1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2000 Commission file number 000-21109 CUNO INCORPORATED (Exact name of registrant as specified in its charter) Delaware 06-1159240 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 Research Parkway, Meriden, Connecticut 06450 (Address of principal executive offices) (Zip Code) (203) 237-5541 Registrant's telephone number, including area code Not Applicable 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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, .001 Par Value -- 16,316,426 shares as of January 31, 2000 2 CUNO INCORPORATED Page ---- Part I. Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Statements of Income - Three months ended January 31, 2000 and 1999 1 Consolidated Balance Sheets - January 31, 2000 and October 31, 1999 2 Consolidated Statements of Cash Flows - Three months ended January 31, 2000 and 1999 3 Notes to Unaudited Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 3 CUNO INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except share amounts) THREE MONTHS ENDED JANUARY 31, 2000 1999 ------------ ------------ Net sales $ 57,734 $ 50,626 Less costs and expenses: Cost of products sold 33,409 30,760 Selling, general and administrative expenses 15,781 14,320 Research, development and engineering 3,135 2,852 ------------ ------------ 52,325 47,932 ------------ ------------ Operating income 5,409 2,694 Nonoperating income (expense): Interest expense (241) (358) Other income, net 104 169 ------------ ------------ (137) (189) ------------ ------------ Income before income taxes 5,272 2,505 Provision for income taxes 2,014 917 ------------ ------------ Net income $ 3,258 $ 1,588 ============ ============ Basic earnings per common share $ 0.20 $ 0.10 Diluted earnings per common share $ 0.20 $ 0.10 Basic shares outstanding 16,162,419 16,034,555 Diluted shares outstanding 16,516,744 16,199,556 See notes to unaudited condensed consolidated financial statements. -1- 4 CUNO INCORPORATED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts) JANUARY 31, OCTOBER 31, 2000 1999 ----------- ----------- ASSETS Current assets Cash and cash equivalents $ 3,878 $ 6,186 Accounts receivable, less allowances for doubtful accounts of $1,714 and $1,706, respectively 46,864 50,777 Inventories 29,111 29,246 Deferred income taxes 8,029 8,606 Prepaid expenses and other current assets 2,405 2,434 --------- --------- Total current assets 90,287 97,249 Noncurrent assets Deferred income taxes 1,448 1,598 Intangible assets, net 22,189 22,567 Other noncurrent assets 2,844 2,576 Property, plant and equipment, net 60,149 60,352 --------- --------- Total assets $ 176,917 $ 184,342 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank loans $ 18,527 $ 19,189 Accounts payable 15,677 16,716 Accrued payroll and related taxes 8,191 11,790 Other accrued expenses 7,470 8,002 Accrued income taxes 3,444 3,750 Current portion of long-term debt 1,980 2,493 --------- --------- Total current liabilities 55,289 61,940 Noncurrent liabilities Long-term debt, less current portion 4,780 8,761 Deferred income taxes 4,648 4,750 Retirement benefits 4,568 4,317 --------- --------- Total noncurrent liabilities 13,996 17,828 Stockholders' equity Preferred Stock, $.001 par value; 2,000,000 shares authorized, no shares issued -- -- Common Stock, $.001 par value; 50,000,000 shares authorized, 16,316,426 and 16,342,952 shares issued and outstanding (excluding 4,328 shares in treasury) 16 16 Additional paid-in-capital 39,832 39,779 Unearned compensation (2,447) (2,568) Accumulated other comprehensive income -- foreign currency translation adjustments 66 440 Retained earnings 70,165 66,907 ========= ========= Total stockholders' equity 107,632 104,574 --------- --------- Total liabilities and stockholders' equity $ 176,917 $ 184,342 ========= ========= See notes to unaudited condensed consolidated financial statements. -2- 5 CUNO INCORPORATED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (dollars in thousands) THREE MONTHS ENDED JANUARY 31, 2000 1999 ------- ------- OPERATING ACTIVITIES Net income $ 3,258 $ 1,588 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,129 2,054 Noncash compensation recognized under employee stock plans 236 240 Gain on sale of property, plant and equipment (16) (1) Pension costs in excess of funding 357 427 Deferred income taxes 545 520 Changes in operating assets and liabilities: Accounts receivable 3,005 2,660 Inventories (314) 792 Prepaid expenses and other current assets 159 (561) Accounts payable and accrued expenses (3,542) (2,485) Accrued income taxes (359) (510) ------- ------- Net cash provided by operating activities 5,458 4,724 INVESTING ACTIVITIES Proceeds from sales of property, plant and equipment 21 -- Capital expenditures (2,101) (3,085) ------- ------- Net cash used for investing activities (2,080) (3,085) FINANCING ACTIVITIES Proceeds from long-term debt -- 1,600 Principal payments on long-term debt (4,412) (5,347) Net borrowings under bank loans (138) 658 Retirement of Common Stock (1,154) -- ------- ------- Net cash used for financing activities (5,704) (3,089) Effect of exchange rate changes on cash and cash equivalents 18 58 ------- ------- Net change in cash and cash equivalents (2,308) (1,392) Cash and cash equivalents -- beginning of period 6,186 4,433 ------- ------- Cash and cash equivalents -- end of period $ 3,878 $ 3,041 ======= ======= See notes to unaudited condensed consolidated financial statements. -3- 6 CUNO INCORPORATED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2000 NOTE 1 - BUSINESS AND BASIS OF PRESENTATION CUNO Incorporated (the "Company" or "CUNO") designs, manufactures and markets a comprehensive line of filtration products for the separation, clarification and purification of liquids and gases. The Company's products, which include proprietary depth filters and semi-permeable membrane filters, are sold in the healthcare, fluid processing and potable water markets throughout the world. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of 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. Operating results for the three-month period ended January 31, 2000 are not necessarily indicative of the results that may be expected for the year ending October 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended October 31, 1999. NOTE 2 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the three months ended: JANUARY 31, JANUARY 31, 2000 1999 ------------ ------------ NUMERATOR: Net income $ 3,258,000 $ 1,588,000 ============ ============ DENOMINATORS: Weighted average shares outstanding 16,309,967 16,168,961 Issued but unearned performance shares (69,222) (91,553) Issued but unearned restricted shares (78,326) (42,853) ------------ ------------ DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,162,419 16,034,555 ============ ============ Weighted average shares outstanding 16,309,967 16,168,961 Effect of dilutive employee stock options 206,777 30,595 ------------ ------------ DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,516,744 16,199,556 ============ ============ Basic earnings per share $ 0.20 $ 0.10 Diluted earnings per share $ 0.20 $ 0.10 4 7 NOTE 3 - INVENTORIES Inventories consist of the following (amounts in thousands): JANUARY 31, OCTOBER 31, 2000 1999 ----------- ----------- Raw materials $12,792 12,399 Work-in-process 2,885 3,197 Finished goods 13,434 13,650 ------- ------- $29,111 $29,246 ======= ======= Inventories are stated at the lower of cost or market. Inventories in the United States are primarily valued by the last-in, first-out (LIFO) cost method. The primary method used for all other inventories is first-in, first-out (FIFO). An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. NOTE 4 - COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss) was comprised of the following (amounts in thousands): THREE MONTHS ENDED JANUARY 31, JANUARY 31, 2000 1999 ------- ------- Net income $ 3,258 $ 1,588 Other comprehensive loss - foreign currency translation adjustments (374) (2,217) ------- ------- Total comprehensive income (loss) $ 2,884 $ (629) ======= ======= 5 8 NOTE 5 - SEGMENT DATA For management reporting and control, the Company is divided into five geographic operating segments as presented below. Each segment has general operating autonomy over its markets. Operating segment data includes the results of all subsidiaries, consistent with the management reporting of these operations. Financial information by geographic operating segments as of and for the three months ended January 31 is summarized below (amounts in thousands): JANUARY 31, 2000 1999 -------- -------- NET SALES: North America $ 37,584 $ 32,631 Europe 8,833 9,993 Japan 8,667 6,849 Asia/Pacific 6,163 5,665 Latin America 4,092 2,929 Elimination of intercompany sales (7,605) (7,441) -------- -------- Consolidated $ 57,734 $ 50,626 ======== ======== JANUARY 31, 2000 1999 -------- -------- OPERATING INCOME (LOSS): North America $ 3,454 $ 1,494 Europe 47 116 Japan 488 (10) Asia/Pacific 898 725 Latin America 522 369 -------- -------- Segment total 5,409 2,694 -------- -------- Interest expense (241) (358) Other income, net 104 169 -------- -------- Income before income taxes $ 5,272 $ 2,505 ======== ======== - - Interest expense and other income (expense) have not been allocated to segments. JANUARY 31, OCTOBER 31, 2000 1999 --------- --------- ASSETS: North America $ 143,769 $ 144,385 Europe 20,805 24,028 Japan 29,321 31,558 Asia/Pacific 13,553 13,239 Latin America 7,436 5,763 General Corporate 3,878 6,186 Eliminations and other (41,845) (40,817) --------- --------- Consolidated $ 176,917 $ 184,342 ========= ========= - - General Corporate assets (principally cash and investments) are not allocated to segments. - - Eliminations and other is primarily comprised of intercompany receivables and investments in subsidiaries, both of which are eliminated in the Company's consolidated financial statements. 6 9 NOTE 6 - OTHER INCOME, NET Other income, net consisted of the following (amounts in thousands): THREE MONTHS ENDED JANUARY 31, JANUARY 31, 2000 1999 ----------- ----------- Interest income $ 52 $ 45 Exchange gains 20 213 Gains on sale of property, plant and equipment 16 1 Other income (expenses) 16 (90) ----- ----- $ 104 $ 169 ===== ===== 7 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED JANUARY 31, 2000 VS. THREE MONTH PERIOD ENDED JANUARY 31, 1999 NET SALES The Company had net sales of $57.7 million in the first quarter of fiscal 2000 representing a 14.0 percent increase over 1999's first quarter sales of $50.6 million. The majority of this improvement can be attributed to an increase in the unit volume of worldwide sales. Had currency values been unchanged from the first quarter of fiscal 1999, net sales for the first quarter of 2000 would have been $1.9 million higher, or 17.7 percent greater overall than the comparable period in fiscal 1999. THREE MONTHS ENDED CURRENCY JANUARY 31, JANUARY 31, PERCENT ADJUSTED 2000 1999 CHANGE CHANGE ---- ---- ------ ------ North America $32,127 $28,176 14.0% 14.0% Europe 7,451 7,730 (3.6%) 10.2% Japan 8,535 6,671 27.9% 14.3% Asia/Pacific 5,730 5,186 10.5% 9.1% Latin America 3,891 2,863 35.9% 92.1% ------- ------- ---- ---- Total sales $57,734 $50,626 14.0% 17.7% ======= ======= ==== ==== North American sales increased 14.0 percent in the first quarter as compared to the same quarter in 1999. The potable water market was responsible for much of this growth, however both the fluid processing and healthcare markets in North America had increased sales quarter over quarter. The Water Group (within the potable water market) continued to record strong sales with its series of new filters designed for various OEM customers with final sales to US consumers. Sales in Europe were down 3.6 percent as compared to the same period in 1999, but up 10.2 percent when expressed in local currency. All three market segments in this region posted gains, on a local currency basis, over the comparable period last year. Sales in Japan were 27.9 percent higher as compared to the same quarter last year, and 14.3 percent higher when expressed in local currency, reflecting double-digit sales growth in all three markets. Asia/Pacific sales increased by 10.5 percent as compared to the same quarter last year and, excluding changes in currency values over the period, increased 9.2 percent. The majority of the increase in Asia/Pacific is due to the slowly recovering economy in Southeast Asia after nearly two years of recession. First quarter Latin American sales increased 35.9 percent as compared to the same period in 1999, and 92.1 percent when expressed in local currency. This increase was primarily driven by a large contract completed and shipped in the first quarter of 2000. 8 11 The following table displays the Company's sales by market (amounts in thousands): THREE MONTHS ENDED CURRENCY JANUARY 31, JANUARY 31, PERCENT ADJUSTED 2000 1999 CHANGE CHANGE ---- ---- ------ ------ Potable Water $23,430 $20,471 14.5% 16.3% Fluid Processing 19,505 17,055 14.4% 19.0% Healthcare 14,799 13,100 13.0% 18.2% ------ ------ ---- ---- Total sales $57,734 $50,626 14.0% 17.7% ======= ======= ===== ===== Although, on a currency adjusted basis, all geographic operating segments experienced sales increases in the potable water segment, the increase was primarily driven by strong sales in North America associated to OEM customers, direct marketing companies, and appliance manufacturers. Similarly, on a currency adjusted basis, all geographic operating segments experienced sales increases in the fluid processing market. These increases reflect the strengthening worldwide demand in the electronics and oil & gas markets. Also, on a currency adjusted basis, all geographic operating segments experienced sales increases in the healthcare market. This market continues to reflect sound business conditions and a focus by management on competitively favorable niches. GROSS PROFIT The Company's gross profit increased $4.5 million to $24.3 million in the first quarter of 2000 from $19.9 million in the first quarter of 1999. Gross profit as a percentage of net sales (gross margin) increased during that same period from 39.2 percent in 1999 to 42.1 percent in 2000. Several factors contributed to the lower gross margin in 1999, chief among these were start-up costs associated with a new product in the Water Group, higher manufacturing costs in the US membrane operation associated with the introduction of a new manufacturing process, and pricing pressure on certain products sold in Japan. OPERATING EXPENSES Selling, general and administrative expenses increased $1.5 million or 10.2 percent in the first quarter of 2000 as compared to the first quarter of 1999. Selling expenses increased $0.7 million due primarily to sales force additions and normal incentive and inflation-based wage increases. Administrative expenses increased $0.5 million due to expansions in the employee base and inflation-based wage increases. Research, development and engineering expenses increased $0.3 million or 9.9 percent in the first quarter as compared to the prior year reflecting the Company's continued focus on the development of new products and technologies. OPERATING INCOME As a result of the above, operating income increased $2.7 million, or 100.8 percent, to $5.4 million or 9.4 percent of sales in the first quarter of 2000 as compared to $2.7 million or 5.3 percent of sales in the first quarter of 1999. 9 12 NONOPERATING ACTIVITY Interest expense was down slightly ($0.1 million) quarter over quarter as the level of debt outstanding decreased. See "Financial Position and Liquidity" below. As detailed in Note 6 to the condensed consolidated financial statements, other income, net was relatively flat quarter over quarter as no material activity occurred in either of the two quarters. INCOME TAXES The Company's effective income tax rate for the first quarter of 2000 was 38.2% compared to 36.6% in the first quarter of 1999. The increase primarily reflects a change in the mix of income attributed to the various countries in which the Company does business and their associated tax rates. FINANCIAL POSITION AND LIQUIDITY The Company assesses its liquidity in terms of its ability to generate cash to fund operating and investing activities. Of particular importance to the management of liquidity are cash flows generated by operating activities, capital expenditure levels, and adequate bank financing alternatives. The Company manages its worldwide cash requirements considering the cost effectiveness of the funds available from the many subsidiaries through which it conducts its business. Management believes that its existing cash position and available sources of liquidity are sufficient to meet current and anticipated requirements for the foreseeable future. Set forth below is selected key cash flow data (in thousands of dollars): Source/(Use) of Cash THREE MONTHS ENDED JANUARY 31, 2000 1999 ---- ---- OPERATING ACTIVITIES: Net cash provided by net income plus depreciation, amortization and non-cash compensation $ 5,623 $ 3,882 Accounts receivable 3,005 2,660 Inventories (314) 792 Net cash provided by operating activities 5,458 4,724 INVESTING ACTIVITIES: Capital expenditures (2,101) (3,085) FINANCING ACTIVITIES: Net change in total debt (4,550) (3,089) Retirement of Common Stock (1,154) -- The net cash provided by net income plus depreciation, amortization and non-cash compensation is an important measurement of cash generated from the earnings process before significant non-cash charges. Net income plus depreciation, amortization and non-cash compensation of $5.6 million increased 44.8 percent in the first quarter of 2000 as compared to 1999 reflecting the Company's increased sales volume and improved gross profit margin as previously discussed above. The net source of $3.0 million generated from accounts receivable reflects the Company's strong management of worldwide receivables, and 10 13 compares favorably to the general increase in sales levels. The net use of $0.3 million applicable to inventories reflects the Company's consistent growth in sales and concomitant increase, although at a lessor rate, in inventories. During the first quarter of 2000, a significant portion of the Company's outstanding performance shares vested. In connection therewith, the Company utilized $1.2 million in cash to pay applicable employee withholding taxes on the common shares earned in return for shares of the Company's Common Stock then retired. Capital expenditures amounted to $2.1 million in the first three months of 2000 and were primarily comprised of building additions and purchases of machinery and equipment for the expansion of manufacturing capabilities. In the second quarter of fiscal 2000, the Company may be required to make contingent consideration payments of up to $3.0 million related to the acquisition of Chemical Engineering Corporation. Any such payments will be recorded as additional goodwill. Due largely to the Company's continued strong cash flows from operating activities ($5.5 million) in the first three months of 2000, the Company was able to reduce its long-term debt and bank loans by $4.6 million. OTHER MATTERS COMPLIANCE WITH YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. EUROPEAN ECONOMIC AND MONETARY UNION On January 1, 1999, the Euro became the official currency of the European Economic and Monetary Union (the "Union"). Companies in the Union may begin conducting their business operations in the new currency, however, the previous local currencies in those countries may also continue to be used as legal tender through January 1, 2002. The Company has implemented its program to accommodate the new currency. Software used by the Company at its European facilities is capable of handling multi-currencies, including the Euro. As such, the Company is able to accept customer or supplier orders in either the new Euro or the previous local currency. The Company continues to address the Euro's impact on its operations (e.g. banking, payroll processing, pricing, currency hedging requirements, etc.) The estimated costs of any remaining required system modifications and other operational changes are not expected to be material to the Company. MARKET RISK DISCLOSURES 11 14 There have been no material changes in the information reported in the Company's Form 10-K for the year ended October 31, 1999 under the "Market Risk Disclosures" section of Management's Discussion and Analysis of Financial Condition and Results of Operations. FORWARD LOOKING INFORMATION The Company wants to provide stockholders and investors with more meaningful and useful information and therefore, this quarterly report describes the Company's belief regarding business conditions and the outlook for the Company, which reflects currently available information. These forward looking statements are subject to risks and uncertainties which, as described in Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended October 31, 1999, could cause the Company's actual results or performance to differ materially from those expressed herein. The Company assumes no obligation to update the information contained in this quarterly report. 12 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Documents filed as part of this report. Exhibit 27. Financial Data Schedule (submitted electronically herewith) (b) Reports on Form 8-K No reports were filed on Form 8-K during the quarter for which this 10-Q is filed. 13 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CUNO INCORPORATED Date March 1, 2000 ---------------- By /s/ Frederick C. Flynn, Jr. --------------------------- Frederick C. Flynn, Jr. Senior Vice President - Finance and Administration, Chief Financial Officer, Treasurer and Assistant Secretary By /s/ Timothy B. Carney --------------------------- Timothy B. Carney Vice President, Controller, and Assistant Secretary 14