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 JULY 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 -- 16,339,092 shares as of July 31, 2000
2
CUNO INCORPORATED
Page
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Three months ended July 31, 2000 and 1999 1
Consolidated Statements of Income - Nine months ended July 31, 2000 and 1999 2
Consolidated Balance Sheets - July 31, 2000 and October 31, 1999 3
Consolidated Statements of Cash Flows - Nine months ended July 31, 2000 and 1999 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
THREE MONTHS ENDED
JULY 31,
-------------------------------------
2000 1999
------------ ------------
Net sales $ 62,795 $ 56,348
Less costs and expenses:
Cost of products sold 35,680 31,188
Selling, general and administrative expenses 15,768 15,044
Research, development and engineering 3,184 2,811
------------ ------------
54,632 49,043
------------ ------------
Operating income 8,163 7,305
Nonoperating income (expense):
Interest expense (128) (291)
Other income, net (63) (91)
------------ ------------
(191) (382)
------------ ------------
Income before income taxes 7,972 6,923
Provision for income taxes 2,953 2,470
------------ ------------
Net income $ 5,019 $ 4,453
============ ============
Basic earnings per common share $ 0.31 $ 0.28
Diluted earnings per common share $ 0.30 $ 0.27
Basic shares outstanding 16,209,017 16,090,458
Diluted shares outstanding 16,672,653 16,396,254
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
NINE MONTHS ENDED
JULY 31,
-------------------------------------
2000 1999
------------ ------------
Net sales $ 179,439 $ 161,001
Less costs and expenses:
Cost of products sold 102,525 92,068
Selling, general and administrative expenses 47,291 44,821
Research, development and engineering 9,684 8,618
------------ ------------
159,500 145,507
------------ ------------
Operating income 19,939 15,494
Nonoperating income (expense):
Interest expense (557) (946)
Other income, net 53 142
------------ ------------
(504) (804)
------------ ------------
Income before income taxes 19,435 14,690
Provision for income taxes 7,286 5,334
------------ ------------
Net income $ 12,149 $ 9,356
============ ============
Basic earnings per common share $ 0.75 $ 0.58
Diluted earnings per common share $ 0.73 $ 0.57
Basic shares outstanding 16,191,142 16,062,795
Diluted shares outstanding 16,610,598 16,288,431
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
JULY 31, OCTOBER 31,
2000 1999
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 9,149 $ 6,186
Accounts receivable, less allowances for
doubtful accounts of $1,763 and $1,706, respectively 48,999 50,777
Inventories 25,424 29,246
Deferred income taxes 7,504 8,606
Prepaid expenses and other current assets 3,322 2,434
--------- ---------
Total current assets 94,398 97,249
Noncurrent assets
Deferred income taxes 1,111 1,598
Intangible assets, net 24,387 22,567
Other noncurrent assets 1,870 2,576
Property, plant and equipment, net 62,325 60,352
--------- ---------
Total assets $ 184,091 $ 184,342
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 17,894 $ 19,189
Accounts payable 16,772 16,716
Accrued payroll and related taxes 9,475 11,790
Other accrued expenses 7,900 8,002
Accrued income taxes 3,736 3,750
Current portion of long-term debt 1,179 2,493
--------- ---------
Total current liabilities 56,956 61,940
Noncurrent liabilities
Long-term debt, less current portion 2,091 8,761
Deferred income taxes 4,604 4,750
Retirement benefits 4,607 4,317
--------- ---------
Total noncurrent liabilities 11,302 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,
16,339,092 and 16,342,952 shares issued and outstanding
(excluding 747 and 4,328 shares in treasury) 16 16
Additional paid-in-capital 40,390 39,779
Unearned compensation (2,086) (2,568)
Accumulated other comprehensive (loss) income --
foreign currency translation adjustments (1,543) 440
Retained earnings 79,056 66,907
--------- ---------
Total stockholders' equity 115,833 104,574
--------- ---------
Total liabilities and stockholders' equity $ 184,091 $ 184,342
========= =========
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED
JULY 31,
-----------------------------
2000 1999
-------- --------
OPERATING ACTIVITIES
Net income $ 12,149 $ 9,356
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,641 6,136
Noncash compensation recognized under employee stock plans 817 1,164
Gains on sales of property, plant and equipment (25) (3)
Pension costs in excess of funding 460 782
Deferred income taxes 1,280 285
Changes in operating assets and liabilities:
Accounts receivable (37) (1,378)
Inventories 2,805 (207)
Prepaid expenses and other current assets (625) (942)
Accounts payable and accrued expenses 55 837
Accrued income taxes (149) 2,049
-------- --------
Net cash provided by operating activities 23,371 18,079
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 44 12
Capital expenditures (8,754) (8,756)
Contingent consideration for prior acquisition (2,885) (1,000)
Proceeds from surrender of life insurance policies 569 --
-------- --------
Net cash used for investing activities (11,026) (9,744)
FINANCING ACTIVITIES
Proceeds from long-term debt 3,800 5,900
Principal payments on long-term debt (11,673) (14,552)
Net (repayments) borrowings under short-term bank loans (411) 423
Retirement of Common Stock (1,154) --
Proceeds from stock options exercised 203 118
-------- --------
Net cash used for financing activities (9,235) (8,111)
Effect of exchange rate changes on cash and cash equivalents (147) 26
-------- --------
Net change in cash and cash equivalents 2,963 250
Cash and cash equivalents -- beginning of period 6,186 4,433
-------- --------
Cash and cash equivalents -- end of period $ 9,149 $ 4,683
======== ========
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 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 nine-month period
ended July 31, 2000 are not necessarily indicative of the results that may be
expected for the full 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:
JULY 31, JULY 31,
2000 1999
------------ ------------
NUMERATOR:
Net income $ 5,019,000 $ 4,453,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,333,841 16,258,057
Issued but unearned performance shares (67,309) (110,228)
Issued but unearned restricted shares (57,515) (57,371)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,209,017 16,090,458
============ ============
Weighted average shares outstanding 16,333,841 16,258,057
Effect of dilutive employee stock options 338,812 138,197
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,672,653 16,396,254
============ ============
Basic earnings per share $ 0.31 $ 0.28
Diluted earnings per share $ 0.30 $ 0.27
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The following table sets forth the computation of basic and diluted
earnings per share for the nine months ended:
JULY 31, JULY 31,
2000 1999
------------ ------------
NUMERATOR:
Net income $ 12,149,000 $ 9,356,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,326,762 16,213,497
Issued but unearned performance shares (68,232) (108,524)
Issued but unearned restricted shares (67,388) (42,178)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,191,142 16,062,795
============ ============
Weighted average shares outstanding 16,326,762 16,213,497
Effect of dilutive employee stock options 283,836 74,934
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,610,598 16,288,431
============ ============
Basic earnings per share $ 0.75 $ 0.58
Diluted earnings per share $ 0.73 $ 0.57
NOTE 3 - INVENTORIES
Inventories consist of the following (amounts in thousands):
JULY 31, OCTOBER 31,
2000 1999
------- -------
Raw materials $11,521 $12,399
Work-in-process 2,560 3,197
Finished goods 11,343 13,650
------- -------
$25,424 $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.
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NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income was comprised of the following (amounts in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2000 1999 2000 1999
-------- -------- -------- --------
Net income $ 5,019 $ 4,453 $ 12,149 $ 9,356
Other comprehensive income (loss) - foreign
currency translation adjustments 120 (170) (1,983) (2,651)
-------- -------- -------- --------
Total comprehensive income $ 5,139 $ 4,283 $ 10,166 $ 6,705
======== ======== ======== ========
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 is summarized below (amounts in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2000 1999 2000 1999
--------- --------- --------- ---------
NET SALES:
North America $ 40,930 $ 37,361 $ 116,695 $ 106,825
Europe 9,655 10,265 27,854 30,921
Japan 10,650 7,633 29,248 21,984
Asia/Pacific 6,474 6,096 19,128 18,006
Latin America 3,014 2,929 10,472 8,412
Intercompany sales (7,928) (7,936) (23,958) (25,147)
--------- --------- --------- ---------
Consolidated $ 62,795 $ 56,348 $ 179,439 $ 161,001
========= ========= ========= =========
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2000 1999 2000 1999
-------- -------- -------- --------
OPERATING INCOME:
North America $ 5,488 $ 4,894 $ 12,772 $ 9,667
Europe 540 859 743 1,630
Japan 908 416 2,395 783
Asia/Pacific 887 705 2,706 2,229
Latin America 340 431 1,323 1,185
-------- -------- -------- --------
Segment total 8,163 7,305 19,939 15,494
-------- -------- -------- --------
Interest expense (128) (291) (557) (946)
Other, net (63) (91) 53 142
-------- -------- -------- --------
Income before income taxes $ 7,972 $ 6,923 $ 19,435 $ 14,690
======== ======== ======== ========
Interest expense and other income (expense) have not been allocated to segments.
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NOTE 6 - OTHER INCOME (EXPENSE), NET
Other income (expense), net consisted of the following (amounts in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2000 1999 2000 1999
----- ----- ----- -----
Interest income $ 44 $ 46 $ 152 $ 129
Exchange (losses) gains (29) (138) (52) 93
Gains on sales of
property, plant,
and equipment 7 2 25 3
Other, net (85) (1) (72) (83)
----- ----- ----- -----
$ (63) $ (91) $ 53 $ 142
===== ===== ===== =====
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED JULY 31, 2000 VS. THREE MONTH PERIOD ENDED
JULY 31, 1999
NET SALES
The Company had net sales of $62.8 million in the third quarter of
fiscal 2000 representing an 11.4 percent increase over 1999's third quarter
sales of $56.3 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 third quarter of 1999, net sales in the third quarter of 2000
would have been $0.4 million higher, or 12.2 percent greater overall.
The following table displays the Company's sales by geographic segment
(amounts in thousands):
THREE MONTHS ENDED CURRENCY
JULY 31, PERCENT ADJUSTED
2000 1999 CHANGE CHANGE
------- ------- ---- ----
North America $35,203 $31,714 11.0% 11.0%
Europe 8,429 8,702 (3.1%) 8.7%
Japan 10,475 7,466 40.3% 25.0%
Asia/Pacific 5,731 5,643 1.6% 8.8%
Latin America 2,957 2,823 4.7% 8.8%
------- ------- ---- ----
Total sales $62,795 $56,348 11.4% 12.2%
======= ======= ==== ====
North American sales increased 11.0 percent in the third quarter as
compared to the same quarter in 1999. The potable water market was responsible
for nearly all of this growth (up 20.6 percent) as both the fluid processing and
healthcare markets in North America were relatively flat quarter over quarter.
The Water Group (which addresses the potable water market) continues to record
strong sales with its series of new filters designed for OEM customers who serve
various channels of distribution with final sales to US consumers. Sales in the
North American healthcare and fluid processing segment were relatively flat due
to reduced volume with a large diagnostic customer in the healthcare industry.
Excluding this large diagnostic customer, sales increased approximately 2
percent in the fluid processing and healthcare segments. Sales in Europe were
down 3.1 percent as compared to the same period in 1999, but up 8.7 percent when
expressed in local currency. Sales in Japan were 40.3 percent higher as compared
to the same quarter last year, and 25.0 percent higher when expressed in local
currency. These strong sales increases primarily reflect a general recovery in
the industrial sector of the economy and the expansion of sales to certain
customers. Asia/Pacific sales increased by 1.6 percent as compared to the same
quarter last year and, excluding changes in currency values over the period,
increased 8.8 percent. The majority of the increase in Asia/Pacific is due to
expanding sales in the potable water segment and the slowly recovering economy
in Southeast Asia. Third quarter Latin American sales increased 4.7 percent as
compared to the same period in 1999, and 8.8 percent when expressed in local
currency. This increase reflects a broad performance improvement and a
continuing strengthening of the economy in Brazil.
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The following table displays the Company's sales by market (amounts in
thousands):
THREE MONTHS ENDED CURRENCY
JULY 31, PERCENT ADJUSTED
2000 1999 CHANGE CHANGE
------- ------- ---- ----
Potable Water $26,065 $21,853 19.3% 20.6%
Fluid Processing 19,868 18,591 6.9% 6.5%
Healthcare 16,862 15,904 6.0% 7.3%
------- ------- ---- ----
Total sales $62,795 $56,348 11.4% 12.2%
======= ======= ==== ====
On a currency adjusted basis, all geographic operating segments
achieved sales increases in the potable water segment. This strength was driven
in part by increased sales (up 20.6 percent) in North America associated with
OEM customers, direct marketing companies, and appliance manufacturers, as well
as increased foreign potable water sales (up 20.8 percent on a currency adjusted
basis). Other than a decrease in fluid processing sales in Asia/Pacific, on a
currency adjusted basis, all other geographic operating segments experienced
sales increases in this market. These increases reflect a general strengthening
worldwide demand in the electronics and oil & gas markets. Adjusting for North
American healthcare sales to a large diagnostic customer, on a currency adjusted
basis, all geographic operating segments achieved sales increases in this
market. International healthcare sales increased 17.1 percent in local
currencies reflecting sound business conditions and a continued focus by
management on competitively favorable niches.
GROSS PROFIT
The Company's gross profit increased $2.0 million to $27.1 million in
the third quarter of 2000 from $25.2 million in the third quarter of 1999. Gross
profit as a percentage of net sales (gross margin) decreased during that same
period from 44.7 percent in 1999 to 43.2 percent in 2000. The primary factor
that contributed to the lower gross margin in 2000 was lower sales volume in the
North American healthcare market which generally carries a higher margin than
most products in the other markets.
OPERATING EXPENSES
Selling, general and administrative expenses increased $0.7 million or
4.8 percent in the third quarter of 2000 as compared to the third quarter of
1999. Research, development and engineering expenses increased $0.4 million or
13.3 percent in the third quarter as compared to the prior year reflecting the
Company's continued focus on the development of new products and technologies.
All other expense categories reflected minor increases consistent with normal
incentive and inflation-based increases.
OPERATING INCOME
As a result of the above, operating income increased $0.9 million, or
11.7 percent, to $8.2 million or 13.0 percent of sales in both the third quarter
of 2000 and the third quarter of 1999.
NONOPERATING ACTIVITY
Interest expense decreased by $0.2 million in the third quarter of 2000
compared to the third quarter of 1999 as the Company continued to reduce the
level of debt outstanding. See "Financial Position and Liquidity" below. As
disclosed in Note 6 to the condensed consolidated financial
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statements, other income (expenses) was relatively minor in both periods as no
material activity occurred in either of the two quarters.
INCOME TAXES
The Company's effective income tax rate for the third quarter of 2000
was 37.0% compared to 35.7% in the third 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.
NINE MONTH PERIOD ENDED JULY 31, 2000 VS. NINE MONTH PERIOD ENDED JULY 31, 1999
NET SALES
The Company had net sales of $179.4 million in the first nine months of
fiscal 2000 representing an 11.5 percent increase over 1999's comparable sales
of $161.0 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 nine months of fiscal 1999, net sales for the first
nine months of 2000 would have been $2.4 million higher, or 12.9 percent greater
overall than the comparable period in fiscal 1999.
The following table displays the Company's sales by geographic segment
(amounts in thousands):
NINE MONTHS ENDED CURRENCY
JULY 31, PERCENT ADJUSTED
2000 1999 CHANGE CHANGE
-------- -------- ---- ----
North America $ 99,579 $ 90,683 9.8% 9.8%
Europe 23,751 24,401 (2.7%) 10.1%
Japan 28,691 21,453 33.7% 19.8%
Asia/Pacific 17,231 16,288 5.8% 8.6%
Latin America 10,187 8,176 24.6% 39.5%
-------- -------- ---- ----
Total sales $179,439 $161,001 11.5% 12.9%
======== ======== ==== ====
North American sales increased 9.8 percent in the first nine months of
2000 as compared to the same period in 1999. The potable water market was
responsible for nearly all of this growth. The Water Group (within the potable
water market) continued to record strong sales with its series of new filters
designed for various OEM customers who serve various channels of distribution
with final sales to US consumers. Adjusting for healthcare sales to a major
diagnostic customer, North American sales in both the healthcare and fluid
processing markets increased modestly over the comparable period in 1999. Sales
in Europe were down 2.7 percent as compared to the same period in 1999, but up
10.1 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 33.7 percent higher as compared to the same period
last year, and 19.8 percent higher when expressed in local currency, reflecting
strong double-digit sales growth in all three markets. Excluding changes in
currency values over the period, Asia/Pacific sales increased by 8.6 percent as
compared to the same period last year. The majority of the increase in this
region is due to the slowly recovering economy in Southeast Asia and strong
gains in the potable water market. Latin American sales increased 24.6 percent
as compared to the same period in 1999, and 39.5 percent when expressed in local
currency. This increase was driven in part
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14
by a large contract completed and shipped in the first quarter of 2000. In
addition, all three market segments in this region posted gains, on a local
currency basis, over the comparable period last year.
The following table displays the Company's sales by market (amounts in
thousands):
NINE MONTHS ENDED CURRENCY
JULY 31, PERCENT ADJUSTED
2000 1999 CHANGE CHANGE
-------- -------- ---- ----
Potable Water $ 74,334 $ 63,494 17.1% 18.3%
Fluid Processing 58,562 53,658 9.1% 10.3%
Healthcare 46,543 43,849 6.1% 8.4%
-------- -------- ---- ----
Total sales $179,439 $161,001 11.5% 12.9%
======== ======== ==== ====
On a currency adjusted basis, all geographic operating segments
experienced sales increases in the potable water segment. This dollar increase
was driven by strong sales (up 17.9%) in North America associated with OEM
customers, direct marketing companies, and appliance manufacturers, as well as
increased foreign potable water sales (up 20.5% on a currency adjusted basis).
Similarly, on a currency adjusted basis, all geographic operating segments
experienced sales increases in the fluid processing market. These increases
primarily reflect the strengthening worldwide demand in the electronics and oil
& gas markets. Adjusting for North American healthcare sales to a major
diagnostic customer, on a currency adjusted basis, all geographic operating
segments experienced sales increases in this market. Foreign healthcare sales
increased 16.1 in local currencies percent reflecting sound business conditions
and a continued focus by management on competitively favorable niches.
GROSS PROFIT
The Company's gross profit increased $8.0 million to $76.9 million in
the first nine months of 2000 from $68.9 million in the first nine months of
1999. This increase was driven by an increase in sales volume period over
period. Gross profit as a percentage of net sales (gross margin) increased
slightly during that same period from 42.8 percent in 1999 to 42.9 percent in
2000.
OPERATING EXPENSES
Selling, general and administrative expenses increased $2.5 million or
5.5 percent in the first nine months of 2000 as compared to the first nine
months of 1999. Generally, all expense categories within SG&A had increases
consistent with normal incentive and inflation-based increases. Research,
development and engineering expenses increased $1.1 million or 12.4 percent in
the first nine months of 2000 as compared to the comparable period in 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 $4.4 million, or
28.7 percent, to $19.9 million or 11.1 percent of sales in the first nine months
of 2000 as compared to $15.5 million or 9.6 percent of sales in the first nine
months of 1999.
NONOPERATING ACTIVITY
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Interest expense decreased by $0.4 million in the first nine months of
2000 compared to the prior period as the Company continues to reduce the level
of debt outstanding. See "Financial Position and Liquidity" below. As disclosed
in Note 6 to the condensed consolidated financial statements, other income
(expenses) was relatively minor in both periods as no material activity occurred
in either of the two periods.
INCOME TAXES
The Company's effective income tax rate for the first nine months of
2000 was 37.5% compared to 36.3% in the first nine months 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 NINE MONTHS ENDED
JULY 31,
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net cash provided by net income plus depreciation, amortization
and non-cash compensation $ 19,607 $ 16,656
Accounts receivable (37) (1,378)
Inventories 2,805 (207)
Net cash provided by operating activities 23,371 18,079
INVESTING ACTIVITIES:
Capital expenditures (8,754) (8,756)
Contingent consideration for prior acquisition (2,885) (1,000)
Proceeds from surrender value of life insurance policies 569 --
FINANCING ACTIVITIES:
Net change in total debt (8,284) (8,229)
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 $19.6 million increased
17.7 percent in the first nine months of 2000 as compared to the same period in
1999 reflecting the Company's increased sales volume, increased gross profit,
and improved operating profit margin as
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discussed above. The improvement in cash used by accounts receivable reflects
the Company's strong management of worldwide receivables during a period of
rising sales volume. Inventories were a source of cash during the first nine
months of fiscal 2000 despite rising sales volumes due to a continued focus by
the Company on improving the efficiency of inventory management. These
improvements led to an increase in cash provided by operating activities of $5.3
million (29.3 percent) in the first nine months of 2000 compared to 1999.
Capital expenditures amounted to $8.8 million in both the first nine
months of 2000 and 1999. Expenditures in both periods 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
made a contingent consideration payment of $2.9 million related to the
acquisition of Chemical Engineering Corporation (CEC). This payment was recorded
as additional goodwill. There will be no future contingency payments related to
the CEC acquisition. The acquisition of CEC included certain life insurance
policies on key officers of CEC. In the second quarter of 2000, CUNO elected to
surrender these policies for their cash surrender value upon settlement.
Due largely to the Company's continued strong cash flows from operating
activities ($23.4 million) in the first nine months of 2000 and despite capital
expenditures and contingent acquisition payments totaling $11.6 million, the
Company was able to reduce its long-term debt and bank loans by $8.3 million.
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.
OTHER MATTERS
COMPLIANCE WITH YEAR 2000
In prior reports, 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
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required system modifications and other operational changes are not expected to
be material to the Company.
MARKET RISK DISCLOSURES
Other than increases in the general level of interest rates in the
United States and Japan, 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.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report.
Exhibit 10. Material Contracts
10.24 Employment Agreement - Michael C. Croft
Exhibit 27. Financial Data Schedule (submitted electronically herewith)
(b) Reports on Form 8-K
During the three month period ended July 31, 2000, the following report
was filed on Form 8-K under:
Item 5. Other Events
Item 7. Financial Statements and Exhibits
The report bearing cover date July 6, 2000 was filed on July 10, 2000
concerning the registrant's announced retirement of Paul J. Powers from
the Company's Board of Directors. A copy of the press release was
attached as an exhibit.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUNO INCORPORATED
Date September 11, 2000
By /s/ Frederick C. Flynn, Jr.
Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer,
Treasurer and Assistant Secretary
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