UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10–Q
x | Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For Quarter Ended March 31, 2001 | |
OR | |
o | Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the transition period from __________ to ________ |
Commission File No. 1-12714 |
OSMONICS, INC |
(Exact name of registrant as specified in its charter) |
Minnesota | 41–0955759 |
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification Number) |
5951 Clearwater Drive, Minnetonka, MN | 55343 |
(Address of principal executive offices) | (Zip Code) |
(952) 933–2277 | |
(Registrant's telephone number, including area code) | |
N/A | |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past 90 days.
Yes x No o
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At April 30, 2001, 14,451,019 shares of the issuer's Common Stock, $0.01 par value, were outstanding.
OSMONICS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Consolidated Statements of Income - For the Three Months Ended March 31, 2001 and 2000
Consolidated Balance Sheets - March 31, 2001 and December 31, 2000
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2001 and 2000
Notes to Consolidated Financial Statements
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
ITEM I – FINANCIAL STATEMENTS
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(UNAUDITED)
Three Months Ended March 31, | ||
2001 | 2000 | |
Sales | $53,302 | $51,095 |
Cost of sales | 35,604 | 34,811 |
Gross profit | 17,698 | 16,284 |
Less: | ||
Selling, general and administrative | 11,409 | 11,573 |
Research, development and engineering | 1,829 | 2,096 |
Special charges | - | 250 |
Income from operations | 4,460 | 2,365 |
Other income (expense) | (259) | 47 |
Income before income taxes | 4,201 | 2,412 |
Income taxes | 1,470 | 820 |
Net income | $2,731 | $1,592 |
Earnings per share | ||
Net Income - basic | $0.19 | $0.11 |
Net Income - assuming dilution | $0.19 | $0.11 |
Average shares outstanding | ||
Basic | 14,419 | 14,273 |
Assuming dilution | 14,465 | 14,333 |
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
(UNAUDITED)
March 31, 2001 | December 31, 2000 | |
ASSETS | ||
Current assets | ||
Cash and cash equivalents | $556 | $21 |
Marketable securities | 172 | 1,889 |
Trade accounts receivable, net of allowance for doubtful accounts of $866 in 2001, and $1,008 in 2000 | 37,510 | 37,092 |
Inventories | 32,879 | 32,758 |
Deferred tax assets | 4,554 | 4,314 |
Other current assets | 3,630 | 2,487 |
Total current assets | 79,301 | 78,561 |
Property and equipment, at cost | ||
Land and land improvements | 5,056 | 5,056 |
Building | 30,237 | 30,283 |
Machinery and equipment | 78,048 | 76,943 |
113,341 | 112,282 | |
Less accumulated depreciation | (56,927) | (55,381) |
56,414 | 56,901 | |
Other assets | 52,577 | 53,230 |
Total assets | $188,292 | $188,692 |
LIABILITIES AND SHAREHOLDERS' EQUITY | ||
Current liabilities | ||
Accounts payable | $12,239 | $15,262 |
Notes payable and current portion of long-term debt | 18,986 | 19,759 |
Other accrued liabilities | 15,369 | 13,784 |
Total current liabilities | 46,594 | 48,805 |
Long–term debt | 24,069 | 24,603 |
Other liabilities | 2 | 4 |
Deferred income taxes | 6,335 | 6,335 |
Shareholders' equity | ||
Common stock, $0.01 par value | ||
Authorized -- 50,000,000 shares | ||
Issued -- 2001: 14,441,390 and 2000: 14,408,634 shares | 144 | 144 |
Preferred stock: Authorized - 500,000 shares; outstanding - none | - | - |
Capital in excess of par value | 23,910 | 23,818 |
Retained earnings | 88,325 | 85,458 |
Other comprehensive income | (1,087) | (475) |
Total shareholders’ equity | 111,292 | 108,945 |
Total liabilities and shareholders' equity | $188,292 | $188,692 |
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
Three Months Ended March 31, | ||
2001 | 2000 | |
Cash flows from operations: | ||
Net income | $2,731 | $1,592 |
Non–cash items included in net income: | ||
Depreciation and amortization | 2,533 | 2,466 |
Deferred income taxes | (29) | 50 |
Gain on sale of investments | (972) | (946) |
Changes in assets and liabilities: | ||
Accounts receivable | (136) | (4,717) |
Inventories | (121) | (1,951) |
Other current assets | (1,718) | (507) |
Accounts payable and other liabilities | (1,440) | 1,109 |
Net cash provided by (used in) operations | 848 | (2,904) |
Cash flows from investing activities: | ||
Purchase of investments | - | (959) |
Sale of investments | 2,088 | 2,059 |
Purchase of property and equipment | (1,721) | (1,386) |
Sales of property and equipment | 6 | 94 |
Other | 615 | 31 |
Cash provided by (used in) investing activities | 988 | (161) |
Cash flows from financing activities: | ||
Payments on long term debt and other | (557) | 3,500 |
Increase (decrease) in line of credit | (750) | (163) |
Issuance of common stock | 228 | 316 |
Net cash (used in) provided by financing activities | (1,079) | 3,653 |
Effect of exchange rate changes on cash | (222) | (182) |
Increase in cash and cash equivalents | 535 | 406 |
Cash and cash equivalents - beginning of year | 21 | 1,807 |
Cash and cash equivalents - end of quarter | $556 | $2,213 |
OSMONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(UNAUDITED)
The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
The Company has the following components of comprehensive income:
1st Qtr. 2001 | 1st Qtr. 2000 | |
Net income | $2,731 | $1,592 |
Other comprehensive income (loss), net of tax: | ||
Foreign currency translation adjustments | (222) | (182) |
Unrealized gains / (losses) on securities | (390) | 177 |
Other comprehensive income (loss), net of tax | (612) | (5) |
Comprehensive income | $2,119 | $1,587 |
The Company has $14,050 of goodwill recorded as of March 31, 2001 associated with the 1998 acquisition of Membrex Corp. (Membrex). Safety Kleen (SK), the principal customer for the Membrex products, filed for Chapter 11 bankruptcy in June of 2000. As a result, first quarter 2001 sales to SK of $400 were substantially below first quarter 2000 sales of $2,100. SK has continued to order product and parts at reduced levels to support its installed base. Future sales levels are uncertain and could be minimal.
The Company has a contract with SK that provides some exclusivity to SK for certain Membrex products. The Company anticipates that the exclusivity provisions of the contract will expire in the third quarter of 2001 due to anticipated failure of SK to buy the required minimum amount of products and continues discussions with SK to renegotiate the contract based on the current situation.
The Company has determined that two-thirds ($9,400) of the Membrex goodwill is associated with the SK products. Business activity in the first quarter of 2001 approximated the financial forecasts used to support the goodwill balance at December 31, 2001; therefore, the Company has concluded there was no impairment of goodwill at March 31, 2001.
Inventory related to the Membrex products for SK was $1,700 while net receivables from SK were current at March 31, 2001. The Company is monitoring the Chapter 11 bankruptcy proceedings to determine any further financial impact to the Company.
Operating results for the three months ended March 31, 2001, are not necessarily indicative of the results that may be expected for the full year 2001.
These statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report to shareholders and Form 10-K for the year ended December 31, 2000.
ITEM II | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
(Dollars in thousands, except share data) |
As an aid to understanding the Company’s operating results, the following table shows the percentage of sales that each income statement item represents for the three months ended March 31, 2001 and 2000, respectively.
Percent of Sales | ||
Three Months Ended March 31, | ||
2001 | 2000 | |
Sales | 100.0% | 100.0% |
Cost of sales | 66.8 | 68.1 |
Gross profit | 33.2 | 31.9 |
Selling, general and administrative | 21.4 | 22.6 |
Research, development and engineering | 3.4 | 4.1 |
Special charges | 0.0 | 0.5 |
Operating expenses | 24.8 | 27.2 |
Income from operations | 8.4 | 4.6 |
Other income (expense) | (0.5) | 0.1 |
Income from continuing operations before income taxes | 7.9 | 4.7 |
Income taxes | 2.8 | 1.6 |
Net income | 5.1% | 3.1% |
SALES
Sales for the first quarter ended March 31, 2001 of $53,302 increased 4.3% from sales for the first quarter of 2000. The first quarter 2001 Filtration & Separations, Process Water and Household Water segment sales were 42%, 41% and 17% of total sales, respectively. The first quarter 2001 sales increase is attributed to internal growth of existing product offerings. Globally, the Americas market grew as a percentage of total Osmonics sales in the first quarter of 2001, while the Asia/Pacific market dropped slightly.
GROSS MARGIN
Gross margin for the first quarter of 2001 was 33.2% versus 31.9% for the corresponding period in 2000. The increase in gross margins is primarily due to increased sales within the Filtration and Separations segment which carry higher margins and reduced overhead costs resulting from the company wide Year 2000 restructuring, plant closures and cost reduction efforts.
Energy costs in California during the first quarter of 2001 were approximately 32% above the levels experienced during the second half of 2000. Management believes that due to product demand the Company has been able to pass the additional costs onto its customers in the first quarter of 2001; however, there is no assurance that this will continue.
Raw material costs in the first quarter 2001 remained comparable to costs incurred during Year 2000.
OPERATING EXPENSES
Operating expenses decreased to 24.8% of sales in the first quarter of 2001 from 27.2% in the first quarter of 2000. The 2001 decrease is primarily attributed to the Year 2000 restructurings and continued consolidation of administrative services. First quarter 2000 also contained special charges of 0.5% (see Special Charges discussion).
SPECIAL CHARGES (RECOVERY)
In the first quarter of 2001, the Company recorded no special charges. In first quarter 2000, the Company recorded special charges and recoveries that netted to zero. Special charges included a $250 recovery of inventory accruals primarily due to gains recognized on the sale of inventory at the Company’s Rockland, Massachusetts manufacturing facility. The special charges also included $250 of workforce reduction severance costs related to the first quarter 2000 restructuring of several corporate functions. The special charges (recovery) are summarized below:
Corporate restructuring | $250 |
Special inventory recovery related to plant closings | (250) |
Gross special charges (recovery) | $- |
Less special inventory recovery – in COS | (250) |
Special charge in operating expense | $250 |
OTHER INCOME (EXPENSE)
Other expense increased by $306 in the first three months of 2001 versus the same period for 2000. Translation loss, primarily from converting net assets of a foreign subsidiary to US dollars, increased $460 to $463 in the first quarter 2001 from $3 in the first quarter 2000. The Company recognized pretax gains on the sale of securities of $972 and $946 in the first quarter of 2001 and 2000, respectively. Net interest expense decreased $159 to $761 in the first quarter of 2001 from $920 in the first quarter of 2000.
INCOME TAXES
The effective tax rate for the three months ended March 31, 2001 was 35.0% based on the forecast for the full year. This rate is comparable to 34.0% in the same period of 2000.
NET INCOME
Net income for the quarter ended March 31, 2001 was $2,731 versus $1,592 for the quarter ended March 31, 2000. Net income per diluted share for the quarter was $0.19 versus $0.11 for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, the Company had cash, cash equivalents and marketable securities of $728 versus $1,910 at December 31, 2000. The current ratio at March 31, 2001 was 1.7 versus 1.6 at year end 2000.
The Company’s long-term and current debt decreased $1,307 from $44,362 at December 31, 2000 to $43,055 at March 31, 2001. The Company’s borrowings outstanding against its $24,000 revolving line of credit decreased to $14,250 as of March 31, 2001 compared to $15,000 as of December 31, 2000.
The Company believes that its current cash and investments position, its cash flow from operations, and amounts available from bank credit will be adequate to meet its anticipated cash needs for working capital, capital expenditures, and potential acquisitions during the foreseeable future.
REVIEW OF INDUSTRY SEGMENTS
The Company designs, manufactures and markets equipment, systems and components used in the processing and handling of fluids. In 2000, the Company changed the focus of its reporting structure from a two-segment, product-focused structure to a three-segment, market-focused structure.
The three-market-segment structure was established to provide strategic leadership within the three major market segments in which the Company conducts business. The new structure was implemented on January 1, 2000.
The Filtration and Separations segment includes products such as filter cartridges, membrane elements, membranes, instruments and laboratory products. The Process Water segment includes products such as pumps, housings, valves, controls, reverse osmosis/ultrafiltration (RO/UF) machines, ozonators and water treatment systems used for industrial, commercial and municipal applications. The Household Water segment includes products such as valves, controls and home reverse osmosis membranes and filters used for the residential water purification and water softening market segments. Each segment is currently supported by several manufacturing facilities, a sales force and various corporate functions. The segments do not have separate accounting, administration or research and development functions.
The reportable segment information for the first quarter of 2001 and 2000 is as follows (all segment information excludes the impact of special charges in 2000):
First Quarter Ended March 31, | ||
2001 | 2000 | |
Sales: | ||
Filtration and Separations | $22,099 | $21,326 |
Process Water | 22,006 | 19,579 |
Household Water | 9,197 | 10,190 |
Net Sales | 53,302 | 51,095 |
Gross Profit: | ||
Filtration and Separations | 8,896 | 7,565 |
Process Water | 5,944 | 5,154 |
Household Water | 2,858 | 3,315 |
Gross Profit | 17,698 | 16,034 |
Operating Income: | ||
Filtration and Separations | 3,422 | 1,491 |
Process Water | 727 | (68) |
Household Water | 311 | 942 |
Operating Income | $4,460 | $2,365 |
Net sales in the Filtration and Separations and Process Water segments increased in the first quarter ended March 31, 2001 compared to the same quarter in 2000. Filtration and Separations and Process Water segments sales growth was organic. Net sales in the Household Water segment decreased in the first quarter ended March 31, 2001, compared to the same quarter in 2000. Management believes this decrease was the result of the continued consumer led economic slowdown.
Gross profit margins and operating income in the Filtration and Separations and Process Water segments were higher in the first quarter 2001 than the same quarter in 2000. This was primarily related to increased sales volume, improved utilization of manufacturing capacity, and cost reductions resulting from the Year 2000 restructuring and plant closures.
Gross profit margins and operating income in the Household Water segment were lower in the first quarter 2001 than the same quarter in 2000. This was primarily related to lower utilization of manufacturing capacity as a result of reduced sales.
Management does not report the balance sheet or any cash-generating measurements by such segments.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act provides a “safe harbor” for forward-looking statements. Certain information included in this Form 10-Q and other materials filed or to be filed with the Securities and Exchange Commission (as well as information included in statements made or to be made by the Company) contains statements that are forward looking. Such statements may relate to plans for future expansion and acquisitions, business development activities, capital spending, operating expenses, financing, or the effects of regulation and competition. Such information involves important risks and uncertainties that could significantly affect results in the future. Such results may differ from those expressed in any forward-looking statements made by the Company. These risks and uncertainties include, but are not limited to, those relating to product development, computer systems development, dependence on existing management, global economic and market conditions and changes in federal or state laws. Investors are referred to the discussion of certain risks and uncertainties associated with forward looking statements contained in the Company’s report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2000.
OSMONICS, INC.
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) During the quarter ended March 31, 2001 the Registrant did not file a Form 8-K report.
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.
Dated: | May 10, 2001 | |
OSMONICS, INC. | ||
(Registrant) | ||
/s/ Keith B. Robinson | ||
Keith B. Robinson | ||
Chief Financial Officer | ||
/s/ D. Dean Spatz | ||
D. Dean Spatz | ||
Chief Executive Officer |