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, 2001 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 January 31, 2001 2 CUNO INCORPORATED Page ---- Part I. Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Statements of Income - Three months ended January 31, 2001 and 2000 1 Consolidated Balance Sheets - January 31, 2001 and October 31, 2000 2 Consolidated Statements of Cash Flows - Three months ended January 31, 2001 and 2000 3 Notes to Unaudited Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12 3 CUNO INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except share amounts) THREE MONTHS ENDED JANUARY 31, 2001 2000 ------------ ------------ Net sales $ 58,586 $ 57,734 Less costs and expenses: Cost of products sold 33,524 33,409 Selling, general and administrative expenses 15,764 15,781 Research, development and engineering 3,263 3,135 ------------ ------------ 52,551 52,325 ------------ ------------ Operating income 6,035 5,409 Nonoperating income (expense): Interest expense (148) (241) Other income, net 111 104 ------------ ------------ (37) (137) ------------ ------------ Income before income taxes 5,998 5,272 Provision for income taxes 2,170 2,014 ------------ ------------ Net income $ 3,828 $ 3,258 ============ ============ Basic earnings per common share $ 0.24 $ 0.20 Diluted earnings per common share $ 0.23 $ 0.20 Basic shares outstanding 16,274,086 16,162,419 Diluted shares outstanding 16,663,683 16,516,744 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, 2001 2000 ----------- ----------- Assets Current assets Cash and cash equivalents $ 17,743 $ 13,814 Accounts receivable, less allowances for doubtful accounts of $1,377 and $1,395, respectively 50,279 52,239 Inventories 24,742 24,087 Deferred income taxes 6,240 6,414 Prepaid expenses and other current assets 2,683 2,101 --------- --------- Total current assets 101,687 98,655 Noncurrent assets Deferred income taxes 1,092 1,168 Intangible assets, net 23,777 23,971 Other noncurrent assets 1,531 1,918 Property, plant and equipment, net 63,509 63,187 --------- --------- Total assets $ 191,596 $ 188,899 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank loans $ 15,031 $ 14,233 Accounts payable 16,475 17,978 Accrued payroll and related taxes 7,954 11,851 Other accrued expenses 8,369 7,675 Accrued income taxes 4,306 4,251 Current portion of long-term debt 634 746 --------- --------- Total current liabilities 52,769 56,734 Noncurrent liabilities Long-term debt, less current portion 3,444 3,422 Deferred income taxes 4,729 4,786 Retirement benefits 4,501 4,439 --------- --------- Total noncurrent liabilities 12,674 12,647 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 16,279,198 shares issued and outstanding (excluding 747 shares in treasury) 16 16 Additional paid-in-capital 41,878 39,814 Unearned compensation (1,482) (1,120) Accumulated other comprehensive loss -- foreign currency translation adjustments (2,441) (3,546) Retained earnings 88,182 84,354 --------- --------- Total stockholders' equity 126,153 119,518 --------- --------- Total liabilities and stockholders' equity $ 191,596 $ 188,899 ========= ========= See notes to unaudited condensed consolidated financial statements. -2- 5 CUNO INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) THREE MONTHS ENDED JANUARY 31, 2001 2000 -------- -------- Operating activities Net income $ 3,828 $ 3,258 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,354 2,129 Noncash compensation recognized under employee stock plans 250 236 Gains on sales of property, plant and equipment (39) (16) Pension costs in excess of funding 236 357 Deferred income taxes 23 545 Changes in operating assets and liabilities: Accounts receivable 1,744 3,005 Inventories (552) (314) Prepaid expenses and other current assets (192) 159 Accounts payable and accrued expenses (3,039) (3,542) Accrued income taxes 53 (359) -------- -------- Net cash provided by operating activities 4,666 5,458 INVESTING ACTIVITIES Proceeds from sales of property, plant and equipment 40 21 Capital expenditures (2,424) (2,101) -------- -------- Net cash used for investing activities (2,384) (2,080) FINANCING ACTIVITIES Principal payments on long-term debt (104) (4,412) Net borrowings (repayments) under short-term bank loans 1,572 (138) Retirement of Common Stock -- (1,154) Proceeds from stock options exercised 46 -- -------- -------- Net cash provided by (used for) financing activities 1,514 (5,704) Effect of exchange rate changes on cash and cash equivalents 133 18 -------- -------- Net change in cash and cash equivalents 3,929 (2,308) Cash and cash equivalents -- beginning of period 13,814 6,186 -------- -------- Cash and cash equivalents -- end of period $ 17,743 $ 3,878 ======== ======== See notes to unaudited condensed consolidated financial statements. -3- 6 CUNO INCORPORATED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2001 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 accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 interim periods are not necessarily indicative of the results that may be expected for the full year. 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, 2000. 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, 2001 2000 ------------ ------------ NUMERATOR: Net income $ 3,828,000 $ 3,258,000 ============ ============ DENOMINATORS: Weighted average shares outstanding 16,326,565 16,309,967 Issued but unearned performance shares (1,219) (69,222) Issued but unearned restricted shares (51,260) (78,326) ------------ ------------ DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,274,086 16,162,419 ============ ============ Weighted average shares outstanding 16,326,565 16,309,967 Effect of dilutive employee stock options 337,118 206,777 ------------ ------------ DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,663,683 16,516,744 ============ ============ Basic earnings per share $ 0.24 $ 0.20 Diluted earnings per share $ 0.23 $ 0.20 7 NOTE 3 - INVENTORIES Inventories consist of the following (amounts in thousands): JANUARY 31, OCTOBER 31, 2001 2000 ----------- ----------- Raw materials $11,111 $10,814 Work-in-process 2,310 2,435 Finished goods 11,321 10,838 ------- ------- $24,742 $24,087 ======= ======= 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 Total comprehensive income was comprised of the following (amounts in thousands): THREE MONTHS ENDED JANUARY 31, 2001 2000 ------ ------ Net income $3,828 $3,258 Other comprehensive income (loss) - foreign currency translation adjustments 1,105 (374) ------ ------ Total comprehensive income $4,933 $2,884 ====== ====== 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): 8 THREE MONTHS ENDED JANUARY 31, 2001 2000 -------- -------- NET SALES: North America $ 38,121 $ 37,584 Europe 7,952 8,833 Japan 9,444 8,667 Asia/Pacific 6,237 6,163 Latin America 3,163 4,092 Intercompany sales (6,331) (7,605) -------- -------- Consolidated $ 58,586 $ 57,734 ======== ======== THREE MONTHS ENDED JANUARY 31, 2001 2000 ------- ------- OPERATING INCOME: North America $ 3,404 $ 3,454 Europe 302 47 Japan 881 488 Asia/Pacific 934 898 Latin America 514 522 ------- ------- Segment total 6,035 5,409 ------- ------- Interest expense (148) (241) Other, net 111 104 ------- ------- Income before income taxes $ 5,998 $ 5,272 ======= ======= Interest expense and other income (expense) have not been allocated to segments. NOTE 6 - OTHER INCOME (EXPENSE), NET Other income (expense), net consisted of the following (amounts in thousands): THREE MONTHS ENDED JANUARY 31, 2001 2000 ----- ----- Interest income $ 208 $ 52 Exchange (losses) gains (75) 20 Gains on sales of property, plant, and equipment 39 16 Other, net (61) 16 ----- ----- $ 111 $ 104 ===== ===== 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED JANUARY 31, 2001 VS. THREE MONTH PERIOD ENDED JANUARY 31, 2000 NET SALES The Company had net sales of $58.6 million in the first quarter of fiscal 2001 representing a 1.5 percent increase over 2000's first quarter sales of $57.7 million. This increase can generally be attributed to an increase in the unit volume of worldwide sales. Had currency values been unchanged from the first quarter of 2000, net sales in the first quarter of 2001 would have been $2.6 million higher, or 6.0 percent greater overall. The following table displays the Company's sales by geographic segment (amounts in thousands): THREE MONTHS ENDED CURRENCY JANUARY 31, PERCENT ADJUSTED 2001 2000 CHANGE CHANGE ------- ------- ------ ------ North America $32,915 $32,127 2.5% 2.5% Europe 7,625 7,451 2.3% 15.3% Japan 9,338 8,535 9.4% 18.3% Asia/Pacific 5,659 5,730 (1.2%) 10.9% Latin America 3,049 3,891 (21.6%) (17.2%) ------- ------- ---- ---- Total sales $58,586 $57,734 1.5% 6.0% ======= ======= ==== ==== North American sales increased 2.5 percent in the first quarter of 2001 as compared to the same quarter in 2000. The potable water market was responsible for this growth (up 8.3 percent) as both the fluid processing and healthcare markets in North America were down from the prior year. The Water Group (which addresses the potable water market) continues to record strong sales with its series of filters designed for OEM customers who serve various channels of distribution with final sales to US consumers. Sales in Europe increased 2.3 percent as compared to the same period in 2000, but were up 15.3 percent when expressed in local currency. All three markets displayed strong gains in sales. Sales in Japan were 9.4 percent higher as compared to the same quarter last year, and 18.3 percent higher when expressed in local currency. These strong sales increases were primarily driven by the fluid processing and healthcare markets reflecting a general recovery in the industrial sector of the economy. Asia/Pacific sales decreased by 1.2 percent as compared to the same quarter last year and, excluding changes in currency values over the period, increased 10.9 percent. The majority of the increase in Asia/Pacific is due to expanding sales in the potable water segment throughout Asia and the slowly recovering economy in Southeast Asia that benefited all markets. First quarter Latin American sales decreased 21.6 percent as compared to the same period in 2000. This decrease is attributable to a large one-time contract completed and shipped in the first quarter of fiscal 2000. 10 The following table displays the Company's sales by market (amounts in thousands): THREE MONTHS ENDED CURRENCY JANUARY 31, PERCENT ADJUSTED 2001 2000 CHANGE CHANGE ------- ------- ------- -------- Potable Water $25,198 $23,430 7.5% 9.4% Fluid Processing 18,807 19,505 (3.6%) 2.5% Healthcare 14,581 14,799 (1.5%) 5.1% ------- ------- --- --- Total sales $58,586 $57,734 1.5% 6.0% ======= ======= === === On a currency adjusted basis, all geographic operating segments achieved sales increases in the potable water segment. This strength was driven by increased sales (up 8.3 percent) in North America associated with OEM customers, direct marketing companies, and appliance manufacturers, as well as increased foreign potable water sales (up 15.6 percent on a currency adjusted basis). A comparison of 2001 vs. 2000 fluid processing sales is adversely impacted by the large one-time contract completed and shipped in the first quarter of fiscal 2000. Adjusting for this, fluid processing sales were up approximately eight percent in the first quarter of 2001 vs. the comparable period in fiscal 2000. Healthcare sales continue to benefit from sound international business conditions and a continued focus by management on competitively favorable niches. GROSS PROFIT The Company's gross profit increased $0.7 million to $25.1 million in the first quarter of 2001 from $24.3 million in the first quarter of 2000. Gross profit as a percentage of net sales (gross margin) increased during that same period from 42.1 percent in 2000 to 42.8 percent in 2001. The primary factors that contributed to the improved gross margin in 2001 were a large one-time contract completed and shipped in the first quarter of 2000 which carried a low margin and a greater proportion of new product sales in the first quarter of 2001 that generally carry more favorable margins. OPERATING EXPENSES Selling, general and administrative expenses were flat reflecting the Company's focus on restraining discretionary spending. Expense categories within SG&A reflected nominal increases or decreases consistent with the Company's cost-management strategy. Research, development and engineering expenses increased from 5.4 percent of sales in the first quarter of fiscal 2000 to 5.6 percent of sales in the first quarter of fiscal 2001. This level of research and development reflects the Company's continued focus on the development of new products and technologies. OPERATING INCOME As a result of the above, operating income increased $0.6 million, or 11.6 percent, to $6.0 million or 10.3 percent of sales in the first quarter of fiscal 2001 compared to $5.4 million or 9.4 percent of sales in the first quarter of 2000. NON-OPERATING ACTIVITY Interest income increased by $0.2 million in the first quarter of 2001 compared to the first quarter of 2000 as the Company maintained higher levels of invested cash. See "Financial Position and 11 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 quarters. INCOME TAXES The Company's effective income tax rate for the first quarter of 2001 was 36.2 percent compared to 38.2 percent in the first quarter of 2000. The decrease primarily reflects the recognition of incremental tax credits and a reduction in CUNO's effective tax rate in Japan caused by statutory rate reductions. 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, 2001 2000 ------- ------- OPERATING ACTIVITIES: Net cash provided by net income plus depreciation, amortization and non-cash compensation $ 6,432 $ 5,623 Accounts receivable 1,744 3,005 Net cash provided by operating activities 4,666 5,458 INVESTING ACTIVITIES: Capital expenditures (2,424) (2,101) FINANCING ACTIVITIES: Net change in total debt 1,468 (4,550) 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. Net income plus depreciation, amortization and non-cash compensation of $6.4 million increased 14.4 percent in the first quarter of 2001 as compared to the same period in 2000 reflecting the Company's increased sales volume, increased gross profit, and improved operating profit margin as discussed above. Accounts receivable continue to provide positive cash from operating activities despite the Company's rising sales volume, albeit at a lower level in the first quarter of 2001 vs. the comparable period in fiscal 2000. This results from a continued focus by the Company on improving the efficiency of international receivable management. Due largely to the reduction in cash provided by changes in accounts receivable in the first quarter of 12 2001 vs. the first quarter of 2000, cash provided by operating activities amounted to $4.7 million in the first quarter of fiscal 2001 vs. $5.5 million in the first quarter of fiscal 2000. Capital expenditures were $2.4 million in the first quarter of fiscal 2001 compared to $2.1 million in the first quarter of fiscal 2000. Expenditures in both periods were primarily comprised of purchases of machinery and equipment for the expansion of manufacturing capabilities. The Company's net borrowings under short-term bank loans increased during the first quarter of fiscal 2001 due primarily to increased book overdrafts related to certain imprest cash accounts. 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 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 There have been no material changes in the information reported in the Company's Form 10-K for the year ended October 31, 2000 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, 2000, 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. 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K No reports were filed on Form 8-K during the quarter for which this 10-Q is filed. 14 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 February 21, 2001 ------------------------------- By /s/ Frederick C. Flynn, Jr. --------------------------- Frederick C. Flynn, Jr. Senior Vice President - Finance and Administration, Chief Financial Officer, and Assistant Secretary