SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 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 or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
65 Grove Street
Watertown, Massachusetts 02472
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 926-2500
Former name, former address and former fiscal year, if changed since last
report: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceeding 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At March 31, 2002 the registrant had 17,533,742 shares of Common Stock, par
value $1 per share, outstanding.
EXPLANATORY NOTE
Ionics, Incorporated (the "Company") is filing this Amendment No. 1 to Form 10-Q
to amend its quarterly report on Form 10-Q for the quarterly period ended March
31, 2002 to reflect the restatement of its consolidated financial statements for
the three months ended March 31, 2002. The restatement was primarily the result
of intercompany transactions, including transactions between the Company and its
French subsidiary that were erroneously recorded at the subsidiary level. The
Company's consolidated financial statements as of and for the three months ended
March 31, 2002 contained in this Amendment No. 1 to Form 10-Q reflect the effect
of the restatement. See Note 2 to Notes to Consolidated Financial Statements.
The Company has amended in their entirety Items 1 and 2 of Part I of this
quarterly report to reflect changes resulting from the restatement described
above, and to update the information contained therein to reflect developments
which have occurred subsequent to May 15, 2002, the date on which the Company
filed its quarterly report on Form 10-Q for the quarterly period ended March 31,
2002. In addition, this Amendment No. 1 to Form 10-Q also amends Item 3 of Part
I of this quarterly report to reiterate and update information previously
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, and Item 6 of Part II of this quarterly report to reflect
that the exhibit referred to therein had previously been filed.
IONICS, INCORPORATED
FORM 10-Q/A
FOR QUARTER ENDED MARCH 31, 2002
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 2
Consolidated Statements of Operations
Three Months Ended March 31, 2002 and 2001 2
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 3
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001 4
Notes to Consolidated Financial Statements 5-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
CERTIFICATIONS 22
EXHIBIT INDEX 23
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
IONICS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)
Three months ended
March 31,
------------------------
2002 2001
------------ ----------
Revenues: (as restated)
Equipment Business Group $ 35,048 $ 39,628
Ultrapure Water Group 24,745 40,848
Consumer Water Group 10,553 29,240
Instrument Business Group 6,544 7,788
Affiliated companies 3,115 5,458
------------ ----------
80,005 122,962
------------ ----------
Costs and expenses:
Cost of sales of Equipment Business Group 25,597 29,715
Cost of sales of Ultrapure Water Group 18,998 30,680
Cost of sales of Consumer Water Group 6,830 17,952
Cost of sales of Instrument Business Group 2,753 3,439
Cost of sales to affiliated companies 3,037 5,337
Research and development 1,621 1,690
Selling, general and administrative 19,855 28,501
------------ ----------
78,691 117,314
------------ ----------
Income from operations 1,314 5,648
Interest income 993 225
Interest expense (560) (1,604)
Equity income 892 441
------------ ----------
Income before income taxes and minority interest 2,639 4,710
Provision for income taxes 876 1,601
------------ ----------
Income before minority interest 1,763 3,109
Minority interest in earnings 264 114
------------ ----------
Net income $ 1,499 $ 2,995
============ ==========
Basic earnings per share $ 0.09 $ 0.18
============ ==========
Diluted earnings per share $ 0.08 $ 0.18
============ ==========
Shares used in basic earnings per share calculations 17,508 16,389
============ ==========
Shares used in diluted earnings per share calculations 17,776 16,574
============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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IONICS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except share and par value amounts)
March 31, December 31,
2002 2001
--------------- --------------
ASSETS (as restated)
Current assets:
Cash and cash equivalents $ 145,717 $ 178,283
Short-term investments 1,216 21
Notes receivable, current 4,954 4,892
Accounts receivable, net 103,964 118,255
Receivables from affiliated companies 19,664 17,199
Inventories:
Raw materials 20,890 20,047
Work in process 8,117 7,547
Finished goods 6,382 5,219
--------------- --------------
35,389 32,813
Other current assets 11,013 11,031
Deferred income taxes 16,297 16,297
--------------- --------------
Total current assets 338,214 378,791
Notes receivable, long-term 23,257 23,210
Investments in affiliated companies 24,593 23,798
Property, plant and equipment:
Land 6,333 6,288
Buildings 41,353 41,272
Machinery and equipment 250,068 243,964
Other, including furniture, fixtures and vehicles 30,434 29,938
--------------- --------------
328,188 321,462
Less accumulated depreciation 160,417 154,430
--------------- --------------
167,771 167,032
Goodwill 19,266 19,037
Deferred income taxes, long-term 12,643 12,643
Other assets 8,122 8,802
--------------- --------------
Total assets $ 593,866 $ 633,313
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 1,916 $ 14,257
Accounts payable 24,899 34,640
Customer deposits 3,617 2,159
Accrued commissions 1,968 2,011
Accrued expenses 53,643 58,064
Income taxes payable 30,004 45,735
--------------- --------------
Total current liabilities 116,047 156,866
Long-term debt and notes payable 10,244 10,126
Deferred income taxes 35,227 34,199
Deferred revenue from affiliated companies 3,364 3,360
Other liabilities 5,469 5,409
Commitments and contingencies
Stockholders' equity:
Common stock, par value $1, authorized
shares: 55,000,000 in 2002 and 2001;
issued: 17,533,742 in 2002 and 17,477,005 in 2001 17,534 17,477
Additional paid-in capital 189,741 188,555
Retained earnings 243,816 242,317
Accumulated other comprehensive income (27,576) (24,996)
--------------- --------------
Total stockholders' equity 423,515 423,353
--------------- --------------
Total liabilities and stockholders' equity $ 593,866 $ 633,313
=============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
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IONICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three months ended
March 31,
------------------------------
2002 2001
------------- -------------
(as restated)
Operating activities:
Net income $ 1,499 $ 2,995
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 5,470 8,078
Amortization of goodwill - 680
Provision for losses on accounts and notes receivable (108) 1,421
Equity in earnings of affiliates (892) (441)
Changes in assets and liabilities:
Notes receivable (96) (4,591)
Accounts receivable and receivables from affiliated companies 11,657 3,476
Inventories (2,494) (2,012)
Other current assets (39) 5,209
Investments in affiliated companies 56 315
Accounts payable and accrued expenses (12,530) (13,871)
Income taxes (15,034) 716
Other (1,411) (440)
------------- -------------
Net cash (used in) provided by operating activities (13,922) 1,535
------------- -------------
Investing activities:
Additions to property, plant and equipment (6,556) (6,513)
Disposals of property, plant and equipment 178 241
Additional investments in affiliates - (3,965)
(Purchase) sale of short-term investments (1,155) 515
------------- -------------
Net cash used in investing activities (7,533) (9,722)
------------- -------------
Financing activities:
Principal payments on current debt (32,082) (18,543)
Proceeds from borrowings of current debt 19,750 23,368
Principal payments on long-term debt (233) (243)
Proceeds from borrowings of long-term debt 400 135
Proceeds from stock option plans 1,242 576
------------- -------------
Net cash (used in) provided by financing activities (10,923) 5,293
------------- -------------
Effect of exchange rate changes on cash (188) (627)
------------- -------------
Net change in cash and cash equivalents (32,566) (3,521)
Cash and cash equivalents at beginning of period 178,283 25,497
------------- -------------
Cash and cash equivalents at end of period $ 145,717 $ 21,976
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
IONICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated quarterly financial statements of Ionics, Incorporated
(the "Company") are unaudited; however, in the opinion of the management of
the Company, all adjustments have been made that are necessary for a fair
statement of the consolidated financial position of the Company, the
consolidated results of its operations and the consolidated cash flows for
each period presented. The consolidated results of operations for the
interim periods are not necessarily indicative of the results of operations
to be expected for the full year or any future period.
The accompanying financial statements have been prepared with the
assumption that users of the interim financial information have either read
or have access to the Company's financial statements for the year ended
December 31, 2001. Accordingly, footnote disclosures that would
substantially duplicate the disclosures contained in the Company's December
31, 2001 audited financial statements have been omitted from these
financial statements. These financial statements have been prepared in
accordance with the instructions to Form 10-Q and the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such instructions, rules and regulations.
These financial statements should be read in conjunction with the Company's
2001 Annual Report as filed on Form 10-K (the "2001 Form 10-K") with the
Securities and Exchange Commission.
Certain prior year amounts have been reclassified to conform to the current
year presentations. 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 6 below. In addition, the consolidated
quarterly financial statements now reflect revenues and cost of sales
derived from transactions with affiliated entities in which the Company
maintains less than a majority equity interest as "affiliated companies"
revenues and costs of sales (see Note 5 of Notes to Consolidated Financial
Statements of the 2001 Form 10-K). These amounts had previously been
reflected within the reportable business segments. Shipping and handling
costs are included in revenues and cost of sales. During the three months
ended March 31, 2002, the Company recorded adjustments reflecting
immaterial corrections to prior year periods which resulted in a reduction
to net income of approximately $594,000. Such adjustments were recorded in
the financial statements for the three months ended March 31, 2002 as
originally reported and as restated.
In addition, Notes 3, 8 and 9 of the Notes to the Consolidated Financial
Statements contained herein have been updated to reflect developments which
have occurred subsequent to May 15, 2002, the date on which the Company
filed its quarterly report on Form 10-Q for the quarterly period ended
March 31, 2002.
2. Restatement of Quarterly Financial Statements
The Company's consolidated financial statements for the three months ended
March 31, 2002 have been 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 did not materially impact any items on the Company's
consolidated balance sheet as of March 31, 2002. The following table
presents a summary of the impact of the restatement on the Company's
consolidated statements of operations for the three months ended March 31,
2002:
-5-
(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
Provision for income taxes 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
3. Commitments and Contingencies
Trinidad Project. 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 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.
The Company's $10 million loan to HKES is included in long-term notes
receivable on the Company's consolidated balance sheets. The loan bears
interest at a rate equal to 2% above 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 at March 31, 2002 and September 30, 2002 was approximately
$18.8 million and $24.2 million, respectively, 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
-6-
$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. 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 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, which it anticipates completing around year-end. 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
receivable from HKES would be at risk.
Kuwait Project. 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. 81-1,
"Accounting for Performance of Construction-Type and Certain
Construction-Type Contracts." At March 31, 2002 and September 30, 2002, the
Company had invested a total of $1.5 million and $1.6 million,
respectively, 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.
Israel Projects. The Company entered into agreements with Kibbutz Ma'agan
Micha'el, an Israeli cooperative society, and I.P.P.S. Infrastructure
Enterprises Ltd., 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 March 31, 2002 and September 30, 2002, the Company
had made a nominal equity investment in MDL, and had deferred costs of
approximately $0.5 million and $0.7 million, respectively, relating to the
design and development work on the project. The Company currently
anticipates that it will invest approximately $1 million in MDL for its 49%
equity interest. MDL is currently seeking approximately $7.7 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 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 Baran Group Ltd.
and Dor Chemicals Ltd., both 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 September 30, 2002, the Company had not yet made any
equity investment in CDL, and had deferred costs of approximately $0.3
million relating to the engineering design and development work on the
project. No costs were deferred at March 31, 2002. If CDL obtains long-term
project financing, the Company's total equity investment to be made in CDL
would be approximately $8 million. The timing of such investment will
depend upon the terms of the long-term financing agreement. Although the
Company currently anticipates that CDL will obtain long-term financing for
the project by the required date in April 2003, such financing may not be
obtained. 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), and could
incur its one-third proportionate share ($2.5 million) of liability under a
$7.5 million performance bond issued on behalf of CDL.
Aqua Cool Pure Bottled Water Operations Disposition. On December 31, 2001,
the Company completed the sale of its Aqua Cool Pure Bottled Water
operations in the United States, United Kingdom and France to affiliates of
Perrier-Vittel S.A., a subsidiary of Nestle S.A. ("Nestle"), for
approximately $220 million, of which $10 million is being held in escrow
-7-
pursuant to the terms of the divestiture agreement. The amount of the
purchase price is subject to final adjustment based on the number of
customers and working capital levels of the transferred businesses, in each
case as determined in accordance with the divestiture agreement. The
process for determining the number of customers and working capital levels,
as well as any related purchase price adjustments, is under way. In
addition, Nestle is seeking payment of certain amounts under the
indemnification provisions of the divestiture agreement. While the ultimate
amount of purchase price adjustments or indemnification payments, if any,
cannot yet be determined with certainty, the Company currently believes
that the reserves it has established for purchase price adjustments and the
escrowed amount will be adequate in all material respects to cover the
resolution of these issues. Accordingly, no additional provision for any
liability that might result from any of these matters has been included in
the accompanying financial statements for the current year.
Litigation. The Company is involved in the normal course of its business in
various litigation matters, some of which are in the pre-trial discovery
stages. The Company believes that none of the pending matters will have an
outcome material to its financial condition or results of operations.
4. Earnings Per Share (EPS) Calculations
(Amounts in thousands, except per share amounts)
For the three months ended March 31,
---------------------------------------------------------------------------------------
2002 2001
------------------------------------------ ------------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------------ ------------- ------------- ------------- ------------- ------------
Basic EPS
Income available to
common stockholders $ 1,499 17,508 $ 0.09 $ 2,995 16,389 $ 0.18
Effect of dilutive
stock options - 268 (0.01) - 185 -
------------ ------------- ------------- ------------- ------------- ------------
Diluted EPS $ 1,499 17,776 $ 0.08 $ 2,995 16,574 $ 0.18
============ ============= ============= ============= ============= ============
The effect of dilutive stock options excludes those stock options for which
the impact would have been antidilutive based on the exercise price of the
options. The number of options that were antidilutive at the three months
ended March 31, 2002 and 2001 was 604,250 and 1,568,234, respectively.
5. Comprehensive Income
The Company has adopted the Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and display of comprehensive income and its
components. The table below sets forth "comprehensive income" as defined by
SFAS No. 130 for the three-month periods ended March 31, 2002 and 2001.
(Amounts in thousands)
Three months ended
March 31,
---------------------------
2002 2001
------------ ------------
Net income $ 1,499 $ 2,995
Other comprehensive income,
net of tax:
Translation adjustments (2,580) (4,590)
------------ ------------
Comprehensive loss $ (1,081) $ (1,595)
============ ============
-8-
6. Segment Information
The Company has four reportable "business group" segments corresponding to
a "business group" structure. In 2002, the Company instituted a matrix-type
organization. As part of the matrix organization, the Company's trailer
leasing and non-consumer bleach based chemical supply businesses which were
included in the Equipment Business Group in prior periods now are included
in the Ultrapure Water Group. Segment information for all periods has been
presented to reflect these changes. In addition, the Company's Aqua Cool
Pure Bottled Water business, which had been reported as part of the
Consumer Water Group, was sold to affiliates of Nestle S.A. on December 31,
2001 and therefore does not appear in 2002 operations.
The following table summarizes the Company's operations by the four
business group segments and "Corporate." Corporate includes legal, research
and development expenses not allocated to the business groups, certain
corporate administrative and insurance costs, foreign exchange gains and
losses on corporate assets, as well as the elimination of intersegment
transfers.
For the three months ended March 31, 2002
--------------------------------------------------------------------------------------------
Equipment Ultrapure Consumer Instrument
Business Water Water Business
Group Group Group Group Corporate Total
-------------- ------------- ------------- ------------- ------------- --------------
(Amounts in thousands)
Revenue - unaffiliated $ 35,048 $ 24,745 $ 10,553 $ 6,544 $ - $ 76,890
Revenue - affiliated 3,115 - - - - 3,115
Inter-segment transfers 1,894 148 - 477 (2,519) -
Gross profit - unaffiliated 9,451 5,747 3,723 3,791 - 22,712
Gross profit - affiliated 78 - - - - 78
Equity income (loss) 656 (2) 238 - - 892
Earnings (loss) before interest,
tax and minority interest 1,745 (1,358) (1,433) 777 2,475 2,206
Interest income 993
Interest expense (560)
Income before income taxes and
minority interest 2,639
Identifiable assets 280,125 136,740 48,016 27,612 76,780 569,273
Goodwill 11,008 6,739 1,519 - - 19,266
For the three months ended March 31, 2001
--------------------------------------------------------------------------------------------
Equipment Ultrapure Consumer Instrument
Business Water Water Business
Group Group Group Group Corporate Total
-------------- ------------- ------------- ------------- ------------- --------------
(Amounts in thousands)
Revenue - unaffiliated $ 39,628 $ 40,848 $ 29,240 $ 7,788 $ - $ 117,504
Revenue - affiliated 5,353 - 105 - - 5,458
Inter-segment transfers 1,397 1,181 - 682 (3,260) -
Gross profit - unaffiliated 9,913 10,168 11,288 4,349 - 35,718
Gross profit - affiliated 68 - 53 - - 121
Equity income (loss) 371 54 102 - (86) 441
Earnings (loss) before interest,
tax and minority interest 2,901 1,803 1,315 1,151 (1,081) 6,089
Interest income 225
Interest expense (1,604)
Income before income taxes and
minority interest 4,710
Goodwill 11,776 16,388 21,230 1,847 - 51,241
Identifiable assets at March 31, 2001 did not differ materially from
identifiable assets at December 31, 2000.
-9-
7. Accounting Pronouncements
In August 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 has determined that SFAS No. 143 will not have a material impact on
its financial position and 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 and 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 and accordingly, the
Company can only determine prospectively the impact, if any, SFAS No. 146
would have on the Company's financial position and results of operations.
8. Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, (SFAS No. 142). This accounting standard addresses financial
accounting and reporting for goodwill and other intangible assets and
requires that goodwill amortization be discontinued and replaced with
periodic tests of impairment. A two-step impairment test is used to first
identify potential goodwill impairment and then measure the amount of
goodwill impairment loss, if any. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001, and is required to be applied at
the beginning of the fiscal year. Impairment losses, if any, that arise due
to the initial application of this standard will be reported as a
cumulative effect of a change in accounting principle. The first step of
the goodwill impairment test, which must be completed within six months of
the effective date of this standard, will identify any potential goodwill
impairment. As of June 30, 2002 the Company completed the transitional
goodwill impairment test and determined that no adjustment to goodwill was
necessary.
In accordance with SFAS No. 142, 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.
-10-
The following adjusts reported net income and EPS to present pro forma
amounts which exclude amortization of goodwill:
(Amounts in thousands, except per share amounts)
Three months ended March 31,
------------------------------------------------
2002 2001
----------------- -----------------
Net income $ 1,499 $ 2,995
Goodwill amortization, net of tax - 347
----------------- -----------------
Adjusted net income $ 1,499 $ 3,342
================= =================
Reported basic earnings per share $ 0.09 $ 0.18
Goodwill amortization, net of tax - 0.02
----------------- -----------------
Adjusted basic earnings per share $ 0.09 $ 0.20
================= =================
Reported diluted earnings per share $ 0.08 $ 0.18
Goodwill amortization, net of tax - 0.02
----------------- -----------------
Adjusted diluted earnings per share $ 0.08 $ 0.20
================= =================
(Amounts in thousands, except per share amounts)
For the years ended December 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
Net income (loss) $ 44,701 $ (1,870) $ 19,361
Goodwill amortization, net of tax 2,188 2,228 1,774
------------- ------------- -------------
Adjusted net income $ 46,889 $ 358 $ 21,135
============= ============= =============
Reported basic earnings (loss) per share $ 2.61 $ (0.12) $ 1.20
Goodwill amortization, net of tax 0.13 0.14 0.11
------------- ------------- -------------
Adjusted basic earnings per share $ 2.74 $ 0.02 $ 1.31
============= ============= =============
Reported diluted earnings (loss) per share $ 2.59 $ (0.12) $ 1.18
Goodwill amortization, net of tax 0.13 0.14 0.11
------------- ------------------------------
Adjusted diluted earnings per share $ 2.72 $ 0.02 $ 1.29
============= ============= =============
There was no change in the carrying value of goodwill during the quarter
ended March 31, 2002, other than the impact of foreign currency translation
adjustment. As a result of the foreign currency translation adjustment, the
Equipment Business Group's goodwill balance decreased $35,000 and the
Ultrapure Water Group's goodwill balance increased by $4,000 from the
respective balances at December 31, 2001. The Company's net intangible
assets included in other assets in the Consolidated Balance Sheets consist
principally patents and trademarks. At March 31, 2002 and December 31,
2001, the net carrying value of these intangible assets was approximately
$0.6 million. Intangible assets are amortized over a period ranging up to
20 years. All intangible assets are amortized on a straight-line basis.
Amortization expense for intangible assets is estimated to be approximately
$0.1 million for each of the next five years.
-11-
9. Subsequent Events
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." In connection
with the sale, the Company recorded a gain of $0.7 million during the
second quarter of 2002. Included in the Company's results for the three
months ended March 31, 2002 were revenues of $2.6 million and a $0.6
million pre-tax loss resulting from Malaysian operations.
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, certain intangibles and goodwill. 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.
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this Amendment
No. 1 to Form 10-Q and the audited consolidated financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K for the year
ended December 31, 2001, which has been filed with the Securities and Exchange
Commission. The analysis of results of operations compares the three month
period ended March 31, 2002 with the comparable period of the prior fiscal year.
Restatement of Quarterly Financial Statements and Reclassifications
The Company's consolidated financial statements for the three months ended March
31, 2002 have been 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. See Note 2 to Notes to
Consolidated Financial Statements. The following discussion of the financial
condition and results of operations of the Company has been amended in its
entirety to reflect changes resulting from this restatement, and to update the
information contained therein to reflect developments which have occurred
subsequent to May 15, 2002, the date on which the Company filed its quarterly
report on Form 10-Q for the quarterly period ended March 31, 2002. In
particular, information provided under "Financial Condition" with respect to the
Company's commitments and contingencies, credit facilities and future capital
requirements has been updated. In addition, the consolidated financial
statements and information provided under "Results of Operations" now reflect
revenues and costs of sales derived from transactions with affiliated entities
in which the Company maintains less than a majority interest as "affiliated
companies" revenues and costs of sales. These amounts had previously been
reflected within the four business segments.
As part of the Company's adoption of a matrix business organization structure
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 have been presented to reflect these changes. Aggregate first
quarter 2002 revenues and gross margin for these businesses were $7.2 million
and $2.1 million, respectively, compared to revenues and gross margin of $7.0
million and $2.0 million, respectively, for the first quarter of 2001.
Results of Operations
Comparison of the Three Months Ended March 31, 2002 with the Three Months Ended
-------------------------------------------------------------------------------
March 31, 2001
--------------
The Company reported consolidated revenues of $80.0 million and net income of
$1.5 million for the first quarter of 2002, which compared to $123.0 million of
revenues and $3.0 million of net income earned during the first quarter of 2001.
Results for the first quarter of 2001 include the operations of the Aqua Cool
Pure Bottled Water business, which was divested on December 31, 2001. In
addition, results for the first quarter of 2002 include $2.6 million in revenues
and a $0.6 million pre-tax loss in the Company's Malaysian affiliate (included
in the UWG segment), in which the Company held a 55% equity interest. At March
31, 2002, the Company was in the process of divesting this interest, and
accordingly this asset was treated as "held for sale" and included in "Other
current assets."
Revenues. The Company's revenues for the first quarter of 2002 of $80.0 million
compared to revenues of $123.0 million in the first quarter of 2001. Excluding
the first quarter 2001 Aqua Cool Pure Bottled Water revenues of $16.9 million,
first quarter 2002 revenues decreased $26.0 million, or 24.6%, from the
comparable period in the prior year, with declines in all four of the Company's
business segments. The reduction in revenues was primarily attributable to
continued softness in the microelectronics industry affecting both the UWG and
Instrument Business Group (IBG).
-13-
EBG revenues of $35.0 million decreased by $4.6 million, or 11.6%, compared to
revenues of $39.6 million during the first quarter of 2001. This decrease was
primarily attributable to lower capital equipment revenues associated with the
Zero Liquid Discharge equipment business.
UWG revenues of $24.7 million decreased by $16.1 million, or 39.4%, compared to
revenues of $40.8 million in the first quarter of 2001. Revenue levels for UWG
were affected by continued softness in the capital equipment portion of the
microelectronics industry, both domestically and internationally.
Consumer Water Group ("CWG") revenues of $10.6 million decreased by $18.7
million, or 63.9%, compared to revenues of $29.2 million in the first quarter of
2001, which included revenues generated in the Company's Aqua Cool Pure Bottled
Water business. Excluding revenues associated with the Aqua Cool Pure Bottled
Water business (which was divested on December 31, 2001), revenues in the first
quarter of 2002 were down 14.4%, or $1.8 million, from the first quarter of
2001. Revenues were primarily impacted by the warmer-than-expected winter, which
affected revenue levels of CWG's consumer-based chemical business as a result of
a lower demand for automobile windshield wash solution.
IBG revenues of $6.5 million decreased by $1.2 million, or 16.0%, compared to
revenues of $7.8 million in the first quarter of 2001. Lower revenue levels were
primarily attributable to continued softness in the microelectronics industry,
an important customer for IBG products.
Revenues from affiliated companies consist of revenues generated from entities
in which the Company has a less than majority equity interest. These revenues
amounted to $3.1 million for the first quarter of 2002 compared to $5.5 million
for the first quarter of 2001. The 42.9% decrease in affiliated companies
revenues primarily resulted from lower equipment sales to Desalcott as a result
of the substantial completion of the construction phase of the Trinidad
desalination facility.
Cost of sales. Total Company cost of sales as a percentage of revenue was 71.5%
in the first quarter of 2002 compared to 70.9% in the first quarter of 2001, and
resulting gross margin was 28.5% in first quarter of 2002 and 29.1% for the
first quarter of 2001. Cost of sales as a percentage of revenue decreased in the
EBG and IBG segments and increased in the UWG and CWG segments in the first
quarter of 2002, over the comparable period for 2001. EBG's cost of sales as a
percentage of revenue decreased to 73.0% for the first quarter of 2002 compared
to 75.0% for the first quarter of 2001, reflecting a shift in product mix from
lower margin capital equipment to more profitable water supply and other
products. IBG's cost of sales as a percentage of revenue decreased to 42.1% in
the first quarter of 2002 from 44.2% in the first quarter of 2001, primarily
reflecting a shift in product mix from lower margin capital equipment to more
profitable after-market services and software sales. UWG's cost of sales as a
percentage of revenue increased from 75.1% in the first quarter of 2001 to 76.8%
in the first quarter of 2002, primarily as a result of lower overall sales
volume levels in 2002 compared to 2001. CWG's cost of sales as a percentage of
revenue increased to 64.7% in the first quarter of 2002 from 61.4% in the first
quarter of 2001, reflecting the exclusion of the Aqua Cool Pure Bottled Water
business which was divested on December 31, 2001. Cost of sales to affiliated
companies as a percentage of revenue decreased slightly to 97.5% for the first
quarter of 2002 compared to 97.8% for the first quarter of 2001. This decrease
was primarily due to lower revenues from sales to Desalcott. For accounting
purposes, because the Company is deemed to have provided all of the equity
funding for Desalcott, profit is being deferred and amortized over the balance
of the term of the Trinidad concession agreement, which has resulted in lower
margins on sales to Desalcott.
Operating expenses. Research and development expenses decreased 4.1% to $1.6
million in the first quarter of 2002 from $1.7 million in the first quarter of
2001. Selling, general and administrative expenses in the first quarter of 2002
decreased 30.3% to $19.9 million in the first quarter of 2002 from $28.5 million
in the first quarter of 2001. These operating expenses, however, increased as a
percentage of revenue to 26.8% in the first quarter of 2002 compared to 24.6% in
the first quarter of 2001. This increase as a percentage of revenue resulted
primarily from lower revenue levels during the first quarter of 2002. Other
factors impacting operating expenses include net foreign currency exchange gains
of approximately $1.7 million, relating primarily to the translation of certain
of the proceeds from the sale of the Aqua Cool Pure Bottled Water business.
These gains were partially offset by residual expenses incurred in the quarter
of approximately $1.4 million, related primarily to on-going restructuring
initiatives in the CWG segment following the divestiture of the Aqua Cool Pure
Bottled Water business.
-14-
Interest income (expense). Interest income of $1.0 million in the first quarter
of 2002 represents an increase of $0.8 million from $0.2 million earned in the
first quarter of 2001, reflecting investment of the proceeds from the Aqua Cool
Pure Bottled Water business divestiture. Interest expense of $0.6 million for
the first quarter of 2002 compared to $1.6 million for the first quarter of
2001. The decrease in interest expense was primarily attributable to lower
short-term borrowing during the 2002 period, which resulted primarily from the
application of the proceeds from the sale of the Aqua Cool Bottled Water
business on December 31, 2001.
Equity income. Equity income of $0.9 million during the first three months of
2002 compared to $0.4 million during the first three months of 2001. This
increase was primarily the result of improved performance in two projects
located in Mexico in which the Company has a 20% equity interest.
Taxes. The Company's effective tax rate was 33.2% for the first quarter of 2002
and 34.0% for the first quarter of 2001. The effective tax rate reflects
anticipated profit before tax adjusted for items such as non-deductible
operating losses, and anticipated tax planning initiatives such as maximizing
foreign tax credit utilization and restructuring certain intercompany debt.
Net income. Net income was $1.5 million for the three months ended March 31,
2002, compared to net income of $3.0 million for the three months ended March
31, 2001.
Financial Condition
At March 31, 2002, the Company had $145.7 million in cash and cash equivalents
and $222.2 million of working capital. Working capital increased $0.2 million
during the first three months of 2002 while the Company's current ratio of 2.9
at March 31, 2002 increased from 2.4 at December 31, 2001. Net accounts
receivable and receivables from affiliated companies and accounts payable and
accrued expenses decreased $11.7 million and $12.5 million, respectively, during
the first three months of 2002, primarily resulting from lower revenue levels.
Current income taxes payable decreased $15.0 million during the first three
months of 2002, primarily reflecting payments made on gain from the sale of the
Company's Aqua Cool Pure Bottled Water business.
Net cash used by operating activities amounted to $13.9 million for the first
three months of 2002, primarily reflecting cash used for payments of current
income taxes, offset by increased collections on accounts receivable. The
primary use of cash for investing activities of $7.5 million was for additions
to property, plant and equipment, primarily relating to investments made in the
Company's UWG segment for a build, own and operate facility in the power
industry. Net cash used by financing activities was $10.9 million, primarily
resulting from the pay-down of the Company's short-term borrowings utilizing the
proceeds from the sale of the Aqua Cool Pure Bottled Water business.
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, 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.
-15-
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 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.
The Company's $10 million loan to HKES is included in long-term notes receivable
on the Company's consolidated balance sheets. The loan bears interest at a rate
equal to 2% above 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 at March 31, 2002 and September 30, 2002 was
approximately $18.8 million and $24.2 million, respectively, 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. 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 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, which it anticipates completing
around year-end. 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 receivable from HKES
would 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. 81-1, "Accounting for Performance of Construction-Type
and Certain Construction-Type Contracts." At March 31, 2002 and September 30,
2002, the Company had invested a total of $1.5 million and $1.6 million,
-16-
respectively, 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.
The Company entered into agreements with Kibbutz Ma'agan Micha'el, an Israeli
cooperative society, and I.P.P.S. Infrastructure Enterprises Ltd., 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 March 31, 2002 and September 30, 2002, the
Company had made a nominal equity investment in MDL, and had deferred costs of
approximately $0.5 million and $0.7 million, respectively, relating to the
design and development work on the project. The Company currently anticipates
that it will invest approximately $1 million in MDL for its 49% equity interest.
MDL is currently seeking approximately $7.7 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 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 Baran Group Ltd. and
Dor Chemicals Ltd., both 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 September 30, 2002, the
Company had not yet made any equity investment in CDL, and had deferred costs of
approximately $0.3 million relating to the engineering design and development
work on the project. No costs had been deferred at March 31, 2002. If CDL
obtains long-term project financing, the Company's total equity investment to be
made in CDL would be approximately $8 million. The timing of such investment
will depend upon the terms of the long-term financing agreement. Although the
Company currently anticipates that CDL will obtain long-term financing for the
project by the required date in April 2003, such financing may not be obtained.
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), and 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 Pure
Bottled Water operations in the United States, United Kingdom and France to
affiliates of Perrier-Vittel S.A., a subsidiary of Nestle S.A. ("Nestle"), for
approximately $220 million, of which $10 million is being held in escrow
pursuant to the terms of the divestiture agreement. The amount of the purchase
price is subject to final adjustment based on the number of customers and
working capital levels of the transferred businesses, in each case as determined
in accordance with the divestiture agreement. The process for determining the
number of customers and working capital levels, as well as any related purchase
price adjustments, is under way. In addition, Nestle is seeking payment of
certain amounts under the indemnification provisions of the divestiture
agreement. While the ultimate amount of purchase price adjustments or
indemnification payments, if any, cannot yet be determined with certainty, the
Company currently believes that the reserves it has established for purchase
price adjustments and the escrowed amount will be adequate in all material
respects to cover the resolution of these issues. Accordingly, no additional
provision for any liability that might result from any of these matters has been
included in the accompanying financial statements for the current year.
The Company has an unsecured domestic revolving credit facility with Fleet
National Bank which expires in March 2003. Under this credit facility, the
Company may borrow up to $30 million. The Company also maintains other domestic
and international unsecured credit facilities under which the Company may borrow
up to an aggregate of $6.0 million. At March 31, 2002, the Company's total
borrowings outstanding under all of its existing credit facilities were $1.0
million.
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 issued 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
-17-
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 any significant liability
or expense as a result of the use of these instruments.
The Company believes that its future capital requirements will depend on a
number of factors, including the amount of cash generated from operations and
its capital commitments to new "own and operate" projects, either directly or
through joint venture entities, 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 and working capital requirements at
least through the end of 2003, based on its current business plans and
projections.
Accounting Pronouncements
In August 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 has determined that SFAS No.
143 will not have a material impact on its financial position and 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 and 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 and accordingly, the Company will prospectively determine the impact,
if any, SFAS No. 146 will have on the Company's financial position and results
of operations.
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" contained in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of the Company's Annual Report on Form 10-K for the year ended December
31, 2001, as well as overall economic and business conditions; competitive
factors, such as acceptance of new products and pricing pressures and
competition from companies 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;
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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 3. Quantitative and Qualitative Disclosures About Market Risk
Derivative Instruments
----------------------
In 2001, the Company's Italian subsidiary entered into a series of U.S.
dollar/euro option contracts with the intent of offsetting the foreign exchange
risk associated with forecasted cash flows related to an ongoing project. These
option contracts were not entered into for trading purposes. In accordance with
the restrictions set forth in SFAS 133, the contracts do not qualify for hedge
accounting treatment. At March 31, 2002, the fair market value of these option
contracts were recorded as a liability of $1.4 million in the "Other current
liabilities" section of the Consolidated Balance Sheets. End-of-period changes
in the market value of the option contracts are reflected in the "Selling,
general and administrative" expenses in the Consolidated Statements of
Operations. These U.S. dollar/euro option contracts were terminated in the
second quarter of 2002. The Company had no other foreign exchange option
contracts outstanding at March 31, 2002.
The Company from time to time enters into foreign exchange contracts to hedge
certain operational and balance sheet expenses against changes in foreign
currency exchange rates. No foreign exchange contracts (other than the option
contracts described above) were outstanding at March 31, 2002 or 2001.
Market Risk
-----------
The Company's primary market risk exposures are in the areas of interest rate
risk and foreign currency exchange rate risk. The Company's investment portfolio
of cash equivalents is subject to interest rate fluctuations, but the Company
believes this risk is not material due to the short-term nature of these
investments. At March 31, 2002, the Company had $1.9 million of short-term debt
and $10.2 million of long-term debt outstanding. A portion of this debt has
variable interest rates and, therefore, is subject to interest rate risk.
However, a hypothetical increase of 10% in these 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 currency exchange gain was
approximately $1.9 and $0.1 million for the three months ended March 31, 2002
and March 31, 2001, respectively. The Company's exposure to foreign currency
exchange rate fluctuations is moderated by the fact that the operations of its
international subsidiaries are primarily conducted in their respective local
currencies. Also, in certain situations, the Company will consider entering into
forward exchange contracts to mitigate the impact of foreign currency exchange
fluctuations.
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PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1* - 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 quarterly period ended March 31, 2002).
---------------
*Previously filed and 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 during the three-month
period ended March 31, 2002. The report on Form 8-K, dated
January 15, 2002, reported under Item 2 (Acquisition or
Disposition of Assets) the completion of the sale by the
Company of its bottled water business in the United States,
United Kingdom and France to affiliates of Nestle S.A.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IONICS, INCORPORATED
Date: December 4, 2002 By: /s/Arthur L. Goldstein
---------------------------------------------
Arthur L. Goldstein
Chairman and Chief Executive Officer
(duly authorized officer)
Date: December 4, 2002 By: /s/Daniel M. Kuzmak
---------------------------------------------
Daniel M. Kuzmak
Vice President and Chief Financial Officer
(principal financial officer)
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CERTIFICATIONS
I, Arthur L. Goldstein, certify that:
1. I have reviewed this Amendment No. 1 to quarterly report on Form 10-Q of
Ionics, Incorporated;
2. Based on my knowledge, this Amendment No. 1 to
quarterly report on Form 10-Q 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 Amendment No. 1 to quarterly report on Form 10-Q;
3. Based on my knowledge, the financial statements, and other financial
information included in this Amendment No. 1 to quarterly report on Form
10-Q, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this Amendment No. 1 to quarterly report on Form 10-Q.
Date: December 4, 2002
/s/Arthur L. Goldstein
----------------------
Arthur L. Goldstein
Chairman and Chief Executive Officer
I, Daniel M. Kuzmak, certify that:
1. I have reviewed this Amendment No. 1 to quarterly report on Form 10-Q of
Ionics, Incorporated;
2. Based on my knowledge, this Amendment No. 1 to
quarterly report on Form 10-Q 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 Amendment No. 1 to quarterly report on Form 10-Q;
3. Based on my knowledge, the financial statements, and other financial
information included in this Amendment No. 1 to quarterly report on Form
10-Q, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this Amendment No. 1 to quarterly report on Form 10-Q.
Date: December 4, 2002
/s/Daniel M. Kuzmak
-------------------
Daniel M. Kuzmak
Vice President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Description
10.1* 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).
------------------
*Previously filed and incorporated herein by reference.
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