
income (loss) was $38.9 million and $(8.2) million, respectively, consisting
primarily of net income (loss) and translation adjustments, net of tax effect.
Derivative Instruments
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 137 and SFAS 138 in the first quarter of
2001. SFAS 133 requires all derivatives to be recognized on the balance sheet at
fair value. The adoption of SFAS 133 did not have a material impact on the
Company's financial position or results of operations. The Company conducts
business in a number of foreign countries, with certain transactions denominated
in local currencies. The purpose of the Company's foreign currency management is
to minimize the effect of exchange rate fluctuations on certain foreign
denominated monetary assets and anticipated cash flows. The terms of currency
instruments used for hedging purposes are consistent with the timing of the
transactions being hedged. The Company does not use derivative financial
instruments for trading or speculative purposes. For purposes of presentation
within the statement of cash flows, derivative gains and losses are presented
within cash provided by operating activities.
The Company enters into foreign currency forward contracts to hedge its
exposures associated with a portion of its forecasted revenue transactions.
These derivative instruments are designated as foreign currency cash flow
hedges. All outstanding derivatives are recognized on the balance sheet at fair
value and changes in their fair value are recorded in accumulated other
comprehensive income (loss) until the underlying forecasted transaction occurs.
Once the underlying forecasted transaction is realized, the gain or loss from
the derivative designated as a hedge of the transaction is reclassified from
accumulated other comprehensive income (loss) to the statement of operations in
the related revenue caption. In the event the underlying forecasted transaction
does not occur, the amount recorded in accumulated other comprehensive income
(loss) will be reclassified to selling, general and administrative expense in
the statement of operations in the then-current period. No amounts were
reclassified from accumulated other comprehensive income (loss) to "Selling,
general and administrative expense" during 2002, 2001 or 2000. The Company's
cash flow hedges generally mature within two years or less.
The Company also enters into foreign exchange forward contracts to hedge its
exposures associated with foreign-currency denominated assets and liabilities.
These derivative instruments are designated as foreign currency fair value
hedges. The derivatives are recognized on the balance sheet at fair value and
period-end changes in fair value are recorded in selling, general and
administrative expense in the statement of operations.
Since the Company is using foreign exchange derivative contracts to hedge
foreign exchange exposures, the changes in the value of the derivatives are
highly effective in offsetting changes in the cash flows of the hedged item.
Hedge effectiveness is assessed on a quarterly basis. Any ineffective portion of
the derivatives designated as cash flow hedges is recognized in current earnings
in "Selling, general and administrative expense." The ineffective portion of the
derivatives consists of discounts or premiums on forward contracts and gains or
losses associated with differences between actual and forecasted amounts. In any
instance in which the designated hedged item matures, is terminated, or, in the
case of an anticipated transaction, is deemed unlikely to occur, the related
derivative contract is closed and any gain or loss is immediately recognized in
the Statement of Operations in "Selling, general and administrative expense."
Accounting for Stock-Based Compensation
The Company applies the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations in accounting for its stock-based compensation plans.
Accordingly, any difference between the option price and the fair market value
of the stock at the date of grant is charged to operations over the expected
period of benefit to the Company. During 2002, 2001 and 2000, no stock-based
compensation expense is reflected in net income as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant.
The following table illustrates the pro forma effect on net income and earnings
per share if the Company had applied the fair value method of accounting for
stock options and other equity instruments defined by SFAS No. 123, "Accounting
-48-
for Stock-Based Compensation." The effect of applying SFAS No. 123 in the pro
forma disclosure are not indicative of future awards, which are anticipated.
SFAS No. 123 does not apply to awards prior to 1995.
2002 2001 2000
---------------------------------
(Amounts in thousands, except per share amounts)
Net income (loss), as reported $ 4,792 $ 44,701 $(1,870)
Less: Stock-based compensation expense determined under
fair value method for all awards, net of related tax effects 2,652 2,596 3,047
---------------------------------
Pro Forma net income (loss) $ 2,140 $ 42,105 $(4,917)
=================================
Earnings (loss) per basic share, as reported $ 0.27 $ 2.61 $ (0.12)
=================================
Earnings (loss) per basic share, pro forma $ 0.12 $ 2.46 $ (0.30)
=================================
Earnings (loss) per diluted share, as reported $ 0.27 $ 2.59 $ (0.12)
=================================
Earnings (loss) per diluted share, pro forma $ 0.12 $ 2.44 $ (0.30)
=================================
The fair value of each option granted during 2002, 2001 and 2000 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions:
2002 2001 2000
---------------------------------
Expected term (years) 6.0 5.0 5.0
Volatility 42.2% 38.6% 37.4%
Risk-free interest rate (zero coupon U.S. treasury note) 3.68% 4.89% 6.25%
Dividend yield None None None
Weighted-average fair value of options granted $ 9.95 $ 11.32 $ 9.65
Use of Estimates
The preparation of financial statements, in conformity with generally accepted
accounting principles in the United States of America, requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS No. 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. The Company does not believe that SFAS No.
143 will have a material impact on its financial position or results of
operations.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of
April 2002." SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that statement. SFAS
No. 145 amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
-49-
conditions. SFAS No. 145 is effective for financial statements for fiscal years
beginning after May 15, 2002. The Company does not believe that SFAS No. 145
will have a material impact on the Company's financial position or results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company does not believe that SFAS No. 146 will have a material
impact on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). Along with new disclosure requirements, FIN 45
requires guarantors to recognize, at the inception of certain guarantees, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This differs from the current practice to record a liability only
when a loss is probable and reasonably estimable; FIN 45 also requires a
guarantor to provide enhanced disclosures concerning guarantees, even when the
likelihood of making a payment under the guarantee is remote. The recognition
and measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002 while the enhanced
disclosure requirements are effective for periods ending after December 15,
2002. The Company does not believe that the adoption of FIN 45 will have a
material impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which amended SFAS No. 123,
"Accounting for Stock-Based Compensation". This Statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. It also amends the disclosure
provisions to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. The provisions of this Statement are to be applied to
financial statements for fiscal years ending after December 15, 2002. The
adoption of SFAS 148 will not have a material impact on the Company's financial
position or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51 (FIN 46). This interpretation addresses the
consolidation of certain variable interest entities (VIEs) for which a
controlling financial interest exists. FIN 46 applies immediately to financial
interests obtained in VIEs after January 31, 2003. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to VIEs in which a
financial interest was obtained before February 1, 2003. FIN 46 may be applied
prospectively with a cumulative-effect adjustment or by restating previously
issued financial statements with a cumulative-effect adjustment as of the
beginning of the first year restated. The Company has a financial interest in
certain entities that may be considered VIEs under FIN 46 (See Notes 5 and 8 for
additional information concerning Investments in Affiliated Companies). The
Company is currently evaluating the impact of FIN 46 on its Investments in
Affiliated Companies and if the Company determines that it has a controlling
financial interest in any of these entities, consolidation may be required. The
ultimate effect of adopting FIN 46 on the Company's financial position or
results of operations has not yet been determined.
-50-
Note 2. Consolidated Balance Sheet Details
Dollars in Thousands 2002 2001
- ----------------------------------------------------------------------------------------------
Raw materials $ 19,837 $ 20,047
Work in process 6,992 7,547
Finished goods 8,018 5,219
- ----------------------------------------------------------------------------------------------
Inventories $ 34,847 $ 32,813
==============================================================================================
Land $ 6,077 $ 6,288
Buildings 45,782 41,272
Machinery and equipment 273,442 243,964
Other, (includes furniture,
fixtures and vehicles) 32,307 29,938
- ----------------------------------------------------------------------------------------------
357,608 321,462
Accumulated depreciation (177,694) (154,430)
- ----------------------------------------------------------------------------------------------
Property, plant and equipment, net $179,914 $167,032
==============================================================================================
Customer deposits $ 4,114 $ 2,159
Accrued expenses 39,881 60,075
- ----------------------------------------------------------------------------------------------
Other current liabilities $ 43,995 $ 62,234
==============================================================================================
Note 3. Supplemental Schedule of Cash Flow Information
Dollars in Thousands 2002 2001 2000
- ----------------------------------------------------------------------------------------
Cash payments for interest
and income taxes:
Interest $ 1,520 $ 6,093 $ 4,662
Taxes $21,503 $ 1,865 $ 6,974
Note 4. Accounts Receivable
Dollars in Thousands 2002 2001
- ------------------------------------------------------------------------
Billed receivables $79,389 $77,978
Unbilled receivables 21,530 36,959
Allowance for doubtful accounts (6,078) (4,208)
- ------------------------------------------------------------------------
Accounts receivable, net $94,841 $110,729
========================================================================
Unbilled receivables represent the excess of revenues recognized on percentage
of completion contracts over amounts billed. These amounts will become billable
as the Company achieves certain contractual milestones. Substantially all of the
unbilled amounts at December 31, 2002 are expected to be billed during 2003.
Billed receivables include retainage amounts of $4,351,000 and $5,581,000 at
December 31, 2002 and 2001, respectively. Substantially all of the retainage
amounts are expected to be collected within one year.
Note 5. Investments in Affiliated Companies
The Company's investments in the following affiliates are accounted for under
the equity method. The principal business activities of these foreign affiliates
involve the production, sale and distribution of treated or bottled water, the
sale of membranes, equipment and replacement parts, and the ownership and
operation of water treatment facilities.
-51-
Ownership
Affiliate Percentage
- ------------------------------------------------------------------------------
Aqua Cool Kuwait - Kuwait 49%
Aqua Cool Saudi Arabia - Saudi Arabia 40%
Aqua Design Ltd. - Cayman Islands 39%
Carmel Desalination Ltd. - Israel 33%
Desalination Company of Trinidad and Tobago Ltd. - Trinidad 40%
Grupo Empresarial de Mejoramiento Ambiental, S. de R.L.
de C.V. - Mexico 20%
Jalal-Ionics - Bahrain 40%
Magan Desalination Ltd. - Israel 49%
Toray Membrane America, Inc. - Massachusetts, USA 43%
UTE El Reventon - Spain 50%
UTE Tamaino - Spain 50%
Utilities Development Company, W.L.L. - Kuwait 25%
Watlington Waterworks, Ltd. - Bermuda 26%
Yuasa-Ionics Co., Ltd. - Japan 50%
The Company's percentage ownership interest in affiliates may vary from its
interest in the earnings of such affiliate.
Activity in investments in affiliated companies:
Dollars in Thousands 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Investments at end
of prior year $ 23,798 $ 18,310 $ 10,752
Equity in earnings, net 3,443 1,396 1,623
Distributions received (3,734) (1,511) (2,092)
Cumulative translation
adjustments and other (344) 804 (99)
Reclassification of Agrinord S.r.l.
resulting from change in
ownership interest - - (1,389)
Reclassification to long-term notes
receivable from Utilities Development Company (775) - -
Additional investments 230 4,799 9,515
- ------------------------------------------------------------------------------------------------------
Investments at end of current year $ 22,618 $ 23,798 $ 18,310
======================================================================================================
At December 31, 2002 and 2001, the Company's equity in the net assets of its
affiliates was $20.6 million and $21.9 million, respectively. The difference
between the carrying amount and the underlying equity in net assets is being
amortized into equity over the estimated useful life of the related intangible
asset.
Grupo Empresarial de Mejoramiento Ambiental, S. de R.L. C.V. ("GEMA") was formed
in 1991. GEMA was incorporated to design and construct wastewater treatment
plants and provide wastewater collection, treatment, conduction and distribution
services. The carrying value of the Company's investment in GEMA was
approximately $3.8 million and $4.6 million, respectively, at December 31, 2002
and 2001, and is included in "Investments in affiliated companies" in the
Consolidated Balance Sheets. During 2002 and 2001, the Company received $2.2
million and $1.4 million, respectively, of cash dividends from GEMA.
Summarized financial information of GEMA is presented as follows (dollars in
thousands):
-52-
December 31,
---------------------------------
2002 2001
--------------- --------------
Current assets $ 16,375 $ 16,417
Non-current assets 37,428 47,188
--------------- --------------
Total assets $ 53,803 $ 63,605
=============== ==============
Current liabilities $ 10,288 $ 10,310
Non-current liabilities 24,381 30,466
--------------- --------------
Total liabilities $ 34,669 $ 40,776
=============== ==============
Years ended December 31,
---------------------------------
2002 2001
--------------- --------------
Sales $ 38,803 $ 35,800
Cost of sales 13,586 12,960
Operating income 20,370 17,817
Income before income taxes 14,743 15,954
Net income 9,910 11,227
Note 6. Impairment of Long-Lived Assets
During 2001 and 2000, the Company wrote down approximately $13.1 million and
$3.4 million, respectively, of impaired long-lived assets. In 2001, the
write-downs included approximately $9.2 million to reduce the carrying value of
assets held for sale related to the Company's divestiture of its majority-owned
Malaysian subsidiary and $3.1 million of goodwill associated with previous
acquisitions.
In late 2001, the Company began negotiations to sell its majority-owned
Malaysian subsidiary to the subsidiary minority shareholders. In early 2002, the
Company had signed a term sheet for the disposition of the Malaysian subsidiary
and the sale was completed in May 2002. Accordingly, at December 31, 2001, the
Company recorded an impairment charge of approximately $9.2 million,
representing the difference between the Company's 55% ownership interest in the
net asset value of the Malaysian subsidiary (principally property, plant and
equipment, and goodwill) and the anticipated net proceeds from the sale of the
subsidiary of approximately $1.0 million.
The Company recorded asset impairment charges related to its decision to abandon
plans to commence bleach-manufacturing operations in Elkton, Maryland. In 2001
and 2000, these impairment charges amounted to $0.7 million and $2.0 million,
respectively. The Elkton plant and equipment were part of a Company strategy to
expand bleach manufacturing in the mid-Atlantic market. This strategy included
the potential acquisition by the Company of a regional bleach manufacturer, but
negotiations relating to the potential acquisition ceased during the fourth
quarter of 2000. The impairment charge recorded in 2000 was consequently derived
by writing off the net book value of specific equipment for which there was no
salvage value or anticipated use within the Company. Due to overcapacity in the
bleach manufacturing industry (as evidenced by the exit of other bleach
manufacturers in the Northeast), the Company was subsequently unable during 2001
to utilize or otherwise sell the remaining equipment and consequently wrote off
the remaining $0.7 million net book value.
Additionally, $0.8 million of goodwill impairment was recognized in 2000
relating to an acquisition made in 1996.
Note 7. Goodwill and Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
amortization of goodwill was discontinued as of January 1, 2002. All of the
Company's intangible assets are subject to amortization. The Company did not
record any reclassification of amounts of intangible assets into or out of the
amounts previously reported as goodwill. As of June 30, 2002, the Company
completed the transitional goodwill impairment test and determined that no
adjustment to goodwill was necessary.
-53-
The following tables reflect the adjustments to selected consolidated financial
information to present pro forma amounts which exclude amortization of goodwill:
(Amounts in thousands,
except per share amounts)
For the years ended December 31,
2001 2000
------------ -------------
Net income (loss) $ 44,701 $(1,870)
Goodwill amortization, net of tax 2,188 2,228
------------ -------------
Adjusted net income $ 46,889 $ 358
============ =============
Reported basic earnings (loss) per share $ 2.61 $ (0.12)
Goodwill amortization, net of tax 0.13 0.14
------------ -------------
Adjusted basic earnings per share $ 2.74 $ 0.02
============ =============
Reported diluted earnings (loss) per share $ 2.59 $ (0.12)
Goodwill amortization, net of tax 0.13 0.14
------------ -------------
Adjusted diluted earnings per share $ 2.72 $ 0.02
============ =============
The changes in the carrying amount of goodwill for the years ended December 31,
2002 and 2001 are as follows:
Equipment Ultrapure Consumer Instrument
Business Water Water Business
Dollars in thousands Group Group Group Group Corporate Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $ 11,920 $ 17,524 $ 20,871 $ 1,864 $ - $ 52,179
Goodwill acquired during the year - - 141 - - 141
Sale of Aqua Cool - - (18,865) - - (18,865)
Impairment losses - (9,222) - (1,794) - (11,016)
Amortization expense (595) (767) (1,355) (70) - (2,787)
Cumulative translation adjustment/other 35 (481) (169) - - (615)
- ---------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 11,360 7,054 623 - - 19,037
Goodwill acquired during the year - 597 - - - 597
Cumulative translation adjustment/other 263 (18) 321 - - 566
- ---------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2002 $ 11,623 $ 7,633 $ 944 $ - $ - $ 20,200
===========================================================================================================================
The Company's net intangible assets included in other assets in the Consolidated
Balance Sheets consist principally of patents and trademarks. At December 31,
2002 and 2001 the gross carrying value of these intangible assets was
approximately $2.8 million and $1.7 million, respectively, and the accumulated
amortization was $0.7 million and $0.4 million, respectively. All of the
Company's intangible assets are subject to amortization and are amortized on a
straight-line basis over a period ranging up to 20 years. Amortization expense
for intangible assets is estimated to be approximately $0.3 million in 2003
through 2005, $0.2 million in 2006 and $0.1 million in 2007.
Note 8. Commitments and Contingencies
Litigation
The Company and its Chief Executive Officer and Chief Financial Officer have
been named as defendants in a class action lawsuit captioned Jerome Deckler v.
Ionics, Inc., et al., filed in the U.S. District Court, District of
Massachusetts in March 2003. Plaintiff alleges violations of the federal
securities laws relating to the restatement of the Company's financial
statements for the first and second quarters of 2002 announced in November 2002.
The Company believes the allegations in the lawsuit are without merit and
intends vigorously to defend the litigation. While the Company believes that the
litigation will have no material adverse impact on its financial condition,
results of operations or cash flows, the litigation process is inherently
-54-
uncertain and the Company can make no assurances as to the ultimate outcome of
this matter.
The Company is involved in the normal course of its business in various other
litigation matters, some of which are in the pre-trial discovery stages. The
Company believes that none of the other pending matters will have an outcome
material to the Company's financial position or results of operations or cash
flows.
The Company was notified in 1992 that it is a potentially responsible party
(PRP) at a Superfund Site, Solvent Recovery Services of New England in
Southington, Connecticut. Ionics' share of assessments to date for site work and
administrative costs totals approximately $77,000. The United States
Environmental Protection Agency ("EPA") has not yet issued a decision regarding
clean-up methods and costs. However, based upon the large number of PRPs
identified, the Company's small volumetric ranking (approximately 0.5%) and the
identities of the larger PRPs, the Company believes that its liability in this
matter will not have a material effect on the Company or its financial position,
results of operations or cash flows.
In 2002, Sievers Instruments, Inc. ("Sievers"), a wholly owned subsidiary of the
Company, filed a patent infringement suit in the United States District Court
for the District of Colorado against Anatel Corporation and against Anatel's
acquiring company, Hach Company ("Anatel"). The suit alleges that Anatel's
manufacture and sale of its Model 643 organic carbon analyzer unlawfully copied
and interfered with sales of Sievers' TOC 400 total organic carbon analyzer in
that the Model 643 infringes certain claims of Sievers' U.S. patents No.
5,976,468 and No. 6,271,043. The suit further asserts that the continuing sale
of calibration standards by Anatel constitutes infringement. The defendants have
raised certain defenses, withdrawn the accused product from the market, and
introduced a redesigned analyzer. Defendants have asked the Court to rule that
their redesigned analyzer does not infringe, and the Court has not yet issued
its decision. The case is in early stages of discovery.
Other
From time to time, the Company enters into joint ventures with respect to
specific projects, including the projects in Trinidad, Kuwait and Israel
described below. Each joint venture arrangement is independently negotiated
based on the specific facts and circumstances of the project, the purpose of the
joint venture company related to the project, as well as the rights and
obligations of the other joint venture partners. Generally, the Company has
structured its project joint ventures so that the Company's obligation to
provide funding to the underlying project or to the joint venture entity is
limited to its proportional capital contribution, which can take the form of
equity or subordinated debt. Except in situations that are negotiated with a
specific joint venture entity as discussed below, the Company has no other
commitment to provide for the joint venture's working capital or other cash
needs. In addition, the joint venture entity typically obtains third-party debt
financing for a substantial portion of the project's total capital requirements.
In these situations, the Company is typically not responsible for the repayment
of the indebtedness incurred by the joint venture entity. In connection with
certain joint venture projects, the Company may also enter into contracts for
the supply and installation of the Company's equipment during the construction
of the project, for the operation and maintenance of the facility once it begins
operation, or both. These commercial arrangements do not require the Company to
commit to any funding for working capital or any other requirements of the joint
venture company. As a result, the Company's exposure with respect to its joint
ventures is typically limited to its debt and equity investments in the joint
venture entity, the fulfillment of any contractual obligations it has to the
joint venture entity and the accounts receivable owing to the Company from the
joint venture entity.
In the second quarter of 2002, construction was completed on the first four (out
of five) phases of the Trinidad desalination facility owned by Desalination
Company of Trinidad and Tobago Ltd. ("Desalcott"), in which the Company has a
40% equity interest, and the facility commenced water deliveries to its
customer, the Water and Sewerage Authority of Trinidad and Tobago. In 2000, the
Company acquired 200 ordinary shares of Desalcott for $10 million and loaned $10
million to Hafeez Karamath Engineering Services Ltd. ("HKES"), the founder of
Desalcott and promoter of the Trinidad desalination project, to enable HKES to
acquire an additional 200 ordinary shares of Desalcott. Prior to those
investments, HKES owned 100 ordinary shares of Desalcott. As a result, the
Company currently owns a 40% equity interest in Desalcott, and HKES currently
owns a 60% equity interest in Desalcott.
The Company's $10 million loan to HKES is included in notes receivable,
long-term on the Company's Consolidated Balance Sheets. The loan bears interest
at a rate equal to 2% above the London Interbank Offered Rate (LIBOR), with
interest payable starting October 25, 2002 and every six months thereafter and
-55-
at maturity. Prior to maturity, however, accrued interest payments (as well as
principal payments) are payable only to the extent dividends or other
distributions are paid by Desalcott on the ordinary shares of Desalcott owned by
HKES and pledged to the Company. Principal repayment is due in 14 equal
installments commencing on April 25, 2004 and continuing semiannually
thereafter. The loan matures and is payable in full on April 25, 2011. The loan
is secured by a security interest in the shares of Desalcott owned by HKES and
purchased with the borrowed funds, which is subordinate to the security interest
in those shares in favor of the Trinidad bank that provided the construction
financing for Desalcott. In addition, any dividends or other distributions paid
by Desalcott to HKES must be applied to loan payments to the Company.
In 2000, Desalcott entered into a "bridge loan" agreement with a Trinidad bank
providing $60 million in construction financing. Effective November 8, 2001, the
loan agreement was amended to increase maximum borrowings to $79.9 million. The
Company is obligated to lend up to $10 million to Desalcott as an additional
source of funds for project completion costs once all bridge loan proceeds have
been expended. However, the bridge loan of $79.9 million and the $20 million
equity provided to Desalcott (together with the additional $10 million dollars
the Company is obligated to lend to Desalcott) have not provided sufficient
funds to pay all of Desalcott's obligations in completing construction and
commissioning of the project prior to receipt of long-term financing. Included
in Desalcott's obligations is approximately $30.1 million payable to the
Company's Trinidad subsidiary for equipment and services purchased in connection
with the construction of the facility. The Company currently intends to convert
$10 million of this amount into a loan to Desalcott to satisfy the Company's
loan commitment described above. The terms of this loan are currently being
negotiated with Desalcott. Although the Company currently anticipates that
Desalcott will pay its remaining outstanding obligations to the Company's
subsidiary partially out of cash flow from the sale of water and from the
proceeds from new long-term debt financing, Desalcott has disputed certain
amounts payable under the construction contract, and this matter is now subject
to the dispute resolution procedures of the contract. The Company does not
believe resolution of these matters will have a material impact on its results
of operations or cash flows. Desalcott has received proposals for new long-term
debt financing, including a term sheet and a draft term loan agreement from the
Trinidad bank which provided the bridge loan and is currently negotiating the
terms of the financing. Such new long-term debt financing may not be completed
on terms acceptable to Desalcott, or at all. Moreover, although the Trinidad
bank that made the bridge loan to Desalcott has not required repayment of the
bridge loan, which matured on September 1, 2002, pending completion of the
long-term debt financing. There can be no assurance that the bank will not
exercise its rights and foreclose on its collateral, in which event the
Company's equity investment in, and receivable from, Desalcott as well as the
loan receivables from HKES would all be at risk.
During 2001, the Company acquired a 25% equity interest in a Kuwaiti project
company, Utilities Development Company W.L.L. ("UDC"), which was awarded a
concession agreement by an agency of the Kuwaiti government for the
construction, ownership and operation of a wastewater reuse facility in Kuwait.
During the second quarter of 2002, UDC entered into agreements for the long-term
financing of the project, and accordingly the Company commenced recognizing
revenue in accordance with American Institute of Certified Public Accountants
Statement of Position No. SOP 81-1. At December 31, 2002, the Company had
invested a total of $2.6 million in UDC as equity contributions and subordinated
debt. The Company is committed to make additional contributions of equity or
subordinated debt to UDC of $15.9 million over a two to three year period.
In 2001, the Company entered into agreements with an Israeli cooperative society
and an Israeli corporation for the establishment of Magan Desalination Ltd.
("MDL") as an Israeli project company in which the Company has a 49% equity
interest. In August 2002, MDL entered into a concession contract with a
state-sponsored water company for the construction, ownership and operation of a
brackish water desalination facility in Israel. At December 31, 2002, the
Company had not yet made an equity investment in MDL, and had deferred costs of
approximately $0.6 million relating to the design and development work on the
project. The Company currently anticipates that it will invest approximately a
total of $1.2 million in MDL for its 49% equity interest. MDL is currently
seeking approximately $7.2 million of debt financing for the project. If MDL is
unable to obtain such debt financing, the Company would expense all its deferred
costs relating to the project and any investment the Company may have made in
MDL, but would incur no other liability, inasmuch as no performance bond has
been issued for the project.
In January 2002, the Company entered into agreements with two Israeli
corporations giving the Company the right to a one-third ownership interest in
an Israeli project company, Carmel Desalination Ltd. ("CDL"). On October 28,
2002, CDL was awarded a concession agreement by the Israeli Water Desalination
Agency (established by the Ministry of Finance and the Ministry of
Infrastructure) for the construction, ownership and operation of a major
seawater desalination facility in Israel. At December 31, 2002, the Company made
-56-
an equity investment of $0.2 million in CDL, and had deferred costs of
approximately $0.4 million relating to the engineering design and development
work on the project. If CDL obtains long-term project financing, the Company's
total equity investment to be made in CDL would be approximately $8.0 million.
The timing of such investment will depend upon the terms of the long-term
financing agreement. The terms of the concession agreement require that
long-term financing be obtained by April 2003 and CDL has requested an extension
to October 2003 to obtain such financing. Although the Company currently
anticipates that CDL will obtain long-term financing for the project, if CDL is
unable to obtain such financing, the Company would expense all its deferred
costs relating to the project and any investment the Company may have made in
CDL (estimated to be approximately $0.8 million by the time of the closing of
the long-term financing). Additionally, the Company could incur its one-third
proportionate share ($2.5 million) of liability under a $7.5 million performance
bond issued on behalf of CDL.
On December 31, 2001, the Company completed the sale of its Aqua Cool Business
in the United States, United Kingdom and France to affiliates of Perrier-Vittel
S.A., a subsidiary of Nestle S.A. (Nestle). As a result of final purchase price
adjustments based on the number of customers and working capital levels, and the
resolution of certain claims made by Nestle, the Company and Nestle reached
final agreement on a purchase price of approximately $207.0 million in the first
quarter of 2003. As a result of such adjustments, the Company realized an
additional net pre-tax gain of $8.2 million in 2002. The 2002 pre-tax gain is
net of direct and incremental costs of the transaction including approximately
$3.4 million of non-recurring management and employee compensation. In
connection with the final resolution, the $10 million held in escrow pursuant to
the divestiture agreement and approximately $2.9 million in cash from the
Company were delivered to Nestle effective as of March 31, 2003.
Guarantees and Indemnifications
In the normal course of business, the Company issues letters of credit to
customers, vendors and lending institutions as guarantees for payment,
performance or both under various commercial contracts into which it enters. Bid
bonds are also sometimes obtained by the Company as security for the Company's
commitment to proceed with a project if it is the successful bidder. Performance
bonds are typically issued for the benefit of the Company's customers as
financial security for the completion or performance by the Company of its
contractual obligations under certain commercial contracts. These instruments
are not reflected on the Company's balance sheet as a liability because they
will not result in a liability to the Company unless the Company fails to
perform the contractual obligations which are secured by the corresponding
instrument. In the past, the Company has not incurred significant liabilities or
expenses as a result of the use of these instruments. Approximately $136.6
million and $77.3 million of these guarantees were outstanding at December 31,
2002 and 2001, respectively. Approximately 48% of the guarantees outstanding at
December 31, 2002 are scheduled to expire in 2003. These instruments were
executed with creditworthy institutions.
Under its By-laws, the Company has an obligation to indemnify its directors and
officers to the extent legally permissible against liabilities reasonably
incurred in connection with any action in which such individual may be involved
by reason of such individual being or having been a director or officer of the
Company.
The Company has agreements to provide additional consideration in a business
combination to the seller if contractually specified conditions related to the
acquired entity are achieved. At December 31, 2002, the Company's exposure on
these liabilities was not material to its financial position and results of
operations.
The Company provided such guarantees after considering the economics of the
transaction, and the liquidity and credit risk of the other party in the
transaction. The Company believes that the likelihood is remote that any such
arrangement could have a significant adverse effect on its financial position,
results of operation or liquidity. The Company records liabilities, as disclosed
above, for such guarantees based on the Company's best estimate of probable
losses which considers amounts recoverable under any recourse provisions.
Note 9. Long-Term Debt and Notes Payable
Dollars in thousands 2002 2001
- -------------------------------------------------------------------------------
Borrowings outstanding $ 13,804 $ 24,383
Less installments due within one year 4,134 14,257
- -------------------------------------------------------------------------------
Long-term debt and notes payable $ 9,670 $ 10,126
===============================================================================
-57-
The Company maintains several foreign lines of credit. The Company's primary
domestic credit facility, a $30 million line of credit with FleetBank, expired
on March 26, 2003. The Company is currently negotiating a new credit line with
FleetBank, which will provide for lower total borrowings in light of the
Company's current cash position. The Company also maintains other international
unsecured credit facilities under which the Company may borrow up to an
aggregate of $8.4 million. At December 31, 2002, the Company's total outstanding
borrowings, including long-term debt, under all of its existing credit
facilities were $13.8 million.
The Company had no outstanding borrowings at December 31, 2002 and borrowings of
$10.0 million at December 31, 2001 against its domestic lines of credit.
Maturities of borrowings outstanding for the five years ending December 31, 2003
through 2007 are approximately $4.1 million, $1.4 million, $1.4 million, $1.5
million, $1.5 million and $3.9 million thereafter, respectively.
Under foreign lines of credit, excluding those related to specific project
financing, the Company had approximately $8.4 million available for borrowing at
interest rates ranging from 5.4% to 9.0% at December 31, 2002. The Company had
outstanding borrowings of $2.9 million and $7.7 million against these lines of
credit at December 31, 2002 and 2001, respectively.
The Company has arranged lines of credit totaling $10.0 million for its
controlled affiliate in Barbados to provide project financing for a desalination
plant at LIBOR plus 2.0% (3.4% at December 31, 2002) for its $6.4 million line,
at a fixed rate of 8.0% for its $2.7 million line and at a fixed rate of 8.75%
for its $0.9 million line. These lines of credit are payable in equal quarterly
installments over a ten-year period which began in 2000. The controlled
affiliate had outstanding borrowings of $7.4 million and $8.3 million against
these lines of credit at December 31, 2002 and 2001, respectively.
The Company utilizes other short-term bank loans to finance working capital
requirements for certain business units. These loan and note agreements contain
certain financial covenants relating to working capital, cash flow, capital
expenditures and consolidated tangible net worth. The weighted-average interest
rate on all borrowings was 6% at both December 31, 2002 and 2001.
Note 10. Income Taxes
The components of domestic and foreign income before income taxes and minority interest were as follows:
Dollars in Thousands 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
U.S. $ 633 $ 4,269 $(16,974)
Non-U.S. 10,036 81,934 14,750
- -------------------------------------------------------------------------------------------------------
Income (loss) before income tax
expense and minority interest $ 10,669 $ 86,203 $(2,224)
=======================================================================================================
Income tax (expense) benefit consisted of the following:
Dollars in Thousands 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
Federal $ (29) $(7,963) $ 3,264
Foreign (3,187) (37,246) (5,304)
State (233) (2,720) 704
- -------------------------------------------------------------------------------------------------------
Current provision (3,449) (47,929) (1,336)
- -------------------------------------------------------------------------------------------------------
Federal (1,071) (605) 555
Foreign (156) 6,316 1,546
State (232) (21) (9)
- -------------------------------------------------------------------------------------------------------
Deferred (provision) benefit (1,459) 5,690 2,092
- -------------------------------------------------------------------------------------------------------
Income tax (expense) benefit $(4,908) $(42,239) $ 756
=======================================================================================================
-58-
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 2002, the
tax effects of the temporary differences were:
Deferred
Deferred Tax
Dollars in Thousands Tax Assets Liabilities
- -----------------------------------------------------------------------------
Depreciation $ - $12,628
Amortization - 1,670
Inventory valuation 1,382 -
Bad debt reserves 1,384 -
Legal 970 -
Accrued commissions 558 -
Profit on sales to foreign subsidiaries 726 -
Insurance accruals 580 -
U.S. tax on unrepatriated earnings - 13,358
Alternative minimum tax credits 3,370 -
Foreign withholding taxes on
undistributed earnings - 1,594
Foreign deferred taxes 4,881 1,160
Tax effect of currency translation loss 5,111 -
Net operating loss carryforwards 4,209 -
Miscellaneous 9,922 5,674
- -----------------------------------------------------------------------------
33,093 36,084
Valuation allowance for deferred tax assets (3,739) -
- -----------------------------------------------------------------------------
Deferred income taxes $29,354 $36,084
=============================================================================
The United States statutory corporate tax rate is reconciled to the Company's
effective tax rate as follows:
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
U.S. Federal statutory rate 35.0% 35.0% 34.0%
Foreign sales corporation/ETI exclusion (3.6) (0.7) (33.9)
Goodwill - 6.6 34.3
State income taxes, net of
federal tax benefit 3.6 2.1 (20.5)
Foreign rate differential (8.4) (3.6) (54.0)
U.S. tax on non-permanently reinvested
foreign earnings 5.2 4.3 61.2
Net change in valuation allowance 10.9 5.3 -
Non-deductible charges 1.4 0.2 13.9
Other, net 1.9 (0.2) (1.0)
- ------------------------------------------------------------------------------------------------------------
Effective tax rate 46.0% 49.0% 34.0%
============================================================================================================
At December 31, 2002, the Company had unused tax loss carryforwards of $13.8
million which expire beginning in 2010. Because of the uncertainty of the
realization of the tax benefits of losses incurred in certain foreign
jurisdictions, the Company has established $3.7 million as a valuation allowance
at December 31, 2002. $2.1 million of deferred tax benefit related to the
minimum pension liability adjustment recorded in other comprehensive income has
been included in other assets at December 31, 2002. Additionally, $0.7 million
of current deferred tax liability has been included in income taxes payable at
December 31, 2002.
The Company has elected not to provide tax on certain undistributed earnings of
its foreign subsidiaries which it considers to be permanently reinvested. The
cumulative amount of such unprovided taxes was approximately $9.7 million, $8.2
million and $5.1 million as of December 31, 2002, 2001 and 2000, respectively.
-59-
Note 11. Stockholders' Equity
Stock Option Plans
Under the Company's1997 Stock Incentive Plan ("1997 Plan"), incentive stock
options, non-qualified stock options, and long-term performance awards may be
awarded to officers and other key employees and to consultants. The 1997 Plan
contains an automatic addition provision under which a number of shares equal to
two percent (2%) of the Company's outstanding stock were added to the 1997 Plan
at the end of each of the four fiscal year-ends following adoption of the 1997
Plan, commencing on December 31, 1997 and ending December 31, 2000. At December
31, 2002 and 2001, there were 775,323 and 637,023 shares, respectively, reserved
for issuance of additional options under the 1997 Plan after giving effect to
the automatic addition provision. Options granted under the 1997 Plan have a
term of 10 years and vest over a five-year period, except that options become
fully vested if an option holder retires after reaching age 65. Only
non-qualified stock options have been granted under the 1997 Plan.
Under the Company's 1986 Stock Option Plan for Non-Employee Directors ("1986
Plan"), which has now expired, options were granted at a price not less than the
fair market value of the stock at the date of grant. The options become fully
exercisable after a six-month period, are exercisable only during certain
"window" periods, and have a term of ten years and one day. As of December 31,
2002 and 2001, 0 and 29,000 shares, respectively, were reserved for issuance of
additional options under the 1986 Plan. The 1986 Plan expired effective December
31, 2002.
On February 25, 2003 the Company adopted the 2003 Non-Employee Directors Stock
Option Plan ("2003 Plan") to replace the expired 1986 Plan, subject to the
approval of the stockholders at the 2003 annual meeting. Under the 2003 Plan,
options will be granted at a price not less than the fair market value of the
stock at the date of grant. The options become fully exercisable after a six
month period and have a term of ten years. Subject to stockholder approval, a
total of 200,000 shares have been reserved for issuance under the 2003 Plan.
The Company has adopted a restricted stock plan ("1994 Plan") under which shares
of common stock may be granted to officers and other key employees of the
Company. Restrictions on the sale of such common stock typically lapse over a
five-year vesting period. No shares were granted under the 1994 Plan in 2002 or
2001. In 2000, 17,937 shares were granted under the restricted stock plan to an
executive officer. The executive officer subsequently terminated his employment
with the Company in 2000, and the restricted stock was forfeited pursuant to the
1994 Plan. As of December 31, 2002, a total of 280,178 shares remain reserved
for issuance under the 1994 Plan.
On August 19, 1998, the Company adopted the 1998 Non-Employee Directors' Fee
Plan ("Fee Plan"). The Fee Plan permits non-employee directors to elect to
receive payment of their annual retainer fee in common stock instead of cash.
The valuation of the common stock is based on the last reported sales price of
the common stock on the New York Stock Exchange on the trading date next
preceding the date of the Board meeting at which payment will be made. Annual
retainer fees are paid in two equal installments during the year. A total of
83,423 shares were reserved for issuance under the Fee Plan as of December 31,
2002.
A summary of the status of the Company's stock option plans as of December 31,
2002, 2001 and 2000 and changes during the years ending on those dates is
presented below:
2002 2001 2000
- ----------------------------------------------------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options in Thousands Options Price Options Price Options Price
- ----------------------------------------------------------------- ------------------------ ------------------------
Outstanding at end of prior year 2,889 $ 28.77 3,226 $ 28.38 2,734 $ 30.04
Granted 790 21.54 65 26.94 941 22.28
Exercised (73) 22.91 (229) 21.84 (163) 16.74
Canceled (103) 29.87 (173) 30.22 (286) 30.70
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at end of current year 3,503 $ 27.21 2,889 $ 28.77 3,226 $ 28.38
Options exercisable at year-end 2,085 $ 30.24 1,873 $ 30.88 1,835 $ 30.86
-60-
The weighted average fair value of options granted were $9.95, $11.32 and $9.65
per option during 2002, 2001 and 2000, respectively.
The following table summarizes the information about stock options outstanding
at December 31, 2002:
Options in Thousands Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contract Exercise Number Exercise
Exercise Prices Outstanding Years Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------
$19.75-$23.74 1,695 7.3 $21.24 525 $20.88
$24.24-$26.50 364 3.0 24.51 341 $24.45
$27.06-$27.88 61 4.6 27.56 35 $27.55
$28.00-$29.88 777 5.8 29.48 601 $29.45
$30.00-$33.81 44 7.6 31.98 21 $32.93
$42.38-$48.18 562 3.8 43.43 562 $43.43
- ---------------------------------------------------------------------------------------------------------
$19.75-$48.18 3,503 5.9 $27.21 2,085 $30.24
Other Plans
The Company has a Section 401(k) stock savings plan under which 150,000 shares
have been registered with the Securities and Exchange Commission for purchase on
behalf of employees. Shares are normally acquired for the plan in the open
market. Through December 31, 2002, no shares had been issued under the plan.
The Company has adopted a Renewed Stockholder Rights Plan designed to protect
stockholders against abusive takeover tactics. Each share of common stock now
carries one right. Each right entitles the holder to purchase from the Company
one share of common stock (or in certain circumstances, to receive cash,
property or other securities of the Company) at a purchase price of $175 subject
to adjustment. In certain circumstances, rights become exercisable for common
stock (or a combination of cash, property or other securities of the Company)
worth twice the exercise price of the right. The rights are not exercisable
until the occurrence of certain events as defined in the Renewed Stockholder
Rights Plan. The rights may be redeemed by the Company at $.01 per right at any
time unless certain events occur. Unless redeemed earlier, the rights, which
have no voting power, expire on August 19, 2007.
Note 12. Earnings Per Share Calculations (EPS)
Dollars and shares in thousands,
Except per share amounts For the Year Ended 2002 For the Year Ended 2001 For the Year Ended 2000
- --------------------------------------------------------------- ------------------------------- -----------------------------
Net Per Share Net Per Share Net Per Share
Income Shares Amount Income Shares Amount Loss Shares Amount
------------------------------- ------------------------------- -----------------------------
Basic EPS
Income (loss) available to
common stockholders $ 4,792 17,541 $ 0.27 $ 44,701 17,106 $ 2.61 $ (1,870) 16,243 $ (0.12)
Effect of dilutive stock options - 130 - - 140 (0.02) - - -
- --------------------------------------------------------------- ------------------------------- -----------------------------
Diluted EPS $ 4,792 17,671 $ 0.27 $ 44,701 17,246 $ 2.59 $ (1,870) 16,243 $ (0.12)
=============================================================== =============================== =============================
The effect of dilutive stock options excludes those stock options for which the
impact would have been antidilutive based on the exercise price of the options.
The number of options that were antidilutive at December 31, 2002, 2001 and 2000
were 1,818,000, 608,750 and 1,649,000, respectively. The number of options that
were antidilutive at December 31, 2000 include 175,000 shares whose dilutive
effect was included as a result of the Company's net loss.
-61-
Note 13. Operating Leases
The Company leases equipment, primarily for industrial water purification and,
until December 31, 2001, bottled water coolers to customers through operating
leases. The original cost of this equipment was $114.7 million and $95.3 million
at December 31, 2002 and 2001, respectively. The accumulated depreciation for
such equipment was $51.4 million and $42.7 million at December 31, 2002 and
2001, respectively. The bottled water coolers were sold on December 31, 2001 as
part of the sale of the Company's bottled water business.
At December 31, 2002, future minimum rentals receivable under noncancelable
operating leases in the years 2003 through 2007 and later were approximately
$32.9 million, $28.8 million, $26.4 million, $25.7 million, $23.9 million and
$123.4 million, respectively.
The Company leases facilities and personal property under various operating
leases. Future minimum payments due under lease arrangements are as follows:
$4.0 million in 2003, $3.7 million in 2004, $2.7 million in 2005, $1.7 million
in 2006 and $3.5 million in 2007 and later. Rent expense under these leases was
approximately $4.2 million, $7.0 million and $5.7 million for 2002, 2001 and
2000, respectively.
Note 14. Profit-Sharing and Pension Plans
The Company has a contributory profit-sharing plan (defined contribution plan)
which covers employees of the Company who are members of the Fabricated Products
Group of the Bridgeville division. The Company contributions to the defined
contribution plan are made from the group's pre-tax profits, may vary from 8% to
15% of participants' compensation, and are allocated to participants' accounts
in proportion to each participant's respective compensation. Company
contributions were $446,000, $375,000 and $300,000 in 2002, 2001 and 2000,
respectively.
The Company also has a contributory defined benefit pension plan ("Retirement
Plan") for all other domestic employees. Benefits are based on years of service
and the employee's average compensation. The Company's funding policy is to
contribute annually an amount that can be deducted for federal income tax
purposes. The plan's assets are comprised of money market funds, equity funds,
short-term bonds and intermediate-term bonds. In 2002, the Board of Directors
approved a "prior period update" to January 1, 1996, so that the base monthly
salary for participants in the Retirement Plan at each January 1 prior to
January 1, 1996 is deemed to be the same as it was on January 1, 1996.
The following table sets forth the defined benefit plan's funded status and
amounts recognized in the Company's balance sheets at December 31, 2002 and
2001:
-62-
Dollars in Thousands 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation as of prior year-end $ 19,494 $15,799
Service cost 1,446 1,285
Interest cost 1,397 1,206
Assumption changes - (205)
Actuarial loss 1,868 1,500
Expenses paid 822 660
Benefits paid (1,275) (751)
- ---------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ 23,752 $19,494
=====================================================================================================================
Change in Plan Assets:
Fair value of plan assets as of prior year-end $ 14,297 $14,923
Actual return on plan assets (124) 248
Company contributions 2,890 -
Expenses paid (123) (123)
Benefits paid (1,275) (751)
- ---------------------------------------------------------------------------------------------------------------------
Fair value of plan assets $ 15,665 $14,297
=====================================================================================================================
Funded Status:
Funded status as of year-end $ (8,087) $ (5,197)
Unrecognized transition asset (44) (97)
Unrecognized prior service cost 266 299
Unrecognized net actuarial loss 9,773 5,822
Intangible asset (267) (300)
Accumulated other comprehensive loss (5,782) (2,617)
- ---------------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (4,141) $ (2,090)
=====================================================================================================================
The Company determined the defined benefit plan's funded status and amounts
recognized in the Company's balance sheet and the expense of the defined benefit
plan using the following assumptions: expected return on plan assets of 7.0% at
December 31, 2002 and 9.0% at December 31, 2001 and 2000; rate of compensation
increase of 5.0% at December 31, 2002, 2001 and 2000; and a discount rate of
6.50%, 7.00%, and 7.50% at December 31, 2002, 2001 and 2000, respectively.
Net periodic benefit cost consisted of the following:
Dollars in Thousands 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost:
Service cost $ 1,446 $ 1,285 $1,055
Interest cost 1,397 1,206 1,107
Expected return on plan assets (1,372) (1,309) (1,445)
Amortization of transition asset (53) (53) (53)
Amortization of prior service cost 33 37 37
Recognized net actuarial loss 356 141 -
- ---------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,807 $ 1,307 $ 701
=====================================================================================================================
The Ionics Section 401(k) Stock Savings Plan is available to substantially all
U.S. employees of the Company. Employees may contribute from 1% to 12% of
compensation subject to certain limits. The Company matches 50% of employee
-63-
contributions allocated to the Company's common stock up to 6% of their salary.
The Company recognized expense of $659,000, $725,000 and $716,000 in 2002, 2001
and 2000, respectively, under this plan.
In 1996, the Company's Board of Directors adopted a Supplemental Executive
Retirement Plan for officers and key employees of the Company ("SERP"). The
purpose of the SERP is to permit officers and other key employees whose base
salary exceeds the maximum pay upon which retirement benefits may be accrued in
any year to accrue retirement benefits on base salary in excess of that amount,
equivalent to the benefits that would have been accrued under the Retirement
Plan if base salary levels over that amount could be taken into account in
calculating benefits under the Retirement Plan. The Company recognized expense
of $98,000 and $50,000 in 2002 and 2000, respectively. No expense was recognized
in 2001. The liability accrued as of December 31, 2002 and 2001 related to the
plan was $505,000 and $406,000, respectively. The SERP is administered by the
Compensation Committee of the Board of Directors.
The Company generally does not provide post-retirement health care benefits to
its employees or any other post-retirement benefits other than those described
above.
Note 15. Financial Instruments
Off-Balance-Sheet Risk
On December 31, 2002, the Company entered into a series of U.S. dollar/euro
forward contracts with the intent of offsetting the foreign exchange risk
associated with forecasted cash flows related to an ongoing project. Because the
contracts were executed on the last day of the year, the fair market value of
the contracts is zero. In future periods, the fair market value of the contracts
will be recorded in either the current assets or current liabilities section of
the Consolidated Balance Sheets. End of period changes in the market value of
the contracts will be recorded as a component of other comprehensive income in
the "Stockholders' Equity" section of the Consolidated Balance Sheets.
In 2002, the Company also entered into a foreign exchange contract to hedge the
balance sheet exposure related to an intercompany loan. The fair market value of
the contract, which was immaterial, was recorded in the "Other current assets"
section of the Consolidated Balance Sheets. The end of period change in the fair
market value of the contract which was immaterial, was recorded in income.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
investments, trade accounts receivable and notes receivable. The credit risk of
cash equivalents and investments is low as the funds are primarily invested in
money market investments and in Spanish Government securities. The Company's
concentrations of credit risk with respect to trade accounts receivable and
notes receivable is considered low. The Company's customer base is spread across
many different industries and geographies, and the Company obtains guarantees or
letters of credit for many of its foreign orders.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, investments, accounts payable and
accrued expenses closely approximate their fair values as these items have
relatively short maturities and are highly liquid. Based on market information,
the carrying amounts of notes receivable and debt approximate their fair values.
Investments in Marketable Securities
Realized gains and losses from the sale of debt and equity securities during
fiscal 2002 and 2001 were not significant.
Long-term investments, maturing in 2004 and 2005, which the Company intends to
hold to maturity have been recorded at a net cost of $1.5 million and $2.1
million at December 31, 2002 and 2001, respectively. At December 31, 2002 and
2001, the Company also had short-term investments of $1.0 million and $21,000,
respectively, which the Company intends to hold to maturity. The cost of these
investments approximates fair value.
-64-
Note 16. Acquisitions and Divestitures
Acquisitions
In June 2002, the Company's Australian subsidiary acquired the business and
assets of Rudd Brothers, an Australian wholesale and retail distributor of
chemical and cleaning products, for approximately $0.6 million in cash. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets acquired based
on their estimated fair values at the date of acquisition. The assets acquired
consist primarily of property, plant and equipment, inventory, and certain
intangibles. The results of operations of Rudd Brothers have been included in
the Company's statements of operations from the date of acquisition. Pro forma
results of operations have not been presented, as the effect of this acquisition
on the Company's consolidated results of operations was not material.
In July 2002, the Company acquired the business and assets of the EnChem
division of Microbar Incorporated. The purchase price was $0.4 million in cash
plus additional contingent payments to be made over a five-year period based on
the profitability of the acquired business. This acquisition has been accounted
for under the purchase method of accounting and, accordingly, the purchase price
has been allocated to the assets acquired based on their estimated fair values
at the date of acquisition. The assets acquired consist primarily of patents and
other intellectual property, inventory and equipment, and are used for
wastewater treatment in the semiconductor industry. The results of operations of
the EnChem division have been included in the Company's statements of operations
from the date of acquisition. Pro forma results of operations have not been
presented, as the effect of this acquisition on the Company's consolidated
results of operations was not material.
Divestitures
In May 2002, the Company completed its planned divestiture of its 55% equity
interest in a Malaysian affiliate, which had previously been treated as "held
for sale" and included in "Other current assets" at December 31, 2001. Included
in the Company's first half results were revenues of $4.2 million and a $0.4
million pre-tax loss resulting from Malaysian operations. For the second quarter
of 2002, revenues totaled $1.6 million and pre-tax profit amounted to $0.2
million, including a gain of approximately $0.7 million on the sale of the
Company's equity interest in the Malaysian subsidiary, which is included in
"Selling, general and administrative" expenses.
On December 31, 2001, the Company completed the sale of its Aqua Cool Pure
Bottled Water business operations in the United States, the United Kingdom and
France to affiliates of Perrier-Vittel, S.A., a subsidiary of Nestle, S.A. for
approximately $220 million, of which $10 million was placed in escrow pursuant
to the terms of the divestiture agreement. The Aqua Cool Business had sales of
$76.2 million in 2001 and $67.2 million in 2000, losses before taxes and
interest of $0.6 million in 2001 and $0.9 million in 2000. The Company's
Consolidated Financial Statements and accompanying Notes reflect the operating
results of the Aqua Cool Business as a continuing operation in the Consumer
Water Group through December 31, 2001. The amount of the purchase price was
subject to final adjustment based on the number of customers and working capital
levels as defined in the divestiture agreement. Including reserves established
for any purchase price adjustments and direct and incremental costs, the Company
recorded a pre-tax gain on the sale amounting to $102.8 million in 2001. As a
result of final purchase price adjustments based on the number of customers and
working capital levels, and the resolution of certain claims made by Nestle, the
Company and Nestle reached final agreement on a purchase price of approximately
$207.0 million in the first quarter of 2003 and the $10 million held in escrow
and approximately $2.9 million in cash from the Company were delivered to Nestle
effective as of March 31, 2003. As a result of such adjustments, the Company
realized an additional pre-tax gain of $8.2 million in 2002.
Note 17. Segment Information
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Since 1998, the Company has been reporting
four "business group" segments corresponding to a "business group" structure put
into place in the latter part of 1998. Starting in 2002, as part of the matrix
organization, the lease of trailers for the production of ultrapure water is
included in the results of the Ultrapure Water Group, rather than the Equipment
Business Group, where such results had been included through 2001. In addition,
the Company's non-consumer bleach-based chemical supply business, which through
2001 had been included in the results of the Equipment Business Group, is
included in the results of the Ultrapure Water Group starting in 2002. The
-65-
discussion and financial results contained in this Annual Report on Form 10-K
reflect these changes for all periods presented. These segments are summarized
as follows:
Equipment Business Group - The EBG engages in the following activities:
o Manufacture and sale of water purification and treatment equipment and
processes from components to turnkey plants, including:
- membrane-based equipment for seawater or brackish water desalination;
- membrane-based equipment for surface water treatment;
- equipment for wastewater treatment, including membrane-based equipment;
brine concentrators;
- crystallizers and evaporators (zero liquid discharge (ZLD) equipment);
and traditional wastewater treatment equipment.
o Supply of water for drinking and industrial use through ownership and/or
operation of desalination or other water treatment facilities.
o Fabrication of specialty metal components for industrial and
defense-related applications.
o Provision of food processing services through oversight for customers of
whey-processing activities using the Company's membrane-based systems.
Ultrapure Water Group - The UWG engages in the following activities:
o Manufacture and sale of equipment, from components to turnkey systems,
utilizing various membrane-based and other technologies for the production
of ultrapure (very highly purified) water to customers in various
industries including microelectronics, pharmaceuticals and power
generation.
o Production and sale of ultrapure and high quality process water through
ownership and/or operation of ultrapure water facilities.
o Production of sodium hypochlorite and related chlor-alkali chemicals for
industrial, municipal, commercial and other non-consumer applications
(prior to 2002, this activity was part of EBG).
o Leasing of trailer-based ultrapure water equipment (prior to 2002, this
activity was part of the EBG).
o Manufacture and sale of ozone-generation equipment.
o Regeneration of ion-exchange resin for industrial customers.
Consumer Water Group - Until December 31, 2001, the largest business group
within the CWG was the Company's Aqua Cool Pure Bottled Water division, which
engaged in the U.S., U.K. and France in the production of purified drinking
water and water deliveries in five-gallon bottles to homes and offices. This
business was sold on December 31, 2001 to subsidiaries of Perrier-Vittel, S.A.
The Company retains equity ownership interests in certain joint ventures in the
bottled water business in Saudi Arabia, Kuwait and Bahrain. The CWG continues to
engage in the following activities:
o Manufacture and sale of "point-of-entry" home water treatment equipment,
including ion-exchange water conditioners to "soften" hard water and
bacteriostatic treatment equipment, and related chemicals and media for
filtration and treatment.
o Manufacture and sale of "point-of-use" over- and under-the-sink water
purifiers.
o Provision of consumer finance services in connection with the sale of home
water treatment equipment.
o Manufacture, utilizing the Company's proprietary Cloromat(R) membrane-based
technology, and sale of bleach-based products for the consumer market,
under private label and the Company's own brands.
-66-
o Production and sale of methanol-based automobile windshield wash solution.
Instrument Business Group - The IBG engages in the following activities:
o Manufacture and sale of laboratory and on-line instruments for the
measurement of impurities in water ranging in quality from ultrapure
process water to wastewater, including:
- total organic carbon (TOC) analyzers;
- on-line boron analyzers;
- instruments for the measurement of other water-borne contaminants,
including total carbon, sulfur, nitric oxide, and total oxygen demand,
and;
- instruments for the detection of thin layers of oil on water.
Geographic Areas
Revenues are reflected in the country from which the sales are made. Long-lived
assets include all long-term assets except for notes receivable. No foreign
country's revenues from sales to unaffiliated customers or long-lived assets
were material.
Included in the United States segment are export sales of approximately 11%, 19%
and 15% for 2002, 2001 and 2000, respectively. Including these U.S. export
sales, the percentages of total revenues attributable to activities outside the
U.S. were 40%, 44% and 42% in 2002, 2001 and 2000, respectively.
Additional information about the Company's business segments is set forth in the
following table:
Information about the Company's operations by geographic area follows:
United
Dollars in Thousands States International Total
- ---------------------------------------------------------------------------------------------
2002
Revenue - unaffiliated customers $206,478 $ 116,725 $323,203
Revenue - affiliated companies 6,263 5,905 12,168
--------------------------------------------------
Total Revenue 212,741 122,630 335,371
Long-lived assets 157,979 84,836 242,815
- ---------------------------------------------------------------------------------------------
2001
Revenue - unaffiliated customers $299,696 $ 145,817 $445,513
Revenue - affiliated companies 20,826 393 21,219
--------------------------------------------------
Total Revenue 320,522 146,210 466,732
Long-lived assets 145,789 85,523 231,312
- ---------------------------------------------------------------------------------------------
2000
Revenue - unaffiliated customers $303,347 $ 151,480 $454,827
Revenue - affiliated companies 19,724 - 19,724
--------------------------------------------------
Total Revenue 323,071 151,480 474,551
Long-lived assets 188,287 127,162 315,449
- ---------------------------------------------------------------------------------------------
No single country outside the United States contributed more than 10% in 2002,
2001 or 2000 of the Company's total revenues.
Additional information about the Company's business segments is set forth in the
following table:
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Equipment Ultrapure Consumer Instrument
Business Water Water Business
Dollars in Thousands Group Group Group Group Corporate Total
- -----------------------------------------------------------------------------------------------------------------------------
2002
Revenue - unaffiliated customers $ 154,378 $ 102,407 $ 38,677 $ 27,741 $ - $ 323,203
Revenue - affiliated companies 11,695 - 74 399 - 12,168
Inter-segment transfers 2,521 2,743 - 1,568 (6,832) -
Gross profit - unaffiliated 40,127 23,984 13,786 16,022 - 93,919
Gross profit - affiliated 967 - 37 199 - 1,203
Equity income (loss) 2,638 7 953 - (155) 3,443
Earnings (loss) before interest, tax, minority
interest, and gain on sale 4,731 (2,171) (4,375) 3,920 (1,844) 261
Interest income - - - - - 3,463
Interest expense - - - - - (1,215)
Income before income taxes, minority interest
and gain on sale - - - - - 2,509
Capital employed 201,900 125,103 57,252 27,716 39,986 451,957
Identifiable assets 297,948 139,383 106,328 30,729 11,007 585,395
Investments in affiliated companies 20,285 - 2,333 - - 22,618
Goodwill 11,623 7,633 944 - - 20,200
Other intangible assets 1,009 740 84 279 - 2,112
Depreciation and amortization 8,843 12,132 1,812 971 295 24,053
Capital expenditures 13,382 17,250 1,294 1,037 492 33,455
=============================================================================================================================
2001
Revenue - unaffiliated customers $ 161,565 $ 133,605 $ 123,748 $ 26,595 $ - $ 445,513
Revenue - affiliated companies 20,571 - 203 445 - 21,219
Inter-segment transfers 2,521 2,743 - 1,568 (6,832) -
Gross profit - unaffiliated 34,808 26,457 49,806 13,839 - 124,910
Gross profit - affiliated 217 - 102 223 - 542
Equity income (loss) 1,441 68 (57) - (56) 1,396
Earnings (loss) before interest, tax, minority
interest, and gain on sale 4,161 (5,490) (1,566) 942 (10,525) (12,478)
Interest income - - - - - 1,013
Interest expense - - - - - (5,166)
Loss before income taxes, minority interest
and gain on sale - - - - - (16,631)
Capital employed 190,319 130,154 63,493 31,062 32,708 447,736
Identifiable assets 289,045 126,943 49,453 25,641 118,433 609,515
Investments in affiliated companies 20,983 - 2,815 - - 23,798
Goodwill 11,360 7,054 623 - - 19,037
Other intangible assets 823 23 162 305 - 1,313
Depreciation and amortization 8,510 12,567 13,580 997 285 35,939
Capital expenditures 9,612 16,135 12,094 1,015 751 39,607
=============================================================================================================================
2000
Revenue - unaffiliated customers $ 162,060 $ 156,396 $ 107,953 $ 28,418 $ - $ 454,827
Revenue - affiliated companies 18,961 - 371 392 - 19,724
Inter-segment transfers 6,087 3,444 - 3,088 (12,619) -
Gross profit - unaffiliated 32,900 32,492 41,812 15,820 - 123,024
Gross profit - affiliated 970 - 186 196 - 1,352
Equity income (loss) 976 (20) 667 - - 1,623
Earnings (loss) before interest, tax and minority
interest 5,694 6,777 (874) 2,598 (12,796) 1,399
Interest income - - - - - 1,286
Interest expense - - - - - (4,909)
Loss before income taxes and minority interest - - - - - (2,224)
Capital employed 120,061 176,432 164,819 34,126 (52,621) 442,817
Identifiable assets 221,488 175,421 163,281 18,454 (11,141) 567,503
Investments in affiliated companies 15,394 44 2,872 - - 18,310
Goodwill 11,920 17,524 20,871 1,864 - 52,179
Other intangible assets 926 39 179 316 1,460
Depreciation and amortization 7,598 11,685 13,270 1,098 144 33,795
Capital expenditures 705 21,019 17,034 766 1,687 41,211
=============================================================================================================================
-68-
Note. 18. Selected Quarterly Financial Data as Restated (Unaudited)
Earnings Earnings Earnings Earnings
Dollars in Thousands Per Per Dollars in Thousands Per Per
Except Per Gross Net Basic Diluted Except Per Gross Net Basic Diluted
Share Amounts Revenues Profit Income Share Share Share Amounts Revenues Profit Income Share Share
- ---------------------------------------------------------------------------------------------------------------------------------
2002 2001
First Quarter $ 80,005 $ 22,790 $ 1,499 $ 0.09 $ 0.08 First Quarter $122,962 $ 35,839 $ 2,995 $ 0.18 $ 0.18
Second Quarter 79,497 24,568 1,245 0.07 0.07 Second Quarter 113,674 34,948 4,170 0.24 0.24
Third Quarter 86,787 22,888 359 0.02 0.02 Third Quarter 118,293 33,702 4,211 0.24 0.24
Fourth Quarter 89,082 24,876 1,689 0.10 0.10 Fourth Quarter 111,803 20,963 33,325 1.91 1.90
- ---------------------------------------------------------------------------------------------------------------------------------
$335,371 $ 95,122 $ 4,792 $ 0.27 $ 0.27 $466,732 $ 125,452$ 44,701 $ 2.61 $ 2.59
=================================================================================================================================
The Company's consolidated financial statements for the three months ended March
31, 2002 and June 30, 2002 and the six months ended June 30, 2002 were restated
primarily as a result of intercompany transactions including transactions
between the Company and its French subsidiary that were erroneously recorded at
the subsidiary level. The restatement resulted primarily from the French
subsidiary's failure to properly record intercompany adjustments necessary to
correct errors on its books, which became apparent to the Company's corporate
management during the preparation of the Company's consolidated financial
statements for the three- and nine-month periods ended September 30, 2002. These
adjustments primarily affected accounting entries related to revenues from sales
of spare parts and expenses related to project cost overruns, sales support
costs and severance costs. These adjustments, which increased the historical
pre-tax loss at the French subsidiary in the quarters ended March 31, 2002 and
June 30, 2002 and the forecast of the French subsidiary's pre-tax losses for the
year ended December 31, 2002, resulted in the Company's determination that it
was more likely than not that the Company would not fully realize future tax
benefits associated with the French subsidiary's net operating losses.
Accordingly, the Company's income tax expense and its effective annual tax rate
for the three months ended June 30, 2002 were increased. In addition, the
restatement reflected other adjustments that primarily consisted of corrections
to various otherwise immaterial accounting errors that were identified during
the preparation of the Company's consolidated financial statements for the
quarters ended March 31, 2002, June 30, 2002 and September 30, 2002. The
restatement did not materially impact any items on the Company's consolidated
balance sheets as of March 31, 2002 and June 30, 2002. The following table
presents a summary of the impact of the restatements on the Company's
consolidated statements of operations for the three months ended March 31, 2002
and the three and six months ended June 30, 2002.
(Amounts in thousands, except per share amounts)
Three months ended March 31, 2002
---------------------------------
As originally
reported As restated
--------------- ----------------
Revenues $ 80,341 $ 80,005
Costs and expenses 78,336 78,691
Income from operations 2,005 1,314
Income before income taxes
and minority interest 3,330 2,639
Income tax expense 1,132 876
Minority interest in earnings 261 264
Net income 1,937 1,499
Basic earnings per share $ 0.11 $ 0.09
Diluted earnings per share $ 0.11 $ 0.08
-69-
(Amounts in thousands, except per share amounts)
Three months ended June 30, 2002
--------------------------------
As originally
reported As restated
-------------- ----------------
Revenues $ 79,321 $ 79,497
Costs and expenses 77,303 78,068
Income from operations 2,018 1,429
Income before income taxes
and minority interest 3,292 2,703
Income tax expense 1,119 1,297
Minority interest in earnings 79 161
Net income 2,094 1,245
Basic earnings per share $ 0.12 $ 0.07
Diluted earnings per share $ 0.12 $ 0.07
Six months ended June 30, 2002
------------------------------
As originally
reported As restated
-------------- ----------------
Revenues $159,662 $ 159,502
Costs and expenses 155,639 156,759
Income from operations 4,023 2,743
Income before income taxes
and minority interest 6,622 5,342
Income tax expense 2,251 2,173
Minority interest in earnings 340 425
Net income 4,031 2,744
Basic earnings per share $ 0.23 $ 0.16
Diluted earnings per share $ 0.23 $ 0.15
-70-
IONICS, INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Additions
Balance at charged to due to
end of costs and acquired Balance at
prior year expenses businesses Deductions(a) end of year
---------------- ---------------- --------------- ---------------- ----------------
Allowance for doubtful
accounts receivable
and notes receivable:
Years ended:
December 31, 2002 $ 4,769,000 $ 4,641,000 $ - $ 2,625,000 $ 6,785,000
================ ================ =============== ================ ================
December 31, 2001 $ 5,250,000 $ 4,632,000 $ - $ 5,113,000 $ 4,769,000
================ ================ =============== ================ ================
December 31, 2000 $ 3,620,000 $ 4,605,000 $599,000 $ 3,574,000 $ 5,250,000
================ ================ =============== ================ ================
(a)Deductions result primarily from the write-off of accounts.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no disagreements with the Company's accountants on accounting and
financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information referenced by this item with respect to directors is hereby
incorporated by reference from the Company's definitive Proxy Statement for the
2003 Annual Meeting (which will be filed with the Securities and Exchange
Commission within 120 days of the close of the Company's fiscal year) under the
caption "Explanation of Agenda for the Meeting - Proposal 1. Election of
Directors." Information about compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference from the Company's definitive
Proxy Statement for the 2003 Annual Meeting (which will be filed with the
Securities and Exchange Commission within 120 days of the close of the Company's
fiscal year) under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance." The balance of the response to this item is contained in the
discussion entitled "Executive Officers of the Registrant" in Part I, Item 1 of
this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information referenced by this item is incorporated by reference from the
Company's definitive Proxy Statement for the 2003 Annual Meeting (which will be
filed with the Securities and Exchange Commission within 120 days of the close
of the Company's fiscal year) under the caption "Executive Compensation and
Other Information."
-71-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information referenced by this item is incorporated by reference from the
Company's definitive Proxy Statement for the 2003 Annual Meeting (which will be
filed with the Securities and Exchange Commission within 120 days of the close
of the Company's fiscal year) under the captions "Equity Compensation Plan
Information" and "Security Ownership of Certain Beneficial Owners and
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information referenced by this item is incorporated by reference from the
Company's definitive Proxy Statement for the 2003 Annual Meeting (which will be
filed with the Securities and Exchange Commission within 120 days of the close
of the Company's fiscal year) under Footnote 3 to the "Summary Compensation
Table," under the caption "Executive Compensation and Other Information," and
under the caption "Compensation Committee Interlocks and Insider Participation."
ITEM 14. CONTROLS AND PROCEDURES
As part of the Company's continuing efforts to ensure that information required
to be disclosed by the Company in its Securities and Exchange Commission filings
is appropriately accumulated and disseminated to allow timely decisions
regarding required disclosure, the Company has been taking various actions to
strengthen its system of internal controls and disclosure controls and
procedures. Such actions were also taken to enhance the processes by which the
Company manages its various divisions and subsidiaries, because managing a large
number of relatively small, locally managed businesses around the world presents
significant challenges.
Prior to the evaluation of the Company's disclosure controls and procedures made
in connection with the filing of its Quarterly Report on Form 10-Q for the
periods ended September 30, 2002, the Company made changes in its
internal controls and took other actions designed to enhance the
Company's internal controls, which consisted of the following:
o the hiring of new personnel including, two new segment controllers in April
and July of 2002, three new divisional controllers in May and September of
2002, a corporate director of accounting in July 2002, and a new
consolidation accountant in September 2002, to enhance the quality of its
accounting capabilities;
o the replacement of the senior operating executive at the Company's French
subsidiary and the reassignment of much of the operational responsibility
for that subsidiary to the Company's Italian subsidiary;
o the implementation of a new financial consolidation software package
(which became operational in September 2002);
o the implementation of a centralized bid and proposal review and approval
process at the beginning of 2002;
o the expansion of the internal audit function through the use of outside
resources beginning in March 2002;
o the formalization of certain accounting and information technology policies
and procedures at various times throughout the year;
o the hiring of a Director of Project Management in October 2002 to oversee
project-related procedures and to train project managers at locations
to enable them to better comply with Company goals, policies and
procedures; and
o the institution of procedures requiring written quarterly certifications
and representations from the head of each business group and the local
controller of each business location.
Since that evaluation in November 2002, the Company has made additional changes
in its internal controls and taken other actions designed to enhance
the Company's internal controls, which consisted of the following:
o the formation of a disclosure committee to oversee the effectiveness of the
Company's disclosure controls and procedures;
o in furtherance of the centralized bid and proposal review and approval
process, the establishment of formal, systematic procedures for reviewing
all major commercial projects being undertaken by the Company, including
monthly participation by senior management;
o the finalization of a project database to facilitate the tracking and
analysis of project performance throughout the Company in December 2002;
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o the hiring of a senior financial manager into a newly created position as
European Controller in December 2002, who is responsible for providing
financial oversight and control for the Equipment Business Group's European
operations; and
o the conduct of a conference, and other educational activities, for the
Company's segment and divisional controllers and corporate accounting
staff, which included programs regarding, among other topics, inter-company
transactions, key policies under U.S. generally accepted accounting
principles (e.g., SAB 101, SOP 81-1), the Sarbanes-Oxley Act of 2002,
internal controls, U.S. regulation of international transactions, and key
responsibilities of the local controllers.
In connection with the audit of its financial statements for 2002, the Company
was advised by its independent auditor that certain of its internal controls had
deficiencies and material control weaknesses. Consequently, and with the goal of
further improving the quality and timeliness of the information available to
management, the Company is continuing to implement measures designed to address
those deficiencies and weaknesses as follows:
o to evaluate and strengthen its financial and accounting staff and their
knowledge and understanding of key policies under U.S. generally accepted
accounting principles and of their responsibilities;
o to improve monitoring controls to assure the prevention or detection of
material accounting errors on a timely basis;
o to reduce the time necessary to collect and report financial and operating
data by improving the timing and accuracy of forecasting and emphasizing
more frequent reviews of the Company's balance sheets and reconciliation
of intercompany balances;
o to continue to update its accounting policies and procedures.
In March 2002, the Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's "disclosure controls and procedures." The SEC defines "disclosure
controls and procedures" as a company's controls and other procedures that are
designed to ensure that information required to be disclosed by the company in
the reports it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Based on their evaluation of the Company's
disclosure controls and procedures, the Company's Chief Executive Officer
(principal executive officer) and Chief Financial Officer (principal financial
officer) concluded that the Company's disclosure controls and procedures were
substantially effective for these purposes as of the date of the evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Index to Financial Statements and Financial Statement Schedule on
page 37.
2. Financial Statement Schedule
See Index to Financial Statements and Financial Statement Schedule on
page 37. All other Financial Statement Schedules have been omitted
because they are either not applicable or the required information is
included in the Consolidated Financial Statements or notes thereto.
-73-
3. Exhibits
Exhibit No. Description
----------- -----------
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 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(a) 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 May 2, 2000 *
(filed as Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000).
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
26, 2002 (filed as Exhibit 10.2 to the
Company's Annual Report on Form 10-K for
the year ended December 31, 2001).
-74-
10.3 1997 Stock Incentive Plan, as amended *
through May 8, 2002 (filed as Exhibit
10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March
31, 2002).
10.4 Second Amendment and Waiver to Third *
Amended and Restated Revolving Credit
Agreement dated as of March 28, 2002
between the Company and Fleet National
Bank (filed as Exhibit 10.3 to the
Company's Annual Report on Form 10-K for
the year ended December 31, 2001).
10.4(1) First Amendment and Waiver to Third *
Amended and Restated Revolving Credit
Agreement dated as of December 21, 2001
by and among the Company, Fleet National
Bank (as agent and lender), Bank
America, N.A., The Chase Manhattan Bank
and Mellon Bank, N.A. (filed as Exhibit
10.3(1) to the Company's Annual Report
on Form 10-K for the year ended December
31, 2001).
10.5 Third Amended and Restated Credit *
Agreement dated as of June 29, 2001,
among the Company, Fleet National Bank
(as agent and lender), Bank of America,
N.A., The Chase Manhattan Bank and
Mellon Bank, N.A. (filed as Exhibit 4.1
to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended
June 30, 2001).
10.6 Global Amendment and Affirmation *
Agreement dated as of June 29, 2001,
among the Company, Fleet National Bank
and certain subsidiaries of the Company
(filed as Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001).
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 Master Agreement dated as of November *
30, 2001 by and between the Company
and The Perrier Group of America, Inc.
(filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated January
15, 2002).
10.9 Form of Employee Retention Agreement *
dated February 24, 1998 between the
Company and certain officers of the
Company and its subsidiaries (filed as
Exhibit 10.9 to the Company's Annual
Report on Form 10-K dated December 31,
1997).
10.10 Ionics, Incorporated Supplemental *
Executive Retirement Plan effective as
of January 1, 1996 (filed as Exhibit
10.10 to the Company's Annual Report
on Form 10-K dated December 31, 1997).
10.11 Shareholders' Agreement dated April 3, *
2001 between the Company and Mohammed
Abdulmohsin Al-Kharafi & Sons (filed as
Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly
period ended March 31, 2001).
-75-
10.12 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).
10.13 Shareholders' Agreement dated as of May *
12, 2000, by and among the Company,
Hafeez Karamath Engineering Services
Limited, and Desalination Company of
Trinidad and Tobago Ltd., as amended on
June 16, 2000 (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form
10-Q for the quarterly period ended June
30, 2000).
10.14 Loan Agreement dated as of October 25, *
2000 between the Company and Hafeez
Karamath Engineering Services Limited
(filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year
ended December 31, 2000).
21.0 Subsidiaries of the Registrant.
23.0 Consents
23.1 Consent of PricewaterhouseCoopers LLP
24.0 Power of Attorney.
-------------------------------
*Incorporated herein by reference
(b) Reports on Form 8-K
One report on Form 8-K was filed by the Company with the Securities and
Exchange Commission (Commission) during the three-month period ended
December 31, 2002. This report, filed on November 14, 2002, reported
under Item 9 the submission to the Securities and Exchange Commission
of the Certifications signed by the Chief Executive Officer and by the
Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to
the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2002 filed on November 14, 2002.
-76-
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 31, 2003
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 31, 2003 By: /s/Arthur L. Goldstein
----------------------
Arthur L. Goldstein
Chairman of the Board
President and Chief Executive Officer
(principal executive officer) and Director
Date: March 31, 2003 By: /s/Daniel M. Kuzmak
-------------------
Daniel M. Kuzmak
Vice President and
Chief Financial Officer
(principal financial officer)
Date: March 31, 2003 By: /s/Anthony Di Paola
-------------------
Anthony Di Paola
Vice President and Corporate Controller
(principal accounting officer)
-77-
Date: March 31, 2003 By: /s/Douglas R. Brown
---------------------------
Douglas R. Brown, Director
Date: March 31, 2003 By: /s/Stephen L. Brown
---------------------------
Stephen L. Brown, Director
Date: March 31, 2003 By: /s/Arnaud de Vitry d'Avaucourt
-------------------------------
Arnaud de Vitry d'Avaucourt, Director
Date: March 31, 2003 By: /s/Kathleen F. Feldstein
------------------------------
Kathleen F. Feldstein, Director
Date: March 31, 2003 By: /s/William E. Katz
------------------------------
William E. Katz, Director
Date: March 31, 2003 By: /s/William K. Reilly
-------------------------------
William K. Reilly, Director
Date: March 31, 2003 By: /s/John J. Shields
--------------------------------
John J. Shields, Director
Date: March 31, 2003 By: /s/Daniel I. C. Wang
--------------------------------
Daniel I. C. Wang, Director
Date: March 31, 2003 By: /s/Mark S. Wrighton
---------------------------------
Mark S. Wrighton, Director
Date: March 31, 2003 By: /s/Allen S. Wyett
----------------------------------
Allen S. Wyett, Director
-78-
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Arthur L. Goldstein, certify that:
1. I have reviewed this annual report on Form 10-K of Ionics, Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls, and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Arthur L. Goldstein
-----------------------
Arthur L. Goldstein
Chairman and
Chief Executive Officer
March 31, 2003
-79-
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Daniel M. Kuzmak, certify that:
1. I have reviewed this annual report on Form 10-K of Ionics, Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls, and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Daniel M. Kuzmak
--------------------
Daniel M. Kuzmak
Vice President, Finance and
Chief Financial Officer
March 31, 2003
-80-
Exhibits
Exhibit No. Description
----------- -----------
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 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(a) 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 May 2, 2000 *
(filed as Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000).
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
26, 2002 (filed as Exhibit 10.2 to the
Company's Annual Report on Form 10-K for
the year ended December 31, 2001).
-81-
10.3 1997 Stock Incentive Plan, as amended *
through May 8, 2002 (filed as Exhibit
10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March
31, 2002).
10.4 Second Amendment and Waiver to Third *
Amended and Restated Revolving Credit
Agreement dated as of March 28, 2002
between the Company and Fleet National
Bank (filed as Exhibit 10.3 to the
Company's Annual Report on Form 10-K for
the year ended December 31, 2001).
10.4(1) First Amendment and Waiver to Third *
Amended and Restated Revolving Credit
Agreement dated as of December 21, 2001
by and among the Company, Fleet National
Bank (as agent and lender), Bank
America, N.A., The Chase Manhattan Bank
and Mellon Bank, N.A. (filed as Exhibit
10.3(1) to the Company's Annual Report
on Form 10-K for the year ended December
31, 2001).
10.5 Third Amended and Restated Credit *
Agreement dated as of June 29, 2001,
among the Company, Fleet National Bank
(as agent and lender), Bank of America,
N.A., The Chase Manhattan Bank and
Mellon Bank, N.A. (filed as Exhibit 4.1
to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended
June 30, 2001).
10.6 Global Amendment and Affirmation *
Agreement dated as of June 29, 2001,
among the Company, Fleet National Bank
and certain subsidiaries of the Company
(filed as Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001).
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 Master Agreement dated as of November *
30, 2001 by and between the Company
and The Perrier Group of America, Inc.
(filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated January
15, 2002).
10.9 Form of Employee Retention Agreement *
dated February 24, 1998 between the
Company and certain officers of the
Company and its subsidiaries (filed as
Exhibit 10.9 to the Company's Annual
Report on Form 10-K dated December 31,
1997).
10.10 Ionics, Incorporated Supplemental *
Executive Retirement Plan effective as
of January 1, 1996 (filed as Exhibit
10.10 to the Company's Annual Report
on Form 10-K dated December 31, 1997).
10.11 Shareholders' Agreement dated April 3, *
2001 between the Company and Mohammed
Abdulmohsin Al-Kharafi & Sons (filed as
Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly
period ended March 31, 2001).
-82-
10.12 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).
10.13 Shareholders' Agreement dated as of May *
12, 2000, by and among the Company,
Hafeez Karamath Engineering Services
Limited, and Desalination Company of
Trinidad and Tobago Ltd., as amended on
June 16, 2000 (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form
10-Q for the quarterly period ended June
30, 2000).
10.14 Loan Agreement dated as of October 25, *
2000 between the Company and Hafeez
Karamath Engineering Services Limited
(filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year
ended December 31, 2000).
21.0 Subsidiaries of the Registrant.
23.0 Consents
23.1 Consent of PricewaterhouseCoopers LLP
24.0 Power of Attorney.
-------------------------------
*Incorporated herein by reference
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