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
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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.
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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.
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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.
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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
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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):
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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
===== =====
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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.
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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
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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.
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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.
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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 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