奇異 (GE) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the review a second quarter and first-half financials conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Caller Instructions). As a reminder, this call is being recorded and I would now like to turn the conference over to your host, Executive Vice President, Ted Papastavros.

Thank you and good morning, everyone. With me this morning is Doug Brown, our Chief Executive Officer and Dan Kuzmak, our Chief Financial Officer. Our format this morning will include some opening comments by Doug, followed by a review of the numbers by Dan and I will make some comments on the business outlook, and then we will go to questions and answers.

Before starting, let me just say that the matters we will discussed today, other than historical information, consist of forward-looking statements relating to future financial and business performance, operating plans and goals and objectives of management made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include statements relating to management's expectations for financial and business performance for the remainder of 2003 and beyond and overall economic and business conditions and trends. Words such as expects, intends, believes, projects, plans, assumes and similar expressions identify forward-looking statements. Listeners are cautioned that forward-looking statements are not promises or guarantees of future performance and are subject to the risk uncertainties that could cause actual results to differ materially from results contemplated by the forward-looking statements. These risks and uncertainties include but are not limited to those relating to overall economic and business conditions as they may be adversely affected by current world events; demand for the company's products, pricing pressures and competition for companies larger than the company, risks of nonpayment of accounts receivable, risks associated with foreign operations, technological and product development risks and fluctuations in our quarterly results. Any forward-looking statements we make should be considered in light of these factors, as well as those set forth in our press release dated today under the heading risks and uncertainties in our annual report on form 10-K for the year ended December 31, 2002, which has been filed with the Securities and Exchange Commission. We incorporate here the discussion of those factors. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements which speak as of today. We undertake no obligation to update or revise the information provided on the call, whether as a result of new information, future events or circumstances or otherwise. Now let me turn the call over to Doug Brown, our new CEO.

Thank you, Ted. Welcome all. As I think most of you know or all of you know, I took over from Art Goldstein as CEO on the first of July. And as such, this is my first conference call with you as Ionics' CEO. To be direct, this is certainly not the way I hoped to get started. Let there be no doubt that I'm disappointed with the results of the second quarter, but to me, they reinforce the need to take significant action.

I do believe there was some positive events in the quarter. In Trinidad, we were able to complete our long-term financing with the Republic Bank of Trinidad, we resolved our outstanding payment dispute and as a result, we collected $12 million in cash in the middle of July. Ironically, this action -- these actions hurt Ionics' second quarter P&L as Desalcott, the local operating company in Trinidad, expensed items related to the financing in the dispute resolution. But resolving these matters will have a significant long-term benefit with the company. In fact, I'm encouraged by the opportunities in Trinidad. It is an island with a vibrant economy and it has significant water needs that still need to be addressed. Desalcott has been exploring several new opportunities on the island. This has introduced some development expenses for Desalcott, which again, has hurt Ionics' short-term P&L. But we have a strong position on the island, we have an excellent local partner and these investments should lead to new opportunities in the future.

Finally, we did sign a contract in the second quarter to supply a further expansion to the existing Trinidad facility. This will lead to a 9 percent capacity increase which will be operational in the second quarter of next year. Overall, I believe Desalcott is well positioned to start delivering reasonable results for Ionics. By the end of this year, we should be reproducing equity income of between 2 and $300,000 per quarter. With the capacity increase coming online early next year, this run rate should significantly increase in 2004.

Clearly though, Ionics has had some issues during the second quarter as well and some disappointments. In the consumer package bleach area, we suffered a failure of our core (indiscernible) used to produce the bleach. This significantly increased our costs as we had to both carry the plant depreciation and the operating personnel expenses and we had to start purchasing bleach on the open market, so we're basically booking double costs on this operation during the quarter. We decided at the end we were not going to invest the capital required to get the core (indiscernible) back online and this resulted in a $4 million impairment charge related to long-lived assets, which is effectively writing off the core (indiscernible). We're currently considering strategic alternatives for this business.

But after you take out the impairment charge and the equity loss related to Desalcott, you see that we also suffered a margin decline during the quarter. This was due to several factors, including the consumer bleach operating issue I just mentioned, slippage of orders that we had expected to close in Q2 but were either not closed or closed too late in order to recognize revenue during the quarter. We had unexpected legal costs related to legal actions where we were the plaintiff, and we had some excess project costs related to older contracts that we were trying to complete. Overall, there is no question that the market is still sluggish for closing new orders, and although the sales pipeline is very active, closing deals remains difficult.

In the end, bookings for the second quarter, despite the slippages, was still a strong quarter. We closed almost $19 million of bookings and our book to bill ratio in the second quarter was basically one versus .7 in Q1. We focused on -- today, we're focused on bookings business with better turns and better margins, which I think bodes well for the future. But the main point is clear. We need to proceed to restructure our business to achieve three objectives. The first is we need to improve our efficiency by reducing costs. The second is we need to improve our operational and project cost controls. And the third is we need to focus on our core activities in order to grow them profitably. Last quarter, I mentioned that I was developing a restructuring plan for the company and we've made a lot of progress on this front. We still need to complete the plan, we need to take it to our Board, and we need to take it to our employees. I expect to be able to take it to you, the public market, in the middle of September. Given this timing, we will not today be providing guidance about our future performance, but we will do so when we talk to you in September when we're more able to fully explain our restructuring plan.

Finally, I believe many of you are aware that Ted Papastavros will be retiring from the position of Executive Vice President of strategy at the end of this year. Ted has been an extremely valuable contributor for Ionics over his 47-year career here. He's been a great help to me as I've gotten restarted with Ionics and has acted as the team leader in resolving our problems in Trinidad. I view the VP strategy position as critical, setting the strategic direction for Ionics, and to accomplishing our objectives for the restructuring program. Therefore, I am keen to fill this position with an extremely capable individual experienced in helping companies re-establish strategic focus and dealing with turnaround situations. I'm delighted to announce that I've found such a person who has agreed to start with us at Ionics as soon as possible. John Curtis (ph) has been a partner with Ernst & Young for almost 20 of his 31 years there. I have known and worked with John personally during my entire 17 year career at Advent (ph) International. We have worked directly together on dozens of transactions and, together, we have had a successful track record of creating equity value in underperforming companies. I'm therefore delighted that John has agreed to join me at Ionics and I'm confident that he will make a significant contribution to our ultimate success. As I said in the beginning, this is my first conference call with you as Ionics CEO and it is not the way I had hoped to get started. But I am encouraged by the opportunity as I see to substantially improve Ionics' operations and I do believe we can into my objective of a 10 percent EBIT margin with solid revenue growth and I am committed to making the changes necessary to achieving this goal. At this point, I would like to turn the mike over to Dan Kuzmak, our CFO.

Thank you. Just a comment further on some of the items that you have already discussed. Revenues for the second quarter were 90.9 million, which was up 14.4 percent, or 11.4 million from the second quarter of 2002. This increase, however, was essentially attributable revenue taking (indiscernible) equipment contract, which as you know, is included in the affiliated company revenue line. When you exclude sales to affiliated companies, revenue levels were essentially flat, and as Doug has commented, we have an active pipeline, but the market continues to be tough and we've seem the delay in the receipt of several orders. So that has affected our revenue line a bit. On the margin side, gross margin overall was 25.7 percent which was down from an overall margin of 30.9 in the second quarter of last year. However, if you exclude the revenue to affiliated companies, and in the case of revenue to affiliated companies, again, that includes a reduced margin typically because we defer a portion equal to our ownership percent. If you exclude that from the overall margin, it was down about 4 points and that was essentially attributable to several items as Doug commented. In the equipment and ultrapure segments, most of that was related to contract charges on several contracts as we realized increased cost estimates, as well as the legal expenses on a contract, which is currently in dispute.

On the consumer segment, as Doug commented, this decrease in margin was related to the additional cost we incurred to buy sodium hypochlorite and led ultimately to our decision to shut down the core (indiscernible) equipment. On the SG&A side, for the quarter, we were up 1.3 million over the same period last year. This was primarily attributable to increased pension and insurance expense and to higher professional fees, a significant large portion of which was attributable to legal costs associated with a patent infringement suit that we have brought against one of our competitors in the instrument field. Equity earnings for the quarter, again, Doug has commented, was $2.7 million loss, which included, compared to a $800,000 for for the same period last year and included a $3.4 million loss associated with Desalcott, as Doug mentioned. And again, to repeat there, we did comment last time that we would provide guidance going forward. We do expect that Trinidad will be contributing 2-300,000 a quarter by the fourth quarter with a substantial increase next year.

The tax rate for the quarter was 38 percent and capital spending and depreciation were essentially equal. Capital spending was 6.2 million and depreciation expense was 6.4 million in the quarter. And I'd like to comment on the balance sheet and just give you a quick review of the major items that fluctuated there. Comparing to December 2002 year-end, you see that the cash balance went down approximately $13 million. That is essentially all related to our Kuwait project, approximately $5 million of which went to our incremental investment, which is going in the form of a shareholder loan and shows up further down on the balance sheet, and the balance of which was simply working capital related to the equipment contract.

I would also comment on accounts receivable net third-party receivables. You can see that that came down by 10.9 million, and actually, our DSO continued to improve if you to exclude the Trinidad AR, which has been outstanding for some time and for which we received $12 million in payments in July. If you look at receivables from affiliated companies, there was a substantial jump there. That's a 23.8 increase over year-end. That change is essentially all related to Kuwait and it includes some advanced billings that were issued in June on that project. And I should comment here that of the 47.5 million, approximately 16 million of that relates to Trinidad. And again, the 12 million which was paid in July of course went towards reducing that and the remainder will be paid out in the near-term over project cash flows.

Looking down on the balance sheet at receivables from affiliated companies, you can see that our 11.7 million went up to 17.9. That is essentially the again shareholder loan on the Kuwait project and also includes $12 million of Trinidad-related notes, but 10 of that is the sub-debt that we've talked about in the past, and two of which is a reclassification of some of the items outstanding that will be paid over the next year or so. And I think that covers most of the items, the major changes items on the balance sheet. The big change in deferred revenue and advances is a reflection of an advanced billing on the Kuwait project. And essentially, that covers most of the major changes. Ted?

Thanks, Dan. I want to say a few things about our business in the quarter and also the business outlook. Bookings for the quarter were 88.5 million, or almost $90 million, which was the best bookings quarter for the last three quarters and significantly up from first quarter bookings of 59.5 million. Almost 60 percent of the bookings were in the equipment business group. A generals tone of business, as Doug mentioned, continues to be mix. Although there is an active pipeline, especially in desal, decisions are being delayed and there is aggressive competition almost on almost every job. The microelectronics sector is still slow, especially in the new fab area, although we are seeing some business in the flat-panel display market and in wastewater applications for the microelectronic plants. In spite of this, however, we did have decent bookings in the quarter, and I do want to highlight two significant closings. As Doug mentioned, we closed what is called the Phase 5 expansion of the Trinidad desal facility, which will improve and increase the capacity of that plant by about 9 percent and will go operational in the first half of next year. We view this as a significant vote of confidence by the water and sewage authority of Trinidad and reflective of the need for additional water supply for all of the islands. And as Doug mentioned, we are working with our partner and the water and sewage authority in looking at alternatives for additional water supply for Trinidad, which may include the further expansion of our point leases (ph) facility and perhaps independent facilities on another part of the island.

The second closing of note was our first field owned and operated desal facility in Israel. In conjunction with our Israeli partner, we will build, won and operate a 6 million gallon per day desal facility that will sell water to the Israeli national company starting in 2004. The desal market in Israel and the rest of the Middle East is very active and we're pursuing a number of additional opportunities in that area.

I also want to say a few words about our CoolerSmart acquisition. As I think as most of you know, we sold our bottled water business at the end of 2001 after 15 years of operation. We've held the belief for some time now that there is an emerging opportunity in what is called the point of use watercooler market, where the bottle on top of the cooler is replaced by a water treatment system within the cooler. The point of use watercooler is rented for a monthly charge and delivery, storage and handling of the water bottle is eliminated. The delivered water quality is as good as bottled water and costs to the consumer are lower. After some market study and evaluation, we concluded the market potential monitored a next step and we acquired CoolerSmart. CoolerSmart is installed and rents approximately 10,000 point of use coolers in the mid-Atlantic regions and has the critical mass that is important for our further market evaluation. If we continue to get positive signs, we intend to grow this business with the anticipation that eventually, this might be as large as our original bottled water business. I would like to now after that brief review go to questions and answers.

(Caller Instructions) TRACY MARSHBANK (indiscernible), First Analysts.

Thanks a lot, good morning, guys. A couple of quick questions upfront. What was the after-tax impact of the equity item and the asset impairment charge?

Well, the $4 million of course is a pretax impairment charge that we spoke of, and of course, equity income is reported after local taxes, and that was the 3 4 (ph) we talked about. So you can figure out the effect using the 38 percent tax rate that I quoted.

So we can just use 38 to get it down to the bottom? Okay. A couple of other items. You talked about the impact of some charges and issues related to current contracts. Was that isolated primarily to the quarter, or should we just view that as may be carrying forward for a period of time on those contracts?

I would say that we have been taking an aggressive posture to writing off costs related to projects. Some of these costs are related to some projects that were entered into a year or to ago on less favorable terms than we're pushing for today. I think that this is a phenomenon we will get through, but it might take us a couple of quarters to get through.

Fair enough. Sort of the related question to that. As you are looking at bringing in the new business and you talked about going after better terms and prices, are there particular keys in there that you're altering that were the issue, or is it, if you will, a better estimation and execution?

There are three elements to it. Clearly, better estimation and better execution help in our performance, but also up front, I think there tend to be terms that get slipped into contracts that can sometimes come back to make final completion more difficult, and we're more cognizant of those terms and making sure that they don't slip in.

Amen on that one. Final question. I was at SemiCon and noticed you didn't have a booth, but understand you guys were sort of trolling around. One, is that a comment on your activity within semiconductor? And prior, you had discussed in ultrapure going after different ancillary businesses flat panel displays, which you mentioned today as well as maybe some pharmaceutical and another applications. Where do you stand on your evaluation of where to take ultrapure?

Clearly, the microelectronics and semiconductor piece of that marketplace has not come back to the levels that we experienced in the mid-90s. And I would say after three years of waiting for that market to come back, we're now taking a serious look at our infrastructure and support for that marketplace. And I think the expectation is that we may be looking at some restructuring in that area as well. We are aggressively pursuing other opportunities in microelectronics, now that the new fab plant building has pretty much come to a halt. And as I said earlier, flat-panel display from applications and wastewater high dis (ph) plants, those opportunities that we're targeting. But it certainly appears that the microelectronics market as we knew it in the mid-90s, has not come back and we're adjusting for the possibility they will never come back as it has -- as it looks today. As a further comment on that. One of the orders -- I mentioned that there were some Q2 orders that slipped and we thought we'd get them and be able to recognize some revenue in the second quarter and they did not come in. One of those orders was a $6 million plant for a hard disk application. So there is business out there, but it is slow.

Thanks a lot.

Deborah Coy (ph), Schwab Capital.

Thank you. Good morning. First a big picture question, then a couple of specifics. Doug, you're sounding a little gloomier than I would have expected, given that a lot of this stuff is onetime charges. What I am wondering is whether you are seeing some more deterioration in the structure of contracts than you expected, kind of the state of the business. Is it a disappointment? What I'm trying to get at is that, clearly the opportunities are there, but are you seeing that the job that you have to fix is perhaps a little bigger than you first thought.

DOUGLAS BROWN I am disappointed that, after you strip out the charges, we still are reporting a loss for the quarter. And that is the source of the disappointment. Is it fair to say that there are more significant changes or other issues that I am finding that I did not anticipate? Yes, that is true. The good news though in that is that I have not seen anything that I don't think is fixable. I have not seen any fundamental problems. I do believe that the future of the company and the future of the industry still has a lot of positive opportunity, it is just the task of getting there is probably a little more significant than I originally anticipated. Okay. Actually, a follow-up on that and Tracy's earlier question too. Dan, the number that I come up in backing out the charges is a 4 cents operating loss in the quarter. Is that about right?

I think that is reasonable.

A couple of specific questions. It sounds to me like from what you are saying that this 23, 24-ish operating margin in the equipment business group may persist for another quarter or two as we're working through some of these old contract issues. Is that a fair assessment?

As a conservative approach to things, I would say that it is probably fair to assume that for the next couple of quarters --

We're not going back to 28?

It may take us a little time to get there. We're trying to take an aggressive position on expense recognition-related projects, so.

Which bodes well for '04, but not for '03?

That said, Deborah, obviously, any contract issues that have been surfaced and that we're aware of, and we do look at them aggressively. As Doug has described, we have (inaudible).

Can you tell me where backlogs stands? You said you booked 88.5 million in the quarter, Ted?

I think we reported the backlog in the press release. It is 346.

So basically stable with the prior quarter?

I think our book to bill was pretty close to 1 (ph).

Definitely an improvement. Finally, a little bit more color on this new consumer water business that you are moving into. First, can you say what you paid for the small cooler company that you acquired? And of more interest really, what I would like to understand is what you see in terms of the revenue and margin potential? My assumption is that, as you perhaps move back to the size of the earlier bottled water business, you should have higher operating margins in the new PUO (ph) cooler business because of a significantly lower SG&A structure?

Yes. Let me try and answer that, Deborah. Generally in the bottled water business, acquisition costs run in the area of $800 to $1000 a cooler, and that sort of has spilled over into the PUO marketplace. And I can't give you a definite number, but I would say that we did better than those marketplace numbers. We are very attracted to this business. As I mentioned earlier, we spent 15 years in the bottled water business. One of the reasons we exited the business, besides the very attractive price we got, is the sense that, eventually, the bottled water business was going to be eroded by point of use activity, simply from the standpoint that, eventually and logically, the consumer will use point of use coolers because they are cheaper, will deliver the same quality water and you eliminate the whole business of storing bottles and lifting them on the cooler, which has always been our consumer complaint. We also think that the PUO cooler marketplace offers margin opportunities that were even better than bottled water. So we are going at it slowly and deliberately, but I would say we are pretty excited about the opportunities.

To be as specific as possible, maybe it's too early, but my assumption on the bottled water business was always that gross margins were in the 40s, but operating margins were only in the low single digits -- call it 10-12 -- because of the SG&A side. Is it fair to say that this business should have higher operating margins than that?

I would think so.

Okay, thanks.

Lorraine Mikus (ph), Merrill Lynch & Co.

Thank you. I just wanted to follow up quickly on Deborah's questions about the bottled water business. I was also surprised that you were getting back into this. Can you just talk a little bit about -- I know you had some receivable problems with that specific business, higher SG&A -- I guess how your view on this business has changed, now that it is the cooler versus the bottle and how it will affect your financial picture going forward?

There is -- a big difference in the business is just in the logistical support, some of the operating mechanics. So that's one of the reasons this business will have performed, we expect, much better than the bottled water business. On the receivable side, I think there is nothing that says that -- that's just a question of management. I think as we've shared in the past, block and tackle work and keeping after accounts and that sort of thing. SO there's no fundamental issues there. Let me add a couple of thoughts to that. One of the big problems in the bottled water business is that you have trucks, you've got bottles, people and this need to deliver this water continually adds up to a work force and controlling that workforce which was always a negative and a concern to us. This point of use business eliminates pretty much that entire distribution for us and what that is replaced with is a small service group that will service this cooler every 3-6 months. So instead of having this huge truck trying find a parking spot in downtown Manhattan on a weekly basis and delivering 10-20-30 bottles to a building, you now have a service man in a panel truck who will show up every 3-6 months and do some service on the water treatment system that is inside the cooler. So we think it has some very significant advantages over the bottled water business. And even when we exited the bottle business, this was high on our agenda, in terms of strategic opportunities.

Okay. The cost to you guys, in addition to obviously the unit itself, is just replacement filters and that service fee every 3-6-months?

Yes. Yes. Essentially, replacement filters, checking the unit, probably doing some sanitization. And in those cases where you might have reverse osmosis systems, it would then -- the point of use cooler -- you would service that as well.

Moving over to Trinidad, the $3.4 million charge -- was that all financing related, or did we have a loss from operations included in there as well?

I think as we said, it was predominately related to the completion of the financing, as well as some of these additional expenses that Desalcott has incurred, essentially related to some of their business development activities, and also the dispute of some of the construction items. So it is a combination of things, but I think it is safe to say it is predominately related to those things. We did continue during the quarter -- the financial close took place at the end of June, so we did continue to incur the higher interest expense during the quarter related to the bridge financing. So we did have that that affected their results in the quarter. But of course, that will improve now with the long-term financing in place.

Finally, the asset impairment. I know that you had taken some impairment charges in 2000 and '01 for bleach manufacturing. (technical difficulty) was this everything that was left?

Well, it's pretty much everything that is left on the generation of the hypochlorite (ph), or bleach piece of that business. Some of the charges we took -- and I believe in 2001, were associated with our mid-Atlantic facility when we had anticipated growing that business. And when we decided that we would not, we took some impairment charges against the mid-Atlantic facility. This charge essentially eliminates the production side of the equation in this business, but there still are some assets in the packaging side.

Do you still have the facility in Australia?

We do, but let me differentiate that from this operation. What we are talking about in this impairment is our consumer bleach operation where we had the expectation that we might be able to compete in the private-label bleach market on the consumer side in the United States and go up against the Cloroxes of the world. We have decided that certainly that is probably not a core business for us going forward. What we do in Australia is just the generation of hypochlorite, which is used for our municipal disinfection. That is a business that has been continually profitable for us, and we certainly will hold onto that business and we we'll even try and grow that because it is profitable, high margin recurring revenue. But that is used for disinfection of municipal water supplies and not the consumer bleach business that we're talking about here in the United States.

Okay, thank you.

Keith Wagner (ph), Credit Suisse First Boston.

In the ultrapure water group, you mentioned that there has been, for example, a $6 million slippage of sales into the third quarter. Will that definitely be closing in the third quarter, or is it slipping indefinitely?

It is closed.

So it's closed?

it was anticipated to be an order that we would receive in Q2 and receive early enough in Q2 that we would get revenue from it. But the order actually slipped into Q3, but it has been closed.

In terms of the equipment business group, I know we talked earlier about these charges with the contracts and what we think (ph) going forward. Can you be more specific and just give us some idea what these charges are and how? Like just more specifics over what the change in practice was and what the actual charges are, or what projects they relate to, etc., so we can get a better idea of what was really going on?

These were equipment contracts. As I said earlier and Doug also commented, has (indiscernible) cost estimates. It's really a reflection of our ongoing efforts to monitor all major projects. We have talked about that. In the past (ph ), we go through all of our major contracts on a regular basis, and there is not any particularly trend beyond that. But we're looking at them aggressively and making sure that we have all of our plans in place to execute as flawlessly as we can.

There was not a specific type of cost related to multiple contracts that is now being looked at differently, like what piece of the cost?

Let me try to answer that. Just to be specific, we have not (technical difficulty) change in policy, in terms of cost recognition policy or accounting policy. So were trying to apply the same standards. But we have been going through a process of reviewing all of our in-house projects and identifying issues that need to be resolved for contract completion. And what we have done is we have tried to take and we're (technical difficulty) take a fairly aggressive view as to costs to complete these projects and our ability to recover these costs and recognize them.

Okay. That is helpful. Thank you.

Neil Miller, Fidelity.

Good morning. I heard -- I want to pursue Trinidad and the expansion of that. And I heard that done in the context of a more competitive environment, so I'm a little worried about good money after bad. In other words, if it is a competitive environment, what can you do to make sure it is more straightforward and you have learned from your previous experience? I'm a little concerned you're going in the wrong direction there?

By going through an expansion in Trinidad?

You bet.

First of all, I'm confident, Neil, that this is not good money after bad. We did go through a period where we were having difficulty in this project because of a combination of the contract dispute and the effect that had on being able to get our long-term financing in place. That is behind us. We have a fixed-price contract for the expansion. It is 100 percent cost related to the desal battery in the planet. This is the business we know very well and we have a high degree of confidence that we have the proper cost estimate on this project expansion. We are confident that we're going to make money on the capital equipment side of the expansion. We also have confidence that we have fixed-price per cubic meter in place with the purchaser of the water and we have both a contract with the purchaser that they will buy the extra water. And in fact, we have a relationship with them that they have to date been telling they will buy all of the water we can produce and they have been buying and paying for all of the water we can produce. So we believe that if Desalcott has the extra 9000 cubic meters a day production capacity and produces that 9000, then we will be paid and we will be paid at a rate that will add significantly to the operating income of the plan. The incremental cost of this expansion on a dollars per cubic meter of extra capacity is significantly lower than the cost of the plant overall. So this is a very leveraged -- this is effectively leveraging this transaction dramatically. These capacity expansions, once you have paid the $100 million to build the plant, to pay another $7 million to get a 10 percent capacity increase is a good deal for the operating company. And on operating an leverage, we can operate the plant, get 10 percent more capacity out of it, 9 percent more capacity out of it, we don't add any labor, we add some valuable operating costs and electrical and chemical consumption, but all of the overheads are fixed, the plant overhead is fixed, so it adds a significant contribution to the bottom line at Desalcott. These are the type of things -- this is where, when you look at these big projects, these capacity expansions, this is where you really make a good project a great project, is when you can get these capacity expansions. We would love for them to come back to us and say -- can you add another 10 percent, even beyond the one we're putting in.

Appreciate it. On Kuwait, a similar kind of concern. I thought it was an installment accounting and that you were far enough along now so -- I kind of got the feeling here that in your earlier comments, there might have been surprises here, in terms of cash flow?

No. The cash flow goes up-and-down, depending on the activity on the contract. But during the first six months, as I indicated, we did utilize cash for the working capital needs of that particular contract. We also -- the investment which we're putting in the form of a shareholder loan that I commented on, goes in over the life of the construction. So it is not happening all at once. But that was about $5 million over the first 6 months of the year. So the combination of those items actually created the cash usage. We will -- we expect actually in August to receive some significant payments on that particular contract, and that will be ongoing. So it is just normal movement on the contract as it goes through its phases.

I appreciate it. Another area, patent suit, there was a reference there. Is that -- obviously you're pursuing litigation. There's something at stake, and I'm kind of wondering -- any comments as to what is involved there?

During the quarter, there were three primary sources of legal expenses. All three cases effectively we were the plaintiff. Two of the cases are cases where we are trying to collect balance due on contracts that have been completed. And there is a dispute about either costs associated with them or delays that might have occurred in the project. But we are incurring expense in order to collect additional proceeds. So we think that is effectively a good investment. The third is a patent litigation case where we are the plaintiff. I am not sure if we disclosed this -- where we are basically suing Anatole (ph) for patent infringement. There have been negotiations related to a settlement, there has been discussions about it. The settlement is not -- we have not reached a settlement, and so we continue to incur expenses related to that case. But I would say that we are optimistic that we're getting close to resolution, but because these things are a little hard to forecast, I would be hesitant to give the guidance as to when we'll actually get closure on this.

Final question relates to the timeline on the acquisition. I heard earlier comments about '01 and I'm just kind of wondering, Doug, whether this -- well, I don't know. I guess to me, if I'm a consumer and I see a bottle on top of a tank, I say it is good. If I see a piece of (ph) mechanics, I kind of wonder what is inside of it. And so I am -- they're from Missouri (ph) I'm not sure. I am wondering whether that's under your watch or the motions were going forward and maybe it is less strategic, or sorry to ask that, but.

I will answer that. Because this is really, this was an initiative that I really pushed forward on. There are clearly consumers out there who will (technical difficulty) hate dealing with the bottles, they cannot find somebody to put them on the cooler, so half the time, they're empty and they have a storage room in the back that is full of files and papers and has got a stack of a dozen bottles on it. And then we can come in and say you don't have hassle with the bottle anymore, you don't have to take up your office space with or storing the things, and by the way, we can save you significantly on the current cost of your bottled water supply. There is a significant percentage of those bottled water users out there who find that the ease-of-use and the cost savings makes for compelling opportunity, and they buy. There will be a part of the market that will always stick with the bottle on the cooler because they like to see the water and they may not trust what is going on inside, but our experience so far -- we have actually been in the POU cooler business on a small-scale in California and in Europe for some time, and our experience there has given us enough confidence that we wanted to take the next step. But I will say that the approach we're taking, as Ted described, is that this is the next step where we're trying to reach critical mass in a specific geographic area to prove to us that we have the right model and that to prove to us that the economics work the way we think they work. If they do work the way we think they work, this is a better business than the bottled water business it has higher margins, it has good gross margins and 100 percent of the revenue is recurring revenue. One last thing is (technical difficulty) it's pretty easy for customers to change suppliers, because people are knocking on the door all the time to say, stop buying the bottles from them, buy the bottles from us. It is a bit harder when you have a POU system because of the way it is installed, but just yank it out and put somebody else in. So the business model to us looks to be a bit more dependable as well.

As a parting comment, Doug, I really appreciate your candor here and I'm glad to hear you're -- whatever you have discovered is manageable and work hard, will you?

DOUGLAS BROWN I'm working hard. But as I said, I think Deborah was right when she said that it probably has more issues to deal with than I anticipated when I came in, but I really mean it when I said -- I have not seen anything that I don't think we can fix. Thanks.

Tom Kaplan, ECI Capital.

Good morning. Thank you for taking my call. I have one big question picture question and one minutiae. I will start with the minutiae. Can you just review for me one more time -- of the short-term receivables from affiliates, 47 million and the long-term 17.9 (ph) and the 13 million in revenue, how much of the 13 million in revenue comes from Kuwait and how much of the 47 and the 17.9 is from Kuwait?

Let me try to take you through that. First of all, the 47.9. They received short-term receivables from affiliates. It's up about 23.8 million, which I said I believe was essentially all related to Kuwait. 13 of that was the revenue, and about 11 -- 10, 11 was an advanced billing, which is also showing up down below in deferred revenue and advances from affiliated companies. So that was a billing that went out late in the quarter that effectively was an advanced billing on that particular project. So that is what is included there. And then in the receivables from affiliated long-term, you asked about that as well, correct?

Yes.

That is essentially the investment we're making in Kuwait. That was about $5 million that went in over the six-month period, so it's taking the 11.7 up by 5 million, and then there is a remaining piece, a tail, if you will, on Trinidad, $2 million which we brought down from up above and put into the long-term category, because it will probably take a year or slightly more to collect on and will be paid out of the proceeds from the project there. Does that answer your question?

Yes. My math is usually terrible, but thank you. The other question is, big picture question, and I guess since this is your first conference call as Chief Executive Officer, I think it's apropos. As you look at your commitment on the balance sheet to your affiliates, in terms of the amount of capital that is employed and the billed, owned and operate, and when I look at the receivables from affiliates as a total, as a percentage of total receivables, the number has marched steadily higher, and yet, your return on average assets, your return on invested capital, your return on equity, they have all been below your cost of capital, even taking the cash portion into consideration. And I'm just wondering -- the balance sheet is telling me you're moving more and more towards the affiliate model, and yet the returns are not there. What is the goal in your mind to raise those returns?

I think you're absolutely right. What is happening is that we have been investing in, first, Trinidad, which was the biggest project that we have undertaken in the history of the company, and then Kuwait. And neither of these projects has actually yielded returns for the company yet. Trinidad is delayed in generating return, because we've had issues there. And Kuwait is in the build phase.It's not an operating plant. So that is going to take some time to flush through. The way the accounting on this works where we are selling to an affiliate, we effectively have to defer a large part of our margin on the EPC contracts, because the argument is we are selling to an entity where we are a part owner, so we cannot take the margin related to our ownership position. So what ends up happening is from a cash perspective, we start investing in these big projects and there is a delay before we start recognizing return. And in the case of Trinidad, to be quite honest, there's been a delay in recognizing that return while we sort through some of these issues. Now I'm confident that we have sorted through the issues in Trinidad and that that is going to be a project that is going to start generating return. Should have happened a year ago. It is going to happen at the end of this year. Kuwait is going to take a little time to build up and generate and put them through. I think from a big picture perspective, the issue that I'm wrestling with -- and I don't have an and for you today -- is to what extent do we want to continue to invest in these big projects that creates an investment upfront and a bulging in the balance sheet that does not come through the P&L for a year or two down the road? Because as you rightly point out, you start looking at it and it looks to you like we're investing a lot capital in the balance sheet and we're not generating any earnings as a result.

Thank you.

Cliff Josephi (ph), HD Braust (ph).

Hi, guys. I would like to follow up on Tom's question on the receivables from affiliates. Obviously, he didn't follow it up, so he understands, but I don't get it. The total accounts receivable from affiliates were up roughly 27 million sequentially, right? And you had $13 million in revenue from affiliates. Now you had -- your total deferred revenue went up $7 million sequentially?

Yes.

Where is the rest of it on the balance sheet?

I think what is confusing on that particular point is that the receivable, the accounts receivable with affiliates, that number 47.5, includes approximately 10 million in advanced billings that effectively is also netted out down below and deferred revenue and advances from affiliates. (MULTIPLE SPEAKERS) we have grossed up the balance sheet for that one billing, because it is a billing in excess of our cost.

So you're saying that the accounts receivable from affiliates, the increase in accounts receivable, is offset by an increase in deferred revenue?

To the extent of the one billing that I just described, yes, the $10 million.

So netting that out, you'd have accounts receivable from affiliates of roughly 17 million, and you would have a deferred revenue decline of roughly $3 million. But still, you only have revenue of 13 million? So you have revenue of 13 million, you have receivables going up 17 million, plus you took down deferred revenues $3 million.

Reduction in deferred revenue related to Trinidad of about $3 million. And that is also a piece that I should have mentioned that I didn't. That is correct. There is a reduction in the deferred revenue related to the resolution of the items that we discussed in Trinidad, so that is also in the equation.

Maybe I don't have my accounting right. If your accounts receivable from affiliates goes up, it should go up by the amount of your revenue, plus your deferred revenue increase, right?

Right. But what I'm saying is -- in the case of the receivables with affiliates, we also had -- in effect, we took down the receivable from affiliates with Trinidad by about $3 million, and that was also corresponded with, or matched with a reduction in the deferred revenue with Trinidad of the same amount. So that also played into the results in the quarter, and that reflected the resolution of the items that we've talked about. There was no P&L impact, but in effect, we reduced the deferred margin by the amount of what we agreed to with our partner.

I guess I need to take an extra accounting class. As far as the backlog is concerned -- excuse me -- the bookings are concerned, what were your prepared comments -- the bookings were $90 million versus $50-something million bookings in Q1?

The actual bookings in Q2 were 88.5 million, and the bookings in Q1 were 59.5 million, so they were up significantly -- Q2 bookings were up significantly from Q1.

Any caveats with that 59.5 million? I remember there being something about it. Would you like me to refresh your memory?

We had an adjustment in Q1 to the bookings number that we talked about at the time. There is no caveats to the --

Because you talked that being 76 million in the prior conference call, because you had to adjust your backlog because you had overstated in the past by 15 million. Okay, thank you very much.

Bill Nascovitch (ph), Heartland Funds.

Good morning. Could you amplify a little bit, in terms of what kind of return hurdles, anyway you want to look at it, return on investment, return on assets, return on equity, return on sales -- what you guys are looking for for these various -- just the contracts you are involved in and your basic desalinization and water treatment business?

What kind of return that we typically --

What are you shooting for?

You mean, when we make a decision to build a plant and operate a plant, we're investing capital -- what kind of return are we expecting to gain?

Yes, and when you think you start to -- going forward, when do you start to make money on these things?

Let's take one where we own it 100 percent where we own (technical difficulty) consolidated in the business. We effectively invest capital in building the plant. And we don't recognize -- we're not going to see any revenue from that until the plant starts operating. And in a lot of the plants, I would say that our experience with the smaller and midsize plants, we have quite a number of them in the Caribbean, for instance and other places around the world. These plants typically start making money pretty much when they start running. Some of the larger plants we've found actually in the first year of operations don't make money right away because there are still costs that are incurred in getting the plant up and running. And it is not until the second year of operation they're forecast to make money. The hurdles that we are using are typically looking for an IRR on our investment over if the life of -- typically, these plants have a contract, an 18 or 25 year supply contract and we are looking for IRRs -- we're looking for IRRs around 20. There are some projects we've taken on where the forecast IRRs are in the high teens. We're also frankly starting to look at them from a net income return on capital employed, because one of the issues that the number of investors have highlighted and is obvious when you look at it, that when you look at our balance sheet and our income statement, we are not making a good return on the total capital of the balance sheet. And so -- on a net income basis. And so we're looking at these plants to see that they can produce a net income return on capital employed in year two of the plant operations of over 10 percent.

Okay, thank you.

Alan Fournier, Tennant Capital Management.

Thank you very much and good morning. I had a question on the water business which I'm not really familiar with, but I wanted to explore a bit. What is the competitive landscape of that business, in terms of marketshares and players? And how do you see this company purchasing you're competing versus established players?

Are you talking about the point of use of water cooler market, I assume?

Yes, I am.

Okay. This is an emerging market. It is not -- there are not participants in this marketplace that are large companies. Clearly, large bottled water companies have a problem in how they deal with this marketplace because they don't want to enter a point of use market themselves and begin scavenging their own bottled water business. So to this point, it has kept some of the big players out of this market. To give you some perspective, CoolerSmart, which has 10,000 coolers, is one of three big players in the U.S. market, one of two or three big players, so that give you a relative size. It is quite small, but it looks like it is growing fairly quickly and that other players may be looking at this marketplace right now. But I think to take a guess there, maybe the total U.S. market this time may be less than 100,000 coolers.

So there are no large, established players here?

That's correct. It is a fragmented industry, the industry growth rates in the U.S. is in excess of 30 percent where the growth rate of the bottled water business is in the single digits.

Okay. You mentioned, in you're prepared comments, that you were able to buy it at a discount to sort of the prevailing rate. Why were you able to pick it up at such an attractive price?

I guess we were effective in negotiating (indiscernible). I don't think that there is any specific reason why we're able to except that we understood the business well enough and we were able to negotiate what we thought was an attractive transaction.

It's not an implication -- I don't think there is an implication that it is damaged goods. It wasn't that we had a motivated seller. They decided that they wanted to focus on their core business and I think it was just the combination of events that led to what looked to us to be of fairly attractive opportunity.

That's great. Can you tell us who the seller was?

We are under a confidentiality agreement at this point, so we're not able to be more specific, I'm sorry. I believe that additional information will be in the Q but at this point, we have a confidentiality agreement that prohibits us from being more specific.

I understand. That's fine. I guess one related question and a bigger picture question -- what kind of capital would you envision employing into this business and are there any other liabilities associated with this business that you are assuming?

Other liabilities associated with this -- with the CoolerSmart acquisition -- I think (indiscernible) we structured it as an asset transaction so that -- I think we have managed effectively isolate ourselves from any contingent liabilities. In general, I don't believe that there are liabilities related to being in this business that are outside of what we already assumed by being in the water business. What was the second part of your question?

Capital employed here.

That part of it -- I think we need some time to answer that question. We're taking this one step at a time. We have been, if you like, experimenting with this business in the lab up until now. This is now our pilot plant. We are going to see how the pilot plant goes and make sure that we understand how it works properly before we invest in a big facility. But it is a business that we do believe, long-term, has the capacity to be as big as the bottled water business, which would involve investment of additional capital depending on the rate at which we want to roll it out.

Understood.

I'm sorry I can't be more specific with you at this time.

I understand. May you can help a little bit more in September. That's fine. Final, bigger picture question -- when you describe your discovery that there are more issues but they are fixable, can you give us any help in terms of what fixable means in terms of potential margins relative to history or are you not prepared yet to -- (MULTIPLE SPEAKERS)?

I think I said in my opening remarks -- I had said in the conference call last quarter that I did not see a reason why we can't get back to 10 percent EBIT margins? I still stand by that. I don't see a reason why we can't get to ten percent EBIT margins.

Back to sort of 1999 levels?

In the late '90s, we had a number of years where we were over ten percent EBIT margins and I think we can still accomplish that.

Great, thank you very much.

Nathaniel -- (technical difficulty) -- Associates.

Good morning. CapEx for the six months and the second six months?

The first six months was 6.2 million. That was for the quarter, excuse me, so it was -- hold on one second -- probably -- well, it's about double that -- $12 million for the first six months of the year.

About the same for the balance?

Yes, I think we do not foresee a radical change in that over the next six months.

Okay. A suggestion -- if you could put a cash-flow statement with your quarterly earnings, it would be very helpful. Could you please take the 47.5 million accounts receivable from affiliates apart? I don't want go into any detail, I'd just like to get a, from the top down, a general sense of what is in there. I have made notes on the moving parts, I understand some of them, but build that up for me.

That's fine, since there were several questions around that, I'm happy to. The 47.5 includes approximately 16 in Trinidad receivables. And of that, as was pointed out earlier, approximately 12 million has been received in July. So that has already been paid. But of course we're looking at the June balance, so let me just point that out. The remainder is predominately related to Kuwait. And of the remainder, approximately 10 million is in advanced billing, which went out late in the quarter and is also offset or marched by an increase in deferred revenue down below in the liability section. And the balance -- so 47 minus 16 minus 10, leaves you approximately $20 million -- is just Kuwait-related equipment, receivables, both billed and unbilled. And that is where I talked earlier about cash usage during the six-month period relating to the Kuwait contract.

Thank you. When do you expect this 47 million less 12 to be paid down? How long will it be -- this 35 million -- how much longer will that be on the balance sheet?

We will receive some significant payments this quarter we expect on our Kuwait contract, and that should go down to a lower number over the balance of the Kuwait contract and certainly be eradicated over the balance of the construction period.

So that would be by -- through '04 '05, these items ought to be brought to zero?

Certainly as the equipment contract is completed on Kuwait, yes.

And the equipment contract is completed '05, isn't it?

Correct.

You use the phrase in Trinidad -- it is a competitive market. Is Kuwait a competitive market in the same vernacular?

We mislead you about Trinidad being a competitive market. I am not sure that was the message we were trying to get across. In Trinidad, we have a fixed contract, the contract calls for our ability to expand the plant. The pricing is fixed and we get good margins on it. We are not facing competition in Trinidad. I think that Ted's comment about competition was related to contracts or bids that are outstanding that have not been closed. It is a competitive market in general.

But that was not with the specific reference to Trinidad, but it is a competitive market for your water treatment facility?

Yes. If you look at the market today and in closing new orders, there is a lot of quotation activity outstanding, there are serious projects to be completed. Closing them is difficult and the competition for those contracts still remains significant.

For some time, we have learned and believed that Ionics had the all-around capabilities to take on a project of virtually any size, anywhere. In other words, you were prepared to be prime contractor. Is that still the case, or are you increasingly looking to be a sub under some larger -- or other entity as you bid on this work?

Our expertise is in designing and building these out plants. And our expertise is not in building roads and buildings and tanks. And frankly, even building pipelines is not necessarily something that we want to do. What we have gotten into in the past where we have gotten into some trouble is by taking on or scope creep, so to speak, where we would take on a broader scope than what our real expertise was. And what we're trying to do now is to get back to our core activity, to focus on what we know how to do well. We know how to put in a desal plant, we can build the desal plant on a site, we can start it, but I had rather not be building buildings and building roads.

And it's those people who would be the prime, and you would be a sub to do the desal?

You will see that situation. Certainly, we have experience in working with people, like the bectals (ph) and the CH (indiscernible) Hills (ph) and being either a partner or being a subcontractor. I would say that there is a large -- a lot of the contracts that are out in the market today people are approaching as more joint ventures, like when you look at Kuwait. We're in joint venture in Kuwait with a contractor and they build the roads and we build the desal.

Got it. Got it. General Ionics. For a while, it was a substantial financing activity associated with General Ionics. Is that still ongoing, and what is the level of that now?

This is financing of home water systems.

Right.

Is still exists, it is still is an active business for us. In fact, we've been looking at and have changed the model a little bit. We actually have, in addition to general Ionics, we have a group out in California that is also in the home water market. It is small for us, it is a very interesting business, though. The returns from the sale of softeners and the financing of those softness has actually been quite attractive and we are undergoing a strategic review of that business (indiscernible).

Good good. That's all I had. Ted, I look forward to seeing you before you leave and thank you very much, gentlemen.

Thank you.

Brett Reese, Prudential Securities.

Good morning, gentlemen. My question is for Mr. Brown. The clauses in the contracts that have necessitated a review of the in-house project, what gave rise to these problem clauses? Was it because the decisions on these contracts were being made in a decentralized fashion and from the field, or was the decision-making decentralized and it was just a matter of the sales department having more clout and being able to override perhaps the contractual discipline of your legal department? What gave rise to it and what is going to change so that things are tightened in the future?

Let me try to answer that. I think also, we have to keep in perspective that we have been through a period where closing contracts was difficult. There weren't many contracts around. The buying power on behalf of the customer was higher, which typically in the marketplace, gives rise to more customer-friendly clauses. Clauses that can affect you are simple things, often what look like to be simple things, that affect your ability to pass through cost increases related to change orders, or change in scope that -- in any case, what led -- in the past, I would say it is fair to characterize that there has been a decentralized system for bid preparation and for contract preparation. And that has a lot of issues with it, including control issues. In fact, a part of the restructuring program that we are putting forward will have a much more centralized bid preparation and contract preparation function. I think the company has made, independent of the restructuring, the company has made significant progress at improving controls and bid preparation and contract negotiation. So I think that, even without my efforts, the company is getting better at dealing with these issues. And what we are dealing with are contracts that are older and have been in the system for a while. But clearly, to be effective in this area, we have to start with having a good process for preparing cost estimates and for negotiating contracts with customers. We have to be consistent in the applications of our prophecies and this is more easily done and more effectively done typically in a centralized system than in a decentralized system.

I guess that is one of your challenges, to get the organization to go along with that?

Thus far, I'm happy to say that I believe I have gotten quite a lot of support from within the organization. I think a lot of people realize that we need to make significant changes to the way we conduct our business. I would also say it is probably fair to characterize that there are a number of people that are concerned with the uncertainty that about how we are going to be structured ultimately and the impact it might have on their personal situation in the company. But I have really seen a tremendous amount of support for people to say we need to change, we need to make these tough decisions, we need to go forward and this is going to ultimately improve the performance of the company and improve the opportunity for our employees.

Now your internal computer systems, do they provide you with the data to monitor these contracts in real-time?

There is real-time feedback opportunity into systems, but I' will tell you that we have a process ongoing to review our entire MIS system, and it is likely that we will be making a significant investment in this area.

Right. Okay, thank you.

John (indiscernible), Adams Harkness and Hill.

Quick question, in terms of your end markets on the flat-panel display side. During the past quarter, there's been a lot of news out of the flat panel guys in Asia saying that they were ramping production, etc.. Two questions. One, do you see that impacting business moving forward, in terms of the flow of purchase orders, or RFPs, that these folks have put out yet? And the second question is -- I think you mentioned at the beginning of the call, at least in the first half of the call, that flat-panel was a bright point in the quarter. Was that a result of this type of news or not?

I think what I said earlier was that, in the microelectronics sector, we had seen some business in the flat-panel display area and also in wastewater applications. And it is a fact that there has been some increase in opportunities, especially in Asia in the flat panel display area and we've been a beneficiary of some of that activity. Going forward, it's hard for us to predict where this goes and what percentage of that market we might get, but it certainly is one of the few bright spots in this whole area.

Great, thank you very much.

Margaret Jones, ACI Capital.

I don't mean to beat a dead horse, but I'm a little confused on the math of the receivables and the deferred revenues and how that was working. What I looked at was, I added up the receivables both short-term and long-term from the affiliates and it seemed to go up 27 million in the quarter sequentially. And the deferred revenue from affiliates seemed to go up 7 million. And then you had 13 million of sales to affiliates running through your income statement. So I just go 27 minus 7 minus 13, and I get a balance of 7 from that. I'm trying to figure out where I can tie that other 7 million to, in terms of the bump-up in receivables from affiliates?

Let me look at this and see if I can explain it. Essentially as we've tried to go through this, you have increases and the receivables with affiliated companies, as you point out, that goes up $28 million, that's in total between the two; long-term and short, and that includes 23 million in Kuwait short-term or contracts activity and another 5 in our investment increase in that project in the quarter. And then on the deferred side down below on the liabilities section, the increase there is related to the advanced billing that I talked about up top. And then on the deferred revenue from affiliates, we essentially have an increase there relating to the deferred revenue on the Kuwait equipment contract and a reduction associated with Trinidad. I said 3 million it actually less than that, slightly less than that but also I correct that line item. So those are the pieces that make up those four different lines on the balance sheet.

I understand what makes up the four different pieces but I guess I am trying to understand -- you can explain -- just go back to the increase in receivables from affiliates both long-term and short-term, in my understanding there is two ways that you would get a receivables from an affiliate. One-way would be if you made a sale in the quarter and that -- we see that in the income statement, there's 13 million. The other way would be is if you have an increase in deferred revenues from affiliates.

Basically, you could actually have several instances. Three ways in which that number or those numbers could go up. You have sales to affiliates, which under PLC accounting could be unbilled or you could have billed receivables, as I pointed out, and we are also are including there our investment in the Kuwait project which is going in the form of a shareholder loan. So all three of those contributed to the growth of the short-term receivables and the long-term.

Okay. So where would the -- I guess where would the -- sort of -- where would the corresponding entry then go on the -- I'm still missing the corresponding entry on the right side of the balance sheet to go -- I mean I just see an increase of 27 on the left and an increase of 7 on the right and 13 going through the income statement. So some other number on the right side of your balance sheet had to have moved?

I think the balance that you're looking for basically reflects in cash. And in case, for instance, the $5 billion investment that was made over the period on the Kuwait project -- that is where your difference would be.

Okay. So that would not show up -- I see because you're showing that as part of the receivables as opposed to an investment and affiliate. Then just rough comparison. You said we have about $30 million in Kuwait related affiliate receivables this quarter?

Correct.

How much was it last quarter?

It has grown in the quarter. I think it is -- let me look and see if I have the last quarter figure in front of me. The activity has been occurring over the six months, so I think it was in the same range. Let me correct what I said.

So do you think it was -- I'm sorry -- so in the last quarter, you are saying it was the same, or?

I think it was in the same relative magnitude, yes.

Okay. I have a bigger picture question. Going back to I think some questions that other callers asked about, which was how you look at the contracts. And you mentioned that you used to look, that you've traditionally looked at things on an 18-20 year IRR. And you're going to be cash-flow negative in the first few years of the project because of the revenue, yet you have to build the thing, and then the first year of operation, you may make money or you may not make money, depending on the project. I guess as you look at -- you obviously are about to enter a restructuring exercise, and obviously as the new CEO, you're going to revisit how things have been done. I guess I am wondering if there is a way that you can participate in this build on an operate (ph) business and make decisions around contracts that have a more immediate positive return on investment capital effect that your outside shareholders can see. Because for us, all we see is several years in a row of negative return on capital or not sort of earning your cost of capital. And we have to believe that these contracts are going to be profitable. And I'm not saying that they're not going to be, but obviously, any IRRs is very dependent on inputs like what kind of growth you're expecting in the out years and what your discount rate is going to be that you're putting on this. And even in the case of some place like Israel, as much as I hate to say it, Israel (indiscernible) not stable inclines (ph) you could have. So sort of with a back-half weighted IRR, you're putting a lot of dependence on what that country is going to look like 10 years from now. So I guess -- are you thinking about ways that maybe time to pay back, first year, return on investing capital first year or second year of operations, that you know maybe new benchmarks for these contracts, or is there something you to share with us that would help us understand how profitable these contracts are going to be once they finally get up and running?

First, I'd like to say that I recognize the need to help the investment community understand better the economics of these owned and operated plants. And that is something that we are endeavoring to figure out how to communicate that with you. And that is something we're going to do. If it's going to be a fundamental part of our business going forward, I think you deserve and need the ability to understand the economics and how that works. One metric that I mentioned was looking at the year two net income on capital employed as being at least 10 percent so that we are not having to wait a long time to see operating earnings coming out of these plants. And I think that is an important element that we need to factor in. I am not sure I would characterize these as back-end weighted 20 year IRR 20 year calculations, because when you look at the operation of a plant, there are price escalations that are typically factored into these projects, but there are cost escalations that you have to factor into the operating side as well. And you find that the income screens are relatively predictable and where you don't have a big spike in the back end cash flows, the IRR of the out years has a very limited effect on the total IRR of the cash flows. So that it is really the early year cash flows that typically drive the IRR (indiscernible) project. But I think what you -- the main points are, A, we need to do a better job of explaining how these work how these contracts work economically and what they mean to us. Second is we are looking at more short-term payback on these with this year to return on capital employed. And we recognize and are sensitive to the need to be able to show that we are making money on these. Again, I think overall performance for the company has been hurt because we have had two huge projects, relatively huge projects for the company going through, and you are seeing a buildup of assets on the balance sheet without a corresponding sourcing, without the corresponding income coming through.

You say year two, do you mean year two from when your first dollar towards the investment and the first contract, the piece of the contract is booked, or do you mean year two from year two of once it is the first year of operations and the second year of operations?

Yes, year two of plant ops.

So that could actually be like three years?

That could be three years from when you start investing the capital.

One other thing, and forgive me, this may be a naive question, but supplying water is essentially a utility function. And I'm familiar with utilities in the U.S. I can't claim expertise on utilities and the Middle East or in the Caribbean. But a lot of utilities in the U.S. are regulated such that the providers can only earn a mid-teens return on equity. So you're price capped. So just sort of going up the chain, if you want to earn a mid-teen return on capital, say, over the life of the project at least, but you have a couple of years losing money in the beginning, how do you make it up later, or is there just less regulation than these other markets?

There's certainly less regulation in the markets. The one thing about water supply contracts is that your typically negotiated contracts between the one point supplier and one point user. The difference between -- I think the most fundamental difference between the power utility industry and the water utility industry is water is not transportable. So you end up with a specific site location supplier and a specific -- a site-specific user. And the supplier and the user enter into an negotiated contract on a set up terms upon which the buyer -- the user will buy the water and the supplier will build the plant in order to supply it.

Great. But I guess to the extent that the user -- (indiscernible) selling to the suppliers than selling onto a user, or you're partnering with a supplier. And you're saying there's not the same kind of controls over what the supplier's can charge the users when you get into water and when you get out of the United States?

Just to be clear -- we are a supplier to the distributor. We do not act as a water distribution company.

I understand that. I guess the distributor's (indiscernible) is regulated?

That's true, I believe.

Okay, thank you for answering my questions.

TRACY MARSHBANKs, First Analysis.

It has been a long way, guys. First as a point of reference maybe for your market research, we're on the 95th, 96th floor of the Sears Tower, mostly elevator shaft and I think we converted to point of use watercooler a little over a year ago. So if you'd like to do a market survey, give us a call. Got a question for you. You pointed out you have a long history with John Curtis when he was at E&Y. Can you point to some examples of companies that you guys have worked on, and if you will, created shareholder value?

Well, most of that is in the private sector because we are a private equity firm. Most of what we did was actually acquisitions and leveraged buyouts and management buyouts. And so they aren't typically public entities. A number of these entities, we ultimately tell the (ph) public, but I am not really at a liberty to talk specifically about investments that I was making in the private equity arena. I'm sorry about that.

Well, if you -- maybe a couple of the ones that have gone public, which might those be?

I really can't -- I'm not really at liberty to talk about my investment.

We will have to dig out the Advent track record. And finally, one small detailed question. Can you quantify the impact of the bleach issue that you had in the quarter as what part probably is not recurring, but was isolated in the quarter as far as impact?

Sure, in terms of incremental costs we talked about?

Yes.

Yes -- they're in the $.5 million range.

Thank you very much.

Deborah Coy, Schwab Capital.

Thank you, and thanks, Doug, for going through all of that excruciating detail. It seems to be helping, I think, on helping people to understand this better. My question is actually regarding the Israeli project. You guys have not put out a press release, but the Barron (ph) Group press release said that the contract value is estimated at 95 million. It appears that the litigation related to it is resolved. What I am wondering, number one, if how big a backlog do you expect to book from this; and number two, getting back to these excruciating issues on contract structure, how is this one going to look relative to Kuwait, albeit it being smaller?

First of all, we have not issued a press release, Deborah, because our policy is until the contract is signed, we don't announce it. We've been notified that we're going to get the award, but the contract is not signed. That one is not a done deal. I think that this is also going to flow through a joint venture with the Barron Group, and therefore, this would not actually show up as backlog for the company, because it is not coming through directly into our P&L. It will end up showing through the equity income line. But suffice it to say, the project from our prospectus (ph) has a healthy profit margin in it. It's an equipment supply project. It does not involve a capital investment on our part.

So you're not going to be an equity participate?

We're an equity anticipate and (ph) the builder of the plant, but we're not an equity participant of the operator of the plant. And so as builder of the plant, it's Barron and ourselves, Barrone (ph) and ourselves are going to build the plant and together, and so we will get equity income related to the profit and supplying and building facility, but --

But you won't collect revenue for selling equipment?

We will collect equity income selling equipment.

Alright. So we can go into that I guess in more detail when we get there?

Yes. On the contract terms, this contract has not been signed so we have to negotiate the contract. We have an understanding of what the headline terms will be. But as you know, the devil is in the details. We will have to put a lot of effort into this to getting a signed contract we're comfortable with, but I think I can give you some assurance that we will make sure we're careful about the terms that we bid (ph) into this contract. The other thing you just mentioned -- you mentioned a comment on Kuwait. I believe that the Kuwait contract actually is a pretty good contract for us. I think we did not have to make significant concessions on that. But the main issue there is that in Kuwait, we are building the plant for ourselves because we are the operator in partnership with the Karafi (ph) Group, we are the plant operator. So we don't tend to get into some of the contract problems that you would in a straight-up equipment sale.

I know I understand that. But I promise very last question, it's been a long call. It does then lead me to my question on the other income line. We're starting to have a fair amount of significant earnings impact flowing through the other income line. It is hard to see where it comes from since we can't go back and look at it at the individual projects. And even though when I back out the 3.4 million charge on Trinidad, it looks like other income is .6 something, which was less than it was before, but maybe that is partly related to interest expense in Trinidad and maybe it's partly related to ongoing issues that you mentioned last quarter related to Mexico and related to the membrane JV. What I'm getting at is -- then we're going to put more stuff in the other equity income line. Are you going to be able to give us some guidance as to where we should see that running? It has been awfully hard to get a good sense of it?

Yes. We need help you understand the equity income line. And we will work to do that.

In the meantime, I know you're not giving guidance, but you did say 3-400,00 for Trinidad. Can you say -- so assume 3 to 400,000. Is the rest of what's in other equity income now running at about a million-ish where it was before, so are we talking 1.3 million by the end of the year in other income or equity income?

Per quarter. I think we said 2-300 for Trinidad.

For Trinidad (MULTIPLE SPEAKERS) and roughly about a million for the rest on a normalized basis?

That is in the ballpark of where we expect to run.

Alright, that helps. Thanks for sticking by for an hour and three quarters.

Thank you for hanging in there as well.

There are no further questions in queue. Please continue.

Well, thank you all. I know it is been a long call on a Friday, but we do appreciate your interest, and any other questions, please get in touch with us.

Ladies and gentlemen, that does conclude your conference for today.

(CONFERENCE CALL CONCLUDED)