OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Year ended December 31,
1994 1993 1992
Sales $ 96,180 $ 89,043 $ 84,017
Cost of sales 52,841 49,272 47,643
Gross profit 43,339 39,771 36,374
Operating expenses:
Selling, general and administrative 23,480 21,839 22,344
Research, development and engineering 7,174 6,795 5,902
Embezzlement loss/(recovery) (Note 4) - (562) 2,342
Merger and transition expenses - 1,644 -
30,654 29,716 30,588
Income from operations 12,685 10,055 5,786
Other income (expense), net:
Interest income 1,543 1,279 925
Interest expense (747) (943) (952)
Other 142 401 (183)
938 737 (210)
Income from continuing operations
before income taxes and cumulative
effect of accounting change 13,623 10,792 5,576
Income taxes (Note 10) 3,668 2,897 2,321
Income from continuing operations
before cumulative effect of
accounting change 9,955 7,895 3,255
Discontinued operations (Note 3)
Operating loss - - (526)
Loss on disposal - - (1,700)
Loss from discontinued operations (Net of
income taxes of $1,147) - - (2,226)
Income before cumulative
effect of accounting change 9,955 7,895 1,029
Cumulative effect of accounting change
(Note 10) - - 420
Net income $ 9,955 $ 7,895 $ 1,449
Per share data:
Income from continuing operations before
cumulative effect of accounting change $ 0.79 $ 0.63 $ 0.26
Loss from discontinued operations - - (0.17)
Cumulative effect of accounting change - - 0.03
Net income $ 0.79 $ 0.63 $ 0.12
Average shares outstanding 12,668,000 12,624,000 12,561,000
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
1994 1993
ASSETS
Cash and cash equivalents $ 9,453 $ 9,710
Marketable securities (Note 5) 27,623 19,874
Trade accounts receivable, net of allowance for doubtful
accounts of $1,259 in 1994 and $1,282 in 1993 15,536 13,655
Inventories (Note 6) 19,428 15,838
Deferred tax assets (Note 11) 3,284 3,234
Recoverable income taxes (Note 10) - 321
Notes receivable - 667
Other current assets 1,303 1,418
Total current assets 76,627 64,717
Property and equipment, at cost
Land and land improvements 1,951 1,937
Buildings 12,300 12,056
Machinery and equipment 33,574 30,527
47,825 44,520
Less accumulated depreciation and amortization (25,262) (22,564)
22,563 21,956
Other assets, net of accumulated amortization of
intangible assets of $315 in 1994 and $848 in 1993 2,845 2,153
Total Assets $102,035 $ 88,826
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,459 $ 5,714
Notes payable and current portion of long-term debt (Note 8) 744 779
Accrued compensation and employee benefits 4,154 3,787
Reserve for VAT taxes payable (Note 4) - 1,605
Reserve for discontinued operations (Note 3) 2,088 2,212
Other accrued liabilities (Note 7) 7,187 5,339
Total current liabilities 20,632 19,436
Long-term debt (Note 8) 14,050 13,913
Deferred compensation 651 729
Deferred income taxes (Note 11) 2,913 2,638
Other liabilities 38 40
Shareholders' equity
Common stock, $0.01 par value
Authorized -- 20,000,000
Issued -- 1994: 12,701,041 and 1993: 12,637,473 127 126
Capital in excess of par value 21,000 20,321
Retained earnings 41,408 31,453
Unrealized gain on marketable securities (Note 5) 1,038 -
Cumulative effect of foreign currency
translation adjustments 178 170
Total shareholders' equity 63,751 52,070
Total liabilities and shareholders' equity $102,035 $ 88,826
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
1994 1993 1992
Cash flows from operations:
Net income $ 9,955 $ 7,895 $ 1,449
Non-cash items included in net income:
Depreciation and amortization 3,048 3,080 3,298
Deferred income taxes (341) 281 (722)
Cumulative effect of accounting change - - (420)
Gain on sale of land and investments - (499) (88)
Provision for deferred compensation - 72 657
Reserve for VAT tax (1,605) (1,030) 822
Accounts receivable (1,881) 181 (1,745)
Inventories and other current assets (2,487) 2,483 2,651
Accounts payable and accrued liabilities 2,636 209 441
Reserves for losses of discontinued operations - (471) (541)
Net cash provided (used) by operations 9,325 12,201 5,802
Cash flows from investing activities:
Purchase of investments (17,467) (15,253) (5,965)
Maturities and sales of investments 11,225 8,680 3,261
Purchase of property and equipment (3,488) (3,257) (4,150)
Proceeds from sale of subsidiary - 613 509
Other 151 (111) 155
Net cash provided (used) for investing
activities (9,579) (9,328) (6,190)
Cash flows from financing activities:
Reduction of long-term debt (Note 8) (521) (552) (974)
Notes payable and current debt (Note 8) 282 (376) (22)
Issuance of common stock 680 295 417
Net cash provided (used) in financing
activities 441 (633) (579)
Effect of exchange rate changes on cash (444) 143 148
Increase (decrease) in cash and cash equivalents (257) 2,383 (819)
Cash and cash equivalents - beginning of year 9,710 7,327 8,146
Cash and cash equivalents - end of year $ 9,453 $ 9,710 $ 7,327
OSMONICS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
Unrealized
Capital Gain on Cumulative
in Excess Retained Marketabe Translation
Common Stock Par Value Earnings Securities Adjustment
Shares Amount
Balance - January 1, 1992 12,357,721 $ 124 $ 17,850 $ 23,874 $ - $ 102
Net income - - - 1,449 - -
Translation adjustment - - - - - 31
Employee stock purchase
plans 83,978 1 416 - - -
Stock dividend 166,008 1 1,760 (1,765) - -
Balance - December 31, 1992 12,607,707 126 20,026 23,558 - 133
Net income - - - 7,895 - -
Translation adjustment - - - - - 37
Employee stock purchase
plans 29,766 - 295 - - -
Balance - December 31, 1993 12,637,473 126 20,321 31,453 - 170
Net income - - - 9,955 - -
Translation adjustment - - - - - 8
Unrealized gain on
marketable securities - - - - 1,038 -
Business combinations
(Note 2) 7,000 - 102 - - -
Employee stock purchase
plans 56,568 1 577 - - -
Balance - December 31, 1994 12,701,041 $ 127 $ 21,000 $ 41,408 $ 1,038 $ 178
SELECTED FINANCIAL INFORMATION
(In thousands, except per share amounts)
INCOME DATA:
Year ended December 31,
1994 1993 1992 1991 1990
Sales $96,180 $89,043 $84,017 $77,253 $74,285
Income from continuing
operations 9,955 7,895 3,255 5,371 6,947
Income from continuing
operations per share $0.79 $0.63 $0.26 $0.43 $0.56
Average shares
outstanding 12,688 12,624 12,561 12,491 12,390
BALANCE SHEET DATA:
Total assets $102,035 $88,826 $82,874 $81,102 $77,440
Long-term debt 14,050 13,913 14,630 15,715 13,761
QUARTERLY INCOME DATA
(In thousands, except per share amounts)
Quarterly Income Data - 1994
Quarter Ended
March 31 June 30 September 30 December 31
Sales $23,534 $24,843 $23,383 $24,420
Gross profit 10,478 10,916 10,499 11,446
Net income 2,371 2,503 2,289 2,792
Net income per share $0.19 $0.20 $0.18 $0.22
Quarterly Income Data - 1993
Quarter Ended
March 31 June 30 September 30 December 31
Sales $22,821 $21,981 $21,683 $22,558
Gross profit 9,940 9,853 9,581 10,397
Net income 1,934 1,957 1,779 2,225
Net income per share $0.15 $0.16 $0.14 $0.18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of
Osmonics, Inc. and its wholly and majority owned subsidiaries (the
Company). Significant intercompany accounts and transactions have
been eliminated.
Sales are recorded when the product is shipped.
Inventories are stated at lower of cost (FIFO method) or market for
all operations except the Autotrol subsidiary domestic operations
which have historically valued inventory on the LIFO method.
Depreciation and amortization of property and equipment are provided
on the straight-line method over estimated lives of 3 to 40 years.
Deferred income taxes have been provided for income and expenses
which are recognized in different accounting periods for financial
reporting purposes than for income tax purposes.
Tax credits are recognized as a reduction of income taxes in the
year the credits are utilized.
The Company accrues for the estimated cost of warranty and start-up
obligations at the time revenue is recognized.
The excess of cost over the fair market value of assets acquired in
acquisitions is amortized over not more than 40 years. Other
intangibles are carried at cost and amortized using the
straight-line method over their estimated lives of 5 to 17 years.
Net income per share is based on the weighted average number of
shares outstanding during each year. The exercise of stock options
would not have a material effect on net income per share.
The Company considers highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
Certain reclassifications have been made to prior year amounts to
conform with current year presentations.
2. Business Acquisitions
On November 18, 1994, the Company acquired the assets including
receivables, inventory and equipment of Lakewood Instruments, Inc.
The Company also obtained noncompetition agreements from two
previous Lakewood directors. The purchase method of accounting was
used.
On January 1, 1994, the Company acquired the 18% minority
shareholder interest of its majority-owned subsidiary, Poretics.
The Company owns 100% of Poretics' shares after the transaction.
The purchase method of accounting was used.
These acquisitions had no significant pro forma effect on the
Company's sales, net income, or net income per share in 1994.
On October 15, 1993, Autotrol Corporation (Autotrol) merged with
Osmonics through an exchange of 0.77 of a share of Osmonics common
stock for each share of Autotrol common stock. The exchange ratio
and share amounts, when revised to reflect Osmonics' 3-for-2 stock
split on March 21, 1994, equate to an exchange of 1.155 shares of
Osmonics common stock for each of the 3.0 million shares of Autotrol
common stock. The transaction was accounted for as a pooling-of-
interests. Autotrol's principal business is the manufacture and
marketing of controls, valves and measuring devices related to water
conditioning.
The historical financial statements of the Company have been
restated to give effect to the acquisition as though the companies
had operated together from the beginning of the earliest period
presented. Before pooling, results for the first nine months of
1993 for Osmonics were net sales of $41,213 and net income of
$3,678, and for Autotrol were sales of $25,272 and net income of
$2,076. Sales for the year ended December 31, 1992 for Osmonics
were $50,541 and net income was $4,528. Sales for the year ended
December 31, 1992 for Autotrol were $33,476, with a net loss of
$3,900.
3. Discontinued Operations
In September 1982, Autotrol sold certain of its Wastewater Treatment
Group (Wastewater) assets and liabilities. Autotrol completed
contracts in progress at the date of sale and discontinued all
operations other than settling warranties, disputed claims and
litigation. In subsequent years, Autotrol incurred charges
significantly in excess of estimated amounts provided in 1982. In
1992, Autotrol recognized additional expenses of $1,403, net of tax
of $722, to reserve for potential litigation claims related to the
Wastewater business. Included in the charges was the effect of
Autotrol's decision to terminate its claims-filed insurance policy
which had been considered in prior years' provisions. In the
opinion of management, based on the advice of its legal counsel,
future claims related to the discontinued Wastewater business will
be resolved without any additional material adverse impact on the
Company's consolidated financial position.
In October 1992, Autotrol entered into an agreement to sell
essentially all of the equipment, intangible assets and the business
of its wholly owned subsidiary, Aquatrol Corporation (Aquatrol),
which represented a separate line of business selling electronic
systems for monitoring waste and wastewater treatment systems.
Proceeds from the sale of Aquatrol were in cash and notes
receivable. The notes receivable have been collected as of
December 31, 1994. The transaction was recorded in 1992 as a
disposal of a segment of business. The loss from the sale of $297,
net of tax of $154, included provisions for other anticipated
expenses.
The operating results of Aquatrol for the final year of operations
were as follows:
Year ended
December 31
1992
Net sales $ 4,725
Cost of sales 3,561
Selling and administrative expense 1,390
Research and development expense 571
Income taxes (271)
Loss from discontinued operations $ (526)
4. Embezzlement
In February 1993, Autotrol, prior to acquisition by Osmonics,
discovered that a former employee of its French subsidiary had been
embezzling funds for several years. The funds were embezzled
through the issuing of fraudulent checks by the former employee and
falsifying of value added tax (VAT) returns and diverting the funds
received from the French government.
Autotrol's investigation of the embezzlement revealed that
approximately $4,750 was embezzled from 1988 to 1992. Of this
total, $2,342 relates to 1992. The prior years' financial
statements reflect embezzlement losses in the year the embezzlement
initially occurred. The Company had net recoveries of $562 in 1993
from insurance and reductions in VAT payable.
5. Marketable Securities
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standard No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities," which requires
the Company to report certain marketable securities at fair market
value. SFAS 115 requires that unrealized gains and losses on
available-for-sale securities be excluded from income, but included
in a separate component of shareholders' equity, net of income tax.
The Company considers all of its marketable securities available-
for-sale. Marketable securities at December 31, 1994 consist of the
following:
Fair
Amortized Unrealized Unrealized Market
Cost Gain (Loss) Value
U.S. government securities
0-5 year maturity $ 6,479 $ - $ (318) $ 6,161
6 year or greater maturity 1,748 - (101) 1,647
Municipal bonds
0-5 year maturity 1,977 100 - 2,077
6 year or greater maturity 6,348 28 (374) 6,002
Corporate debt securities and other
0-5 year maturity 3,764 15 - 3,779
6 year or greater maturity 599 - (44) 555
Equity securities 5,104 2,319 (21) 7,402
Total before tax effect $26,019 $ 2,462 $ (858) $27,623
Deferred tax effect of
unrealized (gain) loss (869) 303
Unrealized gain (loss) on marketable
securities $1,593 $ (555)
Market values are based on quoted market prices.
In 1994, proceeds from sales of available-for-sale securities were
$2,846. There were no material gross realized gains or losses on
these sales. Realized gains and losses are determined on the
specific identification method.
In 1993, marketable securities had an amoritized cost of $19,874 and
a market value of $21,817.
6. Inventories
Inventories consist of the following:
December 31,
1994 1993
Finished goods $ 2,578 $ 2,770
Work in process 5,312 3,656
Raw materials 12,187 9,988
20,077 16,414
Less adjustment to reduce
inventories of $3,475 and $3,078
to last-in, first-out method
(See Note 1) (649) (576)
$19,428 $15,838
7. Other Accrued Liabilities
Other accrued liabilities consist of the following:
December 31,
1994 1993
Warranty and start-up $ 1,942 $ 1,921
Professional fees and other accruals 2,377 1,670
Customer deposits 1,007 604
Accrued property taxes, income
taxes and other taxes 1,861 1,144
$ 7,187 $ 5,339
8. Debt
Long-term debt is as follows:
December 31,
1994 1993
Promissory Notes; interest payable
quarterly at the three month LIBOR
rate plus 80 b.p.; due 1996 through
2001. The interest rate on
December 31, 1994 was 6.05%. $10,000 $10,000
Industrial revenue bonds (IRB's);
interest payable at LIBOR plus 45 to
95 b.p. depending on collateral
deposited with the lender; due in 1997.
The interest rate on December 31, 1994
was 6.20%. 2,800 2,900
Mortgage notes payable to two French
banks; interest payable monthly at PIBOR
plus 40 b.p. The interest rate on
December 31, 1994 was 6.65%. 993 1,028
Term notes payable to municipalities
in varying installments through
October 15, 1995. 421 453
Notes Payable; interest payable annually
and the prime rate; due 1995 through 1999.
The interest rate on December 31, 1994
was 8.5% 341 -
Other notes 239 311
14,794 14,692
Less current portion (744) (779)
$14,050 $13,913
The IRB debt and mortgage notes payable to French banks are
collateralized by real and personal property of the Company.
The aggregate maturities of outstanding long-term debt are:
1995 - $744; 1996 - $1,681; 1997 - $4,456; 1998 - $1,656;
1999 - $1,656, beyond 1999 - $4,601.
In 1994, the terms of the IRB's were amended providing for all
principal payments to be made in 1997. As a result of this
amendment, $400 of current portion of long-term debt was
reclassified to long-term debt with no effect on cash flows.
The interest rate on the IRB's is determined in part by the amount
of collateral held by the lender. At December 31, 1994, $2,000 of
collateral was held by the lender, resulting in an interest rate of
LIBOR plus 45 b.p. The $2,000 of collateral is included in
marketable securities.
The Company has a $1,000 line of credit with a bank, with interest
at the bank reference rate (8.5% at December 31, 1994) and which
requires a 5% compensating cash balance. The line of credit was
unused at year-end and the $50 compensating balance is included in
the balance of cash and cash equivalents.
The promissory notes contain a covenant which limits the payment of
dividends to shareholders. At December 31, 1994 approximately
$21,744 of retained earnings was restricted under this covenant. In
addition, the promissory notes and IRB debt contain certain
restrictions related to ratios, indebtedness, tangible net worth and
capital expenditures.
Cash payments for interest related to all debts of the Company were
$735; $955; and $1,007; for 1994, 1993, and 1992, respectively.
9. Stock Options
At December 31, 1994, the Company had reserved 121,126 common shares
for issuance to key employees under a 1983 stock option plan.
Options are issued at a price not less than market value on date of
grant and become exercisable over a five-year period, after which
they expire. The following is a summary of activity under the 1983
stock option plan. No additional options can be granted under the
1983 plan.
Year ended December 31,
1994 1993 1992
Options held by employees
at December 31, 121,126 143,850 145,725
Exercise price range on $ 3.63 to $ 3.63 to $ 3.63 to
options held at December 31, $13.50 $13.50 $13.50
Number of options exercised
during the year 22,724 1,875 59,682
Price range of options $ 3.63 to $10.16 to $ 2.96 to
exercised during the year $10.16 $10.16 $ 5.26
Exercisable options held at
December 31, 97,500 83,289 49,066
Exercise price range of $ 3.63 to $ 3.63 to $ 3.63 to
exercisable options $13.50 $13.50 $13.50
The Company also has reserved 299,813 common shares at
December 31, 1994 for issuance to key employees under a 1993 Stock
Option Plan. Options are granted at a price not less than market
value on the date of the grant and become exercisable over a period
of up to ten years, after which they expire. At December 31, 1994,
12,633 options were held by employees under this plan with an
exercise price of $13.67 to $14.50. At December 31, 1993,
2,250 options were held by employees under this plan with an
exercise price of $13.66. During 1994, 187 options were exercised
under this plan at a price of $13.67, and 375 options were
exercisable at a price of $13.67 at December 31, 1994. No options
were exercised during 1993 under this plan and no options were
exercisable at December 31, 1993.
The Company also has an employee stock purchase plan with 45,680 and
79,729 common shares remaining unissued at December 31, 1994 and
1993, respectively. Employees may purchase common shares of the
Company at 85% of market price.
The following is a summary of shares issued under this plan:
1994 1993 1992
Number of shares 34,048 23,380 17,460
Average price per share $12.80 $10.62 $ 9.38
The Company had 500,000 authorized and unissued shares of preferred
stock at December 31, 1994 and 1993.
In 1993 the Company granted a director an option to purchase
45,000 shares of common stock at an exercise price of $12.33 per
share. This option vests over a five-year period.
10. Income taxes
Income tax expense consists of:
Year ended December 31,
1994 1993 1992
Current:
Federal 3,506 2,632 1,588
State 354 134 168
Foreign 156 (250) 140
Deferred:
Depreciation (229) (157) (216)
Allowance for doubtful
accounts, start-up, warranty,
inventory and other accruals (247) 10 (87)
Discontinued operations 350 524 906
Other (222) 4 (178)
3,668 2,897 2,321
Cash payments for income taxes were $3,062, $2,935, and $1,872, for
1994, 1993, and 1992, respectively.
A reconciliation of the income taxes computed at the Federal
statutory rate to the Company's income tax expense is as follows:
Year ended December 31,
1994 1993 1992
Taxes at Federal rate (35% in 4,768 3,670 1,895
1994 and 34% in 1993 and 1992)
Increase (decrease) resulting from:
State taxes, net of Federal tax
benefit 220 66 85
Foreign Sales Corp. benefit (167) (159) (167)
Tax credits (272) (209) -
Tax exempt interest/dividend
deduction (193) (176) (146)
Effect of foreign affiliates with
different tax rates or net losses (324) (446) 772
NOL and credit carryforwards used (608) (350) -
Nondeductibility of merger costs - 363 -
Other 244 138 (118)
3,668 2,897 2,321
During 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 109, "Accounting for
Income Taxes," which requires the Company to adjust its deferred tax
assets and liabilities to reflect current tax rates. Osmonics, Inc.
and its subsidiaries adopted the provisions of SFAS 109 in reporting
its financial results for 1992, prior to the merger of Osmonics,
Inc. and Autotrol Corporation. The result was to reduce previously
recorded deferred income taxes and increase net income by $420,
which was recorded as a cumulative effect of a change in accounting
principle in that year.
Autotrol Corporation and its subsidiaries adopted SFAS 109 in 1993,
prior to the merger of Osmonics, Inc. and Autotrol Corporation. As
a result of the adoption of SFAS 109, Autotrol Corp. increased its
current deferred tax assets from zero to $4,328 and its long-term
deferred tax assets from zero to $14. These increases in deferred
tax assets were accompanied by increases in offsetting valuation
reserves for the same amounts, thus creating no increase or decrease
in income for the year ending December 31, 1993.
As a result of the merger between Osmonics, Inc., and Autotrol Corp.
in 1993, value was created for the deferred tax assets of Autotrol
Corp., due to the deductibility of Autotrol expenses on future
consolidated tax returns. This increased Autotrol Corp.'s equity
value by $2,081 above its previously stated book value prior to the
merger. Income for the year prior to the 1993 merger was restated
by $821 for 1992 to account for this equity increase. The
combination of adopting SFAS 109, and the merger in 1993, resulted
in increased tax expense from continuing operations for Autotrol
Corporation of $384 for the year ended December 31, 1993.
11. Deferred Tax Assets and Liabilities
Temporary differences which give rise to Deferred Tax Assets and
Liabilities are as follows as of December 31:
1994 1993
Current Assets:
Allowance for doubtful
accounts, start-up, warranty,
inventory and other accruals 3,506 3,044
Net operating loss and credit
carryforwards 335 1,157
Other (30) 458
Less: Valuation allowance (527) (1,425)
Total current deferred assets 3,284 3,234
Noncurrent liabilities:
Depreciation 2.395 2,616
Unrealized gain on marketable
securities 566 -
Other (48) 22
Total non-current deferred
tax liabilities 2,913 2,638
The Company had outstanding net operating loss carryforwards and tax
credit carryforwards of $633 and $3,403 at December 31, 1994 and
1993, respectively. The carryforwards that have expiration dates
will expire in years ranging from 2004 to 2008.
The valuation reserve decreased by $898 during the year ended
December 31, 1994. This decrease was due mainly to the use of net
operating loss carryforwards and credits during the year, as offsets
against taxable income. The carryforwards outstanding at December
31, 1994 and 1993 have been fully offset by valuation reserves in
those years.
12. Sales and Segment Information
All continuing operations for which geographic data is presented
below are in one principal industry (design, manufacture and
marketing of machines, systems, and components used in the
processing of fluids).
1994 1993 1992
Sales to unaffiliated customers from:
United States $ 83,904 $ 77,212 $ 72,455
Foreign operations 12,276 11,831 11,562
Transfers from (to) geographic areas:
United States 6,699 7,139 6,729
Foreign operations (6,699) (7,139) (6,729)
$ 96,180 $ 89,043 $ 84,017
Pretax income from continuing operations:
United States $ 12,311 $ 10,273 $ 7,452
Foreign operations 1,312 519 (1,876)
$ 13,623 $ 10,792 $ 5,576
Identifiable assets:
United States $ 94,504 $ 79,457 $ 75,033
Foreign operations 7,531 9,369 7,841
$102,035 $ 88,826 $ 82,874
NOTE: Transfers are made at market value.
Sales by United States operations to unaffiliated customers in
foreign geographic areas are as follows:
Year ended December 31,
1994 1993 1992
Asia/Pacific $ 7,460 $ 6,488 $ 6,268
Europe 3,193 2,611 2,692
Rest of the World 6,211 6,470 5,624
$16,864 $15,569 $14,584
13. Commitments and Contingencies
The Company leases facilities for sales, service or manufacturing
purposes in Minnesota, Wisconsin, Massachusetts, California, Iowa,
Arizona, Switzerland, Australia, Hong Kong, Japan, Singapore,
Indonesia, and Thailand.
Future minimum lease payments on all operating leases of $5,437 are
as follows: 1995 - $1,204; 1996 - $882; 1997 - $669; 1998 - $571;
1999 - $528; and beyond 1999 - $1,583. Rent expense for the past
three years was: 1994 - $1,262, 1993 - $1,463 and 1992 - $1,870,
respectively.
The Company is involved in certain legal actions arising in the
ordinary course of business. In the opinion of management, based on
the advice of legal counsel, such litigation and claims will be
resolved without a material effect on the Company's financial
position or results of operations.
14. Stock Split
On February 18, 1994, the Company approved a three-for-two stock
split in the form of a 50% stock dividend for shareholders of record
March 4, 1994. All shares and per share amounts have been restated
to reflect the stock split.
15. Employee Benefit Plans
The Company has a noncontributory discretionary profit sharing plan
covering certain employees meeting age and length of service
requirements. The Company contributes annually to the plan an
amount established at the discretion of the Board of Directors.
Total expense recognized by the Company under these plans amounted
to $982, $816 and $929 in 1994, 1993 and 1992, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
(Dollars in thousands, except per share amounts)
As an aid to understanding the Company's operating
results, the following table indicates the percentage of
sales that each income statement item represents, and the
percentage increase or decrease in such items for the
years indicated.
Percentage
Increase
Year ended December 31, (Decrease)
1994 1993 1992 1993 1992
Sales 100.0% 100.0% 100.0% 8.0% 6.0%
Cost of sales 54.9 55.3 56.7 7.2 3.4
Gross profit 45.1 44.7 43.3 9.0 9.3
Operating expenses:
Selling, general and administrative 24.4 24.5 26.6 7.5 (2.3)
Research, development and engineering 7.5 7.6 7.0 5.6 15.1
Embezzlement loss/(recovery) - (0.6) 2.8 - (124.0)
Merger & transition expenses - 1.9 - - -
31.9 33.4 36.4 3.2 (2.9)
Income from operations 13.2 11.3 6.9 26.2 73.8
Other income (expense), net:
Interest income 1.6 1.4 1.1 20.6 38.3
Interest expense (0.8) (1.1) (1.1) (20.8) (1.0)
Other income (expense) 0.1 0.5 (0.2) (64.6) 319.1
1.0 0.8 (0.2) 27.3 451.0
Income from continuing operations
before income taxes and cumulative
effect of accounting change 14.2 12.1 6.6 26.2 93.5
Income taxes 3.8 3.3 2.8 26.6 24.8
Income from continuing operations
before cumulative effect of
accounting change 10.4 8.9 3.8 26.1 142.5
Discontinued operations
Operating loss - - (0.6) - -
Loss on disposal - - (2.0) - -
Loss from discontinued operations - - (2.6) - -
Income before cumulative
effect of accounting change 10.4 8.9 1.2 26.1 667.2
Cumulative effect of accounting change - - 0.5 - N/A
Net income 10.4% 8.9% 1.7% 26.1 445.0%
RESULTS OF OPERATIONS
Sales:
Sales for 1994 increased by 8% over 1993 and sales for 1993 increased by
6% over 1992. Sales for all years include both Osmonics and Autotrol,
which was acquired on a pooling-of-interests basis on October 15, 1993.
The Company's sales are composed of capital equipment and replaceable
components. The ratio of equipment sales compared to replaceable
component sales as a percent of total sales remained at 60% in 1994
compared to 60% for both 1993 and 1992. International sales increased
at a slightly slower rate than domestic sales in 1994, due to weaker
markets in Europe and Mexico.
The increase in sales for 1994 was strongly influenced by an increase in
crossflow filtration equipment and systems activity, with lesser
influence from growth in the sales of certain replaceable component
product lines. Osmonics' core product lines showed sales increases of
13% for the year, while Autotrol product sales were flat with 1993. In
1995, Autotrol will begin selling Osmonics products through their
existing sales organization.
The dollar amount of the Company's backlog of orders considered to be
firm at December 31, 1994 was $15,700. The comparable backlog at
December 31, 1993 was $14,800. The Company believes that its backlog at
any time is not necessarily indicative of annual sales. The business of
the Company is not subject to significant seasonal variations.
Selective price increases averaged less than 1% from 1993 to 1994, and
less than 2% from 1992 to 1993.
Gross Margins:
Gross margins for 1994 increased to 45.1% of sales as a result of better
management of costs on system sales, value engineering of equipment,
reduced manufacturing costs on replaceable products and improved plant
utilization rates on the higher sales volume. Gross margins for 1993
increased to 44.7% of sales compared to 43.3% in 1992 for essentially
the same reasons.
Operating Expenses:
Selling, general and administrative expenses in both 1994 and 1993
increased in dollars from the preceding year's level. Increases were
attributable to increased marketing programs and expanded domestic and
international selling efforts. As a percent of sales, the ratio
declined slightly in 1994, as a result of continued cost savings in the
administrative area as we assimilate Autotrol operations into Osmonics.
Research, development and engineering expense increased to $7,174 in
1994, but declined slightly to 7.5% of sales. Research, development and
engineering expense had increased to 7.6% of sales in 1993, compared to
7.0% in 1992. These changes reflect the Company's continued commitment
to product development, including continued strong development efforts
related to filter and softener controls.
Operating expenses for 1992 include embezzlement losses of $2,342 at
Autotrol's French subsidiary. During late 1993, the Company obtained
$562 net recovery of these losses.
During 1993, the Company also incurred $1,644 of merger and transition
expenses related to the acquisition of Autotrol which are non-recurring
in nature, and were not capitalizable in a pooling-of-interests merger.
Other Income (Expense):
During 1994 and 1993, interest income increased due to increasing
interest rates on higher invested balances. Other Income in 1994
includes $325 of currency translation and exchange gains, compared to
$75 of such losses in 1993. Other income in 1993 includes a $295 gain
on the sale of land claimed by a municipality. Other income was also
affected in 1993 and 1992 by the sale of certain short-term investments
at net pretax gains of $204 and $88, respectively. No such net gains
occurred in 1994.
Income Taxes:
The Company's effective tax rates during 1994, 1993, and 1992 were 27%,
27%, and 42%, respectively. The decrease in the effective tax rate in
1994 and 1993, as compared to 1992, is primarily due to the
deductibility of the French embezzlement losses, the use of loss
carryforwards and credits at Autotrol and its subsidiaries, and an
increase in R&D tax credits. The effective tax rate in 1995 is expected
to increase to 31-32% as tax loss carryforwards and credits are
depleted.
Discontinued Operations:
Losses on discontinued operations in 1992 relate to the Aquatrol and RBC
businesses as discussed in Note 3 to the consolidated financial
statements.
Cumulative Effect of Accounting Change:
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," in reporting its
financial results for 1992 (see Note 10 to the consolidated financial
statements). The result was to reduce previously recorded deferred
income taxes and increase net income by $420, which has been recorded as
a cumulative effect of a change in accounting principle.
Liquidity and Capital Resources:
At December 31, 1994, the Company had cash and cash equivalents of
$9,453 and marketable securities of $27,623 versus $9,710 and $19,874,
respectively, at December 31, 1993. The net increase in cash, cash
equivalents and marketable securities resulted primarily from cash flows
generated from operations in 1994 and 1993. Effective January 1, 1994,
the Company adopted Statement of Financial Accounting Standard No. 115
(SFAS) "Accounting for Certain Investments in Debt and Equity
Securities." The effect of SFAS 115 was to increase marketable
securities by $1,604 in 1994. The current ratio increased to 3.7 as of
December 31, 1994 compared to 3.3 as of December 31, 1993, primarily due
to the increased levels of cash and marketable securities.
Net cash provided from operations in 1994, 1993, and 1992 amounted to
$9,325, $12,201, and $5,802, respectively.
The Company's capital expenditures in 1994 were $3,488 compared to
$3,257 in 1993 and $4,150 in 1992. In September 1992, the Company
completed the purchase of a 50,000-square-foot facility in Phoenix,
Arizona for $975, and has relocated the operations of its OREC business
unit to this facility. The Company anticipates that capital
expenditures in 1995 will be somewhat larger than the 1994 level due to
planned capital projects to introduce new products, improve production
processes and expand office automation. A possible building addition is
anticipated in 1995 or 1996.
The Company believes that its current cash and investment 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 1995 and 1996.
The Company has not paid cash dividends on its common shares. The Board
of Directors currently intends to retain its earnings for the expansion
of the Company's business.
Factors Affecting Future Performance:
The Company believes that in most cases it has been and will be able to
increase selling prices in response to increases in the cost of raw
materials on a timely basis.
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," setting forth reporting
requirements for investments in equity securities that have determinable
fair values, and for all investments in debt securities. The Company
adopted this new standard in fiscal 1994, increasing marketable
securities by $1,604, increasing deferred tax liability by $566, and
increasing shareholders' equity by $1,038.
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 112, "Accounting For Post-employment Benefits,"
with no effect on the consolidated financial statements.
On February 18, 1994, the Company announced a three-for-two stock split
in the form of a 50% stock dividend for shareholders of record on March
4, 1994, payable on March 21, 1994.