FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
___________________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
________________ ________________
Commission File Number 1-7211
____________________________________________
IONICS, INCORPORATED
___________________________________________________
(exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2068530
_________________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 Grove Street, Watertown, Massachusetts 02472
____________________________________________________________________
(Address of principal executive offices)
(Zip Code)
(617) 926-2500
_______________________________
(Registrant's telephone number, including area code)
NONE
_______________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
___ ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at June 30, 1998
____________________________ _________________________________
Common Stock, Par Value $1 16,092,185 Shares
IONICS, INCORPORATED
FORM 10-Q FOR
QUARTER ENDED JUNE 30, 1998
INDEX
Page No.
_______
Part I - Financial Information
Consolidated Statements of Operations 2
Consolidated Balance Sheets 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Results
of Operations and Financial Condition 7
Part II - Other Information 10
Signatures 12
Exhibit Index 13
Exhibit 27 - Financial Data Schedule (for electronic
purposes only)
-1-
PART I - FINANCIAL INFORMATION
IONICS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
__________________ ___________________
1998 1997 1998 1997
_______ _______ ________ _______
Net revenue:
Membranes and related equipment $38,347 $37,454 $ 76,621 $ 77,287
Water, food and chemical supply 21,803 31,562 44,007 61,715
Consumer products 20,117 18,095 38,613 35,211
_______ _______ ________ ________
80,267 87,111 159,241 174,213
_______ _______ ________ ________
Costs and expenses:
Cost of membranes and related equipment 26,342 26,079 51,636 53,879
Cost of water, food and chemical supply 15,922 22,648 31,019 44,112
Cost of consumer products 11,182 9,772 21,480 19,555
Research and development 1,739 1,282 3,383 2,584
Selling, general and administrative 18,277 16,717 36,154 33,228
_______ _______ ________ ________
73,462 76,498 143,672 153,358
_______ _______ ________ ________
Income from operations 6,805 10,613 15,569 20,855
Interest income 150 274 301 562
Interest expense (72) (227) (191) (463)
Equity income 147 192 258 301
_______ _______ ________ ________
Income before income taxes and minority
interest 7,030 10,852 15,937 21,255
Provision for income taxes 2,222 3,583 5,118 7,014
_______ _______ ________ ________
Income before minority interest 4,808 7,269 10,819 14,241
Minority interest expense 188 - 191 -
_______ _______ ________ ________
Net income $ 4,620 $ 7,269 $ 10,628 $ 14,241
======= ======= ======== ========
Basic earnings per share $ .29 $ .46 $ .66 $ .90
======= ======= ======== ========
Diluted earnings per share $ .28 $ .44 $ .65 $ .87
======= ======= ======== ========
Shares used in basic earnings
per share calculation 16,074 15,925 16,051 15,895
======= ======= ======== ========
Shares used in diluted earnings
per share calculation 16,459 16,448 16,435 16,426
======= ======= ======== ========
The accompanying notes are an integral part of these financial statements.
-2-
IONICS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except par value)
June 30, December 31,
1998 1997
________ ___________
ASSETS
______
Current assets:
Cash and cash equivalents $ 20,507 $ 25,787
Short-term investments 556 107
Notes receivable, current 3,846 3,856
Accounts receivable 96,684 98,275
Receivables from affiliated companies 2,570 2,624
Inventories:
Raw materials 18,863 17,183
Work in process 9,002 8,773
Finished goods 4,090 2,954
________ ________
31,955 28,910
Other current assets 6,508 6,291
________ ________
Total current assets 162,626 165,850
Notes receivable, long-term 8,522 8,349
Investments in affiliated companies 5,041 3,983
Property, plant and equipment:
Land 6,823 6,767
Buildings 34,816 34,239
Machinery and equipment 247,478 236,526
Other, including furniture, fixtures and vehicles 43,651 41,397
________ ________
332,768 318,929
Less accumulated depreciation (149,485) (138,972)
________ ________
183,283 179,957
Other assets 49,896 48,597
________ ________
Total assets $409,368 $406,736
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current liabilities:
Notes payable and current portion
of long-term debt $ 2,371 $ 12,084
Accounts payable 23,531 27,099
Customer deposits 3,281 3,685
Accrued commissions 1,969 2,370
Accrued expenses 24,992 20,172
Taxes on income 1,222 602
________ ________
Total current liabilities 57,366 66,012
Long-term debt and notes payable 1,431 804
Deferred income taxes 15,747 17,783
Other liabilities 2,287 2,478
Stockholders' equity:
Common stock, par value $1, 55,000,000 authorized shares;
issued: 16,092,185 in 1998 and 16,001,285 in 1997 16,092 16,001
Additional paid-in capital 157,067 154,479
Retained earnings 169,185 158,557
Accumulated other comprehensive income (9,609) (9,126)
Unearned compensation (198) (252)
________ ________
Total stockholders' equity 332,537 319,659
________ ________
Total liabilities and stockholders' equity $409,368 $406,736
======== ========
The accompanying notes are an integral part of these financial statements.
-3-
IONICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
____________________
1998 1997
__________ ________
Operating activities:
Net income $10,628 $14,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,284 13,881
Provision for losses on accounts and notes receivable 477 784
Compensation expense on restricted stock awards 54 54
Changes in assets and liabilities:
Notes receivable (111) (1,151)
Accounts receivable 474 592
Inventories (3,258) (894)
Other current assets (451) 2,774
Investments in affiliates (1,058) (103)
Accounts payable and accrued expenses 520 (2,033)
Income taxes 622 2,758
Other (2,628) (509)
_______ _______
Net cash provided by operating activities 18,553 30,394
_______ _______
Investing activities:
Additions to property, plant and equipment (16,878) (16,595)
Disposals of property, plant and equipment 578 502
Purchase of short-term investments (487) -
_______ _______
Net cash used by investing activities (16,787) (16,093)
_______ _______
Financing activities:
Principal payments on current debt (11,718) (7,847)
Proceeds from issuance of current debt 2,519 207
Principal payments on long-term debt (5) (28)
Proceeds from issuance of long-term debt 274 -
Proceeds from stock option plans 2,019 1,954
_______ _______
Net cash used by financing activities (6,911) (5,714)
_______ _______
Effect of exchange rate changes on cash (135) (390)
_______ _______
Net change in cash and cash equivalents (5,280) 8,197
Cash and cash equivalents at beginning of period 25,787 12,269
_______ _______
Cash and cash equivalents at end of period $20,507 $20,466
======= =======
The accompanying notes are an integral part of these financial statements.
-4-
IONICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments (consisting of only
normal, recurring accruals) necessary to present fairly the
consolidated financial position of the Company as of June 30, 1998
and December 31, 1997, the consolidated results of its operations
for the three and six months ended June 30, 1998 and 1997 and the
consolidated cash flows for the six months then ended.
2. The consolidated results of operations of the Company for the three
and six months ended June 30, 1998 and 1997 are not necessarily
indicative of the results of operations to be expected for the full
year.
3. Reference is made to the Notes to Consolidated Financial Statements
appearing in the Company's 1997 Annual Report as filed on Form 10-K
with the Securities and Exchange Commission. There have been no
significant changes in the information reported in those Notes,
other than from the normal business activities of the Company, and
there have been no changes which would, in the opinion of
Management, have a materially adverse effect upon the Company.
4. Certain prior year amounts have been reclassified to conform to the
current year presentation with no impact on net income.
5. Earnings per share (EPS) calculations:
(Amounts in thousands, except for per share amounts)
For the three months ended June 30,
1998 1997
____________________________ _____________________________
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
_________ ________ _________ _________ _________ _________
Basic EPS
Income available to
common stockholders $ 4,620 16,074 $ 0.29 $ 7,269 15,925 $ 0.46
Effect of dilutive
stock options - 385 - 523
_________________ _________________
Diluted EPS $ 4,620 16,459 $ 0.28 $ 7,269 16,448 $ 0.44
========= ======= ======== ======== ======= ========
For the six months ended June 30,
1998 1997
____________________________ _____________________________
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
_________ ________ _________ _________ _________ _________
Basic EPS
Income available to
common stockholders $ 10,628 16,051 $ 0.66 $ 14,241 15,895 $ 0.90
Effect of dilutive
stock options - 384 - 531
_________________ _________________
Diluted EPS $ 10,628 16,435 $ 0.65 $ 14,241 16,426 $ 0.87
======== ======= ======== ======== ======= ========
-5-
6. Comprehensive Income
The Company has adopted the Statement of Financial Accounting
Standards ("FAS") No. 130, "Reporting Comprehensive Income", which
establishes standards for the reporting and display of
comprehensive income and its components in general purpose
financial statements for the year ended December 31, 1998. The
table below sets forth "comprehensive income" as defined by FAS No.
130 for the three month periods and six month periods ended June
30, 1998 and 1997.
(Amounts in thousands, except
for per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- -------
Net income $ 4,620 $ 7,269 $10,628 $14,241
Other comprehensive income,
net of tax:
Translation adjustments (289) (588) (483) (2,913)
------- ------- ------- -------
Comprehensive income $ 4,331 $ 6,681 $10,145 $11,328
======= ======= ======= =======
7. In 1998, the FASB released Statement of Financial Accounting
Standard No. 132 ("FAS No. 132"), "Employers' Disclosures about
Pensions and Other Post Retirement Benefits." FAS No. 132
standardizes the disclosure requirements for pensions and other
post retirement benefits. This Statement is effective for fiscal
years beginning after December 15, 1997. This Statement is a
disclosure-only statement.
8. In 1998, the FASB released Statement of Financial Accounting
Standard No. 133 ("FAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities." FAS No. 133 standardizes
accounting for derivative instruments. This Statement is effective
for fiscal years beginning after June 15, 1999.
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
_____________________
Comparison of the Three and Six Months Ended June 30, 1998 with the
___________________________________________________________________
Three and Six Months Ended June 30, 1997
________________________________________
Revenues for the second quarter of 1998 decreased 7.9% to $80.3
million from $87.1 million in 1997. Revenues for the first six-month
period decreased 8.6% to $159.2 million from $174.2 million in the
comparable period in 1997. Revenues during 1998 were higher during
the second quarter in the Membranes and Related Equipment segment but
were lower during the six-month period. During both the second
quarter and the six-month period of 1998, revenues were lower in the
Water, Food and Chemical Supply segment, but were higher in the
Consumer Products segment.
Within the Membranes and Related Equipment segment, revenues grew
during the second quarter due primarily to increased sales of
instrumentation, particularly to the pharmaceutical industry, and
wastewater treatment systems. This increase was partially offset by
lower sales of water desalting equipment and ultrapure water systems.
The Company has noted increased competitive pressure within the
Membranes and Related Equipment segment and particularly an overall
slowdown in the sale of ultrapure water systems to the semiconductor
industry. During the six-month period, revenues decreased as lower
sales of water desalting equipment and ultrapure water systems more
than offset increased sales of instrumentation and wastewater
treatment systems.
Revenues from the Water, Food and Chemical Supply segment decreased in
both periods due primarily to a reduction in revenue from the
ultrapure water supply area. In addition, decreased revenues were
experienced during both periods in the municipal water supply and food
processing businesses. The decrease in municipal water supply
reflected the City of Santa Barbara's buy-out in the second quarter of
1997 of the desalination plant that was constructed and maintained by
the Company. Softness in the food processing business reflected a
slowdown in new dairy applications.
Consumer Products revenues increased during both periods due to higher
revenues from bottled water sales. This increase resulted from growth
in the customer base in both the United States and the United Kingdom.
The increase also reflected an overall average price increase.
Cost of sales as a percentage of revenues for the second quarter was
66.6% in 1998 and 67.2% in 1997. For the six-month period, cost of
sales as a percentage of revenues was 65.4% in 1998 and 67.5% in 1997.
In the Membranes and Related Equipment segment, cost of sales as a
percentage of revenues decreased during both periods. This
improvement primarily reflected a shift in the mix of revenues toward
the higher margin instrumentation business. The instrumentation
business also benefited from improved absorption of fixed overhead
costs resulting from higher unit volume and an overall price increase.
This improvement was partially offset by a shift in mix towards
wastewater treatment systems.
-7-
Within the Water, Food and Chemical Supply segment, cost of sales
increased as a percentage of revenues during the second quarter due to
a change in the mix of contracts within the municipal water supply
business, partially offset by a change in the mix of ultrapure water
and chemical supply contracts. During the six-month period, an
overall improvement was experienced in this segment as the improvement
in the mix of ultrapure water and chemical supply contracts more than
offset the change in mix of municipal supply contracts.
Cost of sales as a percentage of revenues increased in the Consumer
Products segment due to increased competitive pressure within the
consumer bleach business and increased bottled water manufacturing
variances and storage costs.
Operating expenses as a percentage of revenues increased during the
second quarter to 24.9% in 1998 from 20.7% in 1997. For the six-month
period, operating expenses as a percentage of revenues increased to
24.8% in 1998 from 20.6% in 1997. The increase during both periods
primarily reflected the decrease in ultrapure water, water desalting
and food processing revenues, noted above, which typically carry
disproportionately lower selling expenses as a percentage of such
revenues than do revenues from other businesses. Furthermore, the
increase during both periods also reflects the growth, noted above, in
the instrumentation and bottled water businesses which typically carry
disproportionately higher selling costs as a percentage of revenues
(and higher gross margins) than do revenues from other businesses. In
addition, operating expenses increased due to expanded marketing
initiatives as well as the Company's continued commitment to
investment in its research and development programs.
Interest income of $0.2 million and interest expense of $0.1 million
during the second quarter of 1998 remained relatively consistent with
1997. During the six-month period, interest income of $0.3 million
and interest expense of $0.2 million were lower than interest income
of $0.6 million and interest expense of $0.5 million in 1997,
reflecting overall lower average interest rates.
Financial Condition
___________________
Working capital increased $5.4 million during the first six months of
1998, and the current ratio increased to 2.8 at June 30, 1998 from 2.5
at December 31, 1997. Cash provided from net income and depreciation
totaled $23.9 million during the first six months of 1998, while the
primary uses of cash were for additions to property, plant and
equipment and principal payments on current debt. Significant capital
expenditures were incurred to support growth in bottled water
operations and "own and operate" facilities.
At June 30, 1998, the Company had $20.5 million in cash and cash
equivalents, a decrease of $5.3 million from December 31, 1997. Notes
payable and long-term debt decreased $9.1 million during the same
period. The Company believes that its cash, cash from operations,
lines of credit and foreign exchange facilities are adequate to meet
its currently anticipated needs.
-8-
Forward-Looking Information
___________________________
The Company's future results of operations, as well as statements
contained in this Management's Discussion and Analysis which are
forward-looking statements, depend upon a number of factors that could
cause actual results to differ materially from management's current
expectations. Among these factors are business conditions and the
general economy; competitive factors, such as acceptance of new
products and price pressures; risk of nonpayment of accounts
receivable; risks associated with foreign operations; and regulations
and laws affecting business in each of the Company's markets.
Recent Accounting Pronouncements
________________________________
In 1998, the FASB released Statement of Financial Accounting Standard
No. 132 ("FAS No. 132"), "Employers' Disclosures about Pensions and
Other Post Retirement Benefits." FAS No. 132 standardizes the
disclosure requirements for pensions and other post retirement
benefits. This Statement is effective for fiscal years beginning
after December 15, 1997. This Statement is a disclosure-only
statement.
In 1998, the FASB released Statement of Financial Accounting Standard
No. 133 ("FAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities." FAS No. 133 standardizes accounting for
derivative instruments. This Statement is effective for fiscal years
beginning after June 15, 1999.
-9-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
___________________________
1. The lawsuit brought against the Company by Sybron Chemicals, Inc.
(Sybron) and a Sybron employee pursuant to a third party
complaint on September 3, 1997 in Dallas, Texas, reported in the
Company's filing on Form 10-Q for the third quarter of 1997, was
dismissed without prejudice as to the Company on July 8, 1998.
2. On May 13, 1998, Apollo Ultrapure Water Systems, Inc. (Apollo), a
subsidiary of the Company, received a notice from the United
States Environmental Protection Agency (EPA) that it is a
potentially responsible party with respect to the Operating
Industries, Inc. Superfund Site located in Monterey Park,
California (OII Site). Although the Company has not yet been
provided by the EPA with information concerning its potential
liability in the event it is determined that waste from Apollo
was sent to the OII Site, the notice from the EPA stated that
Apollo is potentially responsible for contributing "a
comparatively small" amount of the waste disposed at the OII
Site, and will be eligible to enter into a "DE MINIMIS"
Settlement Agreement. Consequently, the Company believes that
any liability it may have in this matter will not have a material
effect on the Company or its financial position.
Item 4. Submission of Matters to a Vote of Security Holders
_____________________________________________________________
(a) The Annual Meeting of Stockholders was held on May 7, 1998.
(b) William L. Brown, Robert B. Luick, John J. Shields and Allen S.
Wyett were re-elected as Class III Directors for a three-year
term. Continuing as Class I Directors until the 1999 Annual
Meeting are Douglas R. Brown, Kathleen F. Feldstein, Arthur L.
Goldstein and Carl S. Sloane. Continuing as Class II Directors
until the 2000 Annual Meeting are Arnaud de Vitry d'Avaucourt,
William E. Katz, Mark S. Wrighton and Daniel I.C. Wang.
Each of the Class III Directors received at least the following
votes "for" election and no more than the following votes
withheld:
Votes for: 13,582,989
Votes withheld: 190,807
(c) The other matters submitted for stockholder approval were:
(i) Approval of the amendment to the Corporation's Restated Articles
of Organization to increase the authorized capital stock from 30
million to 55 million shares of Common Stock, $1 par value per
share.
Votes for: 13,097,425 shares
Votes against: 617,238 shares
Abstentions: 59,132 shares
-10-
(ii) The selection of PricewaterhouseCoopers LLP, formerly known as
Coopers & Lybrand L.L.P., as the Company's auditors for 1998.
Votes for: 13,716,378
Votes against: 25,700
Abstentions: 31,717
Item 6. Exhibits and Reports on Form 8-K
_________________________________________
(a) Reports on Form 8-K
___________________
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30, 1998.
All other items reportable under Part II have been omitted as
inapplicable or because the answer is negative, or because the
information was previously reported to the Securities and Exchange
Commission.
-11-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
IONICS, INCORPORATED
Date: August 13, 1998 By: /s/Arthur L. Goldstein
___________________ ___________________________
Arthur L. Goldstein
Chairman and
Chief Executive Officer
(duly authorized officer)
Date: August 13, 1998 By: /s/Robert J. Halliday
___________________ ___________________________
Robert J. Halliday
Vice President, Finance and
Chief Financial Officer
-12-
EXHIBIT INDEX
Sequential
Exhibit Page No.
_______ __________
27. Financial Data Schedule (for electronic
purposes only)
-13-