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 APRIL 30, 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 -- 16,384,508 shares as of April 30, 2001
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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 April 30, 2001 and 2000 1
Consolidated Statements of Income - Six months ended April 30, 2001 and 2000 2
Consolidated Balance Sheets - April 30, 2001 and October 31, 2000 3
Consolidated Statements of Cash Flows - Six months ended April 30, 2001 and 2000 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16
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
APRIL 30,
2001 2000
------------ ------------
Net sales $ 60,186 $ 58,910
Less costs and expenses:
Cost of products sold 33,519 33,436
Selling, general and administrative expenses 16,386 15,742
Research, development and engineering 3,339 3,365
------------ ------------
53,244 52,543
------------ ------------
Operating income 6,942 6,367
Nonoperating income (expense):
Interest expense (121) (188)
Interest and other income, net 266 12
------------ ------------
145 (176)
------------ ------------
Income before income taxes 7,087 6,191
Provision for income taxes 2,565 2,319
------------ ------------
Net income $ 4,522 $ 3,872
============ ============
Basic earnings per common share $ 0.28 $ 0.24
Diluted earnings per common share $ 0.27 $ 0.23
Basic shares outstanding 16,320,750 16,186,989
Diluted shares outstanding 16,688,637 16,623,908
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)
SIX MONTHS ENDED
APRIL 30,
2001 2000
------------ ------------
Net sales $ 118,772 $ 116,644
Less costs and expenses:
Cost of products sold 67,043 66,845
Selling, general and administrative expenses 32,150 31,523
Research, development and engineering 6,602 6,500
------------ ------------
105,795 104,868
------------ ------------
Operating income 12,977 11,776
Nonoperating income (expense):
Interest expense (269) (429)
Interest and other income, net 377 116
------------ ------------
108 (313)
------------ ------------
Income before income taxes 13,085 11,463
Provision for income taxes 4,735 4,333
------------ ------------
Net income $ 8,350 $ 7,130
============ ============
Basic earnings per common share $ 0.51 $ 0.44
Diluted earnings per common share $ 0.50 $ 0.43
Basic shares outstanding 16,297,418 16,174,704
Diluted shares outstanding 16,670,836 16,572,664
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
APRIL 30, OCTOBER 31,
2001 2000
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 15,564 $ 13,814
Accounts receivable, less allowances for
doubtful accounts of $1,347 and $1,395, respectively 50,633 52,239
Inventories 25,660 24,087
Deferred income taxes 6,664 6,414
Prepaid expenses and other current assets 3,227 2,101
--------- ---------
Total current assets 101,748 98,655
Noncurrent assets
Deferred income taxes 1,341 1,168
Intangible assets, net 27,747 23,971
Other noncurrent assets 1,665 1,918
Property, plant and equipment, net 63,564 63,187
--------- ---------
Total assets $ 196,065 $ 188,899
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 13,220 $ 14,233
Accounts payable 18,999 17,978
Accrued payroll and related taxes 9,185 11,851
Other accrued expenses 9,039 7,675
Accrued income taxes 3,233 4,251
Current portion of long-term debt 721 746
--------- ---------
Total current liabilities 54,397 56,734
Noncurrent liabilities
Long-term debt, less current portion 2,951 3,422
Deferred income taxes 5,107 4,786
Retirement benefits 4,173 4,439
--------- ---------
Total noncurrent liabilities 12,231 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,
16,384,508 and 16,279,198 shares issued and outstanding
(excluding 747 shares in treasury) 16 16
Additional paid-in-capital 42,280 39,814
Unearned compensation (1,317) (1,120)
Accumulated other comprehensive income (loss) --
Foreign currency translation adjustments (4,335) (3,546)
Change in fair value of derivative financial instruments 89 --
--------- ---------
(4,246) (3,546)
Retained earnings 92,704 84,354
--------- ---------
Total stockholders' equity 129,437 119,518
--------- ---------
Total liabilities and stockholders' equity $ 196,065 $ 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)
SIX MONTHS ENDED
APRIL 30,
2001 2000
-------- --------
OPERATING ACTIVITIES
Net income $ 8,350 $ 7,130
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,489 4,328
Noncash compensation recognized under employee stock plans 463 483
Gains on sales of property, plant and equipment (40) (18)
Pension costs in excess of funding (106) 455
Deferred income taxes (173) 445
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 995 2,264
Inventories (2,645) (376)
Prepaid expenses and other current assets (903) (563)
Accounts payable and accrued expenses 1,985 (333)
Accrued income taxes (974) (236)
-------- --------
Net cash provided by operating activities 11,441 13,579
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 54 21
Proceeds from surrender of life insurance policies -- 569
Acquisitions of companies, net of cash acquired (4,489) (2,885)
Capital expenditures (4,964) (5,271)
-------- --------
Net cash used for investing activities (9,399) (7,566)
FINANCING ACTIVITIES
Proceeds from long term debt -- 3,800
Principal payments on long-term debt (845) (8,127)
Net borrowings (repayments) under short-term bank loans 363 (184)
Retirement of Common Stock -- (1,154)
Proceeds from stock options exercised 401 142
-------- --------
Net cash provided by (used for) financing activities (81) (5,523)
Effect of exchange rate changes on cash and cash equivalents (211) (114)
-------- --------
Net change in cash and cash equivalents 1,750 376
Cash and cash equivalents -- beginning of period 13,814 6,186
-------- --------
Cash and cash equivalents -- end of period $ 15,564 $ 6,562
======== ========
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 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:
APRIL 30, APRIL 30,
2001 2000
---- ----
NUMERATOR:
Net income $ 4,522,000 $ 3,872,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,369,726 16,321,476
Issued but unearned performance shares (914) (68,165)
Issued but unearned restricted shares (48,062) (66,322)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,320,750 16,186,989
============ ============
Weighted average shares outstanding 16,369,726 16,321,476
Effect of dilutive employee stock options 318,911 302,432
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,688,637 16,623,908
============ ============
Basic earnings per share $ 0.28 $ 0.24
Diluted earnings per share $ 0.27 $ 0.23
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The following table sets forth the computation of basic and diluted
earnings per share for the six months ended:
APRIL 30, APRIL 30,
2001 2000
---- ----
NUMERATOR:
Net income $ 8,350,000 $ 7,130,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,348,146 16,315,722
Issued but unearned performance shares (1,067) (68,694)
Issued but unearned restricted shares (49,661) (72,324)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,297,418 16,174,704
============ ============
Weighted average shares outstanding 16,348,146 16,315,722
Effect of dilutive employee stock options 322,690 256,942
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,670,836 16,572,664
============ ============
Basic earnings per share $ 0.51 $ 0.44
Diluted earnings per share $ 0.50 $ 0.43
NOTE 3 - INVENTORIES
Inventories consist of the following (amounts in thousands):
APRIL 30, OCTOBER 31,
2001 2000
------- -------
Raw materials $10,552 $10,814
Work-in-process 3,732 2,435
Finished goods 11,376 10,838
------- -------
$25,660 $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.
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NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income was comprised of the following (amounts in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 4,522 $ 3,872 $ 8,350 $ 7,130
Other comprehensive income (loss):
Change in fair value of derivative
Financial instruments, net of deferred
Income taxes of $64 89 -- 89 --
Foreign currency translation adjustments (1,894) (1,729) (789) (2,103)
------- ------- ------- -------
Total comprehensive income $ 2,717 $ 2,143 $ 7,650 $ 5,027
======= ======= ======= =======
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 SIX MONTHS ENDED
APRIL 30, APRIL 30,
2001 2000 2001 2000
---- ---- ---- ----
NET SALES:
Europe $11,508 $9,366 $20,373 $18,199
Japan 9,087 9,931 18,531 18,598
Asia/Pacific 6,462 6,491 12,699 12,653
Latin America 3,045 3,366 6,208 7,458
------- ------- -------- --------
Subtotal - Foreign Sales 30,102 29,154 57,811 56,908
North America 38,867 38,181 76,989 75,766
Intercompany sales (8,783) (8,425) (16,028) (16,030)
------- ------- -------- --------
$60,186 $58,910 $118,772 $116,644
======= ======= ======== ========
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THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2001 2000 2001 2000
---- ---- ---- ----
OPERATING INCOME:
North America $ 4,061 $ 3,830 $ 7,467 $ 7,284
Europe 622 156 923 202
Japan 842 999 1,723 1,489
Asia/Pacific 948 921 1,881 1,820
Latin America 469 461 983 981
-------- -------- -------- --------
Segment Total 6,942 6,367 12,977 11,776
-------- -------- -------- --------
Interest Expense (121) (188) (269) (429)
Other, net 266 12 377 116
-------- -------- -------- --------
Income before income taxes $ 7,087 $ 6,191 $ 13,085 $ 11,463
======== ======== ======== ========
Interest expense and other income (expense) have not been allocated to segments.
NOTE 6 - INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net consisted of the following
(amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2001 2000 2001 2000
----- ----- ----- -----
Interest income $ 179 $ 56 $ 387 $ 108
Exchange gains (losses) 109 (43) 34 (23)
Gains on sales of
property, plant, and
equipment 1 18 40 18
Other, net (23) (19) (84) 13
----- ----- ----- -----
$ 266 $ 12 $ 377 $ 116
===== ===== ===== =====
NOTE 7 - NEWLY ISSUED ACCOUNTING STANDARD
As of November 1, 2000, the Company adopted Financial Accounting Standards Board
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
(Statement 133). The adoption of Statement 133 did not effect the Company's
financial statements since the accounting treatment for the financial
instruments held at the time did not change.
As a result of adoption of Statement 133, the Company recognizes all derivative
financial instruments, such as interest rate swap contracts and foreign exchange
contracts, in the consolidated financial statements at fair value regardless of
the purpose or intent for holding the instrument. Changes in the fair value of
derivative financial instruments are either recognized periodically in income or
in shareholders' equity as a component of comprehensive income depending on
whether the derivative financial instrument qualifies for hedge accounting, and
if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in income along with the portions of the changes in the fair values of
the hedged items that
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relate to the hedged risk(s). Changes in fair values of derivatives accounted
for as cash flow hedges, to the extent they are effective as hedges, are
recorded in other comprehensive income net of deferred taxes. Changes in fair
values of derivatives not qualifying as hedges are reported in income.
NOTE 8 - CONTINGENCIES
The Company is subject to various legal actions, governmental audits, and
proceedings relating to various matters incidental to its business including
product liability and environmental claims. While the outcome of such matters
cannot be predicted with certainty, in the opinion of management, after
reviewing such matters and consulting with the Company's counsel and considering
any applicable insurance or indemnifications, any liability which may ultimately
be incurred is not expected to materially affect the consolidated financial
position, cash flows or results of operations of the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED APRIL 30, 2001 VS. THREE MONTH PERIOD ENDED APRIL 30,
2000
NET SALES
The Company had net sales of $60.2 million in the second quarter of
fiscal 2001 representing a 2.2 percent increase over 2000's second quarter sales
of $58.9 million. This increase can generally be attributed to an increase in
the unit volume of worldwide sales. Had currency values been unchanged from the
second quarter of 2000, net sales in the second quarter of 2001 would have been
$3.0 million higher, or 7.3 percent greater overall.
The following table displays the Company's sales by geographic segment
(amounts in thousands):
THREE MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2001 2000 CHANGE CHANGE
------- ------- ------ ------
North America $32,951 $32,249 2.2% 2.2%
Europe 9,515 7,871 20.9% 28.5%
Japan 8,987 9,681 (7.2%) 4.6%
Asia/Pacific 5,784 5,770 0.2% 12.1%
Latin America 2,949 3,339 (11.7%) 5.4%
------- ------- ------ ----
Total sales $60,186 $58,910 2.2% 7.3%
======= ======= ====== ====
North American sales increased 2.2 percent in the second quarter of
2001 as compared to the same quarter in 2000. The Healthcare market was
responsible for the majority of the growth in North America during the three
months ended April 30, 2001. Sales in Europe increased 20.9 percent as compared
to the same period in 2000, and were up 28.5 percent when expressed in local
currency. All three markets displayed strong double-digit gains in sales. Sales
in Japan were down 7.2 percent as compared to the same quarter last year, but
were 4.6 percent higher when expressed in local currency. The increase in sales
was primarily concentrated in the Healthcare market. Asia/Pacific sales were
flat quarter over quarter, however sales increased 12.1 percent excluding
changes in currency values. The majority of the increase in Asia/Pacific is due
to sales growth throughout Australia and strong healthcare sales throughout
Asia/Pacific. Second quarter Latin American sales decreased 11.7 percent as
compared to the same period in 2000, but were up 5.4 percent when expressed in
local currency. The increase in local currency sales was primarily concentrated
in the Potable Water and Healthcare market.
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The following table displays the Company's sales by market (amounts in
thousands):
THREE MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2001 2000 CHANGE CHANGE
---- ---- ------ ------
Potable Water $25,909 $24,839 4.3% 6.7%
Fluid Processing 18,148 19,189 (5.4%) 1.1%
Healthcare 16,129 14,882 8.4% 16.4%
------- ------- ------ ----
Total sales $60,186 $58,910 2.2% 7.3%
======= ======= ====== ====
On a currency adjusted basis, all geographic operating segments
achieved sales increases in the potable water market. This strength was
primarily driven by increased overseas sales (up 21.8 percent) tempered by
moderate sales growth in North America (up 3.7 percent) associated with OEM
customers, direct marketing companies, and appliance manufacturers. Fluid
processing sales were most affected by the slowing economies in the US and
overseas. Healthcare sales continue to benefit from a continued focus by
management on competitively favorable niches.
GROSS PROFIT
The Company's gross profit increased $1.2 million to $26.7 million in
the second quarter of 2001 from $25.5 million in the second quarter of 2000.
Gross profit as a percentage of net sales (gross margin) increased during that
same period from 43.2 percent in 2000 to 44.3 percent in 2001. The primary
factor that contributed to the improved gross margin in 2001 was increased
healthcare sales which generally carry higher margins.
OPERATING EXPENSES
Selling, general and administrative expenses increased 4.1 percent
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 were generally flat -- 5.7 percent of sales in the second quarter of
fiscal 2000 compared to 5.5 percent of sales in the second 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
9.0 percent, to $6.9 million or 11.5 percent of sales in the second quarter of
fiscal 2001 compared to $6.4 million or 10.8 percent of sales in the second
quarter of 2000.
NON-OPERATING ACTIVITY
Interest income increased by $0.1 million in the second quarter of 2001
compared to the second quarter of 2000 as the Company maintained higher levels
of invested cash. See "Financial Position and Liquidity" below. Exchange gains
(losses) improved by $0.2 million in 2001 over 2000 as well. 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 one.
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]INCOME TAXES
The Company's effective income tax rate for the second quarter of 2001
was 36.2 percent compared to 37.5 percent in the second quarter of 2000. The
decrease primarily reflects the recognition of incremental tax credits, certain
tax planning initiatives, and a change in the mix of income attributed to the
various countries in which the Company does business.
SIX MONTH PERIOD ENDED APRIL 30, 2001 VS. SIX MONTH PERIOD ENDED APRIL 30, 2000
- -------------------------------------------------------------------------------
NET SALES
The Company had net sales of $118.8 million in the first six months of
fiscal 2001 representing a 1.8 percent increase over 2000's comparable sales of
$116.6 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 six months of 2000, net sales in the first six months of 2001 would have
been $5.6 million higher, or 6.6 percent greater overall.
The following table displays the Company's sales by geographic segment
(amounts in thousands):
SIX MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2001 2000 CHANGE CHANGE
---- ---- ------ ------
North America $ 65,866 $ 64,376 2.3% 2.3%
Europe 17,140 15,322 11.9% 22.3%
Japan 18,325 18,216 0.6% 10.9%
Asia/Pacific 11,443 11,500 (0.5%) 11.5%
Latin America 5,998 7,230 (17.0%) (7.1%)
-------- -------- ------ -----
Total sales $118,772 $116,644 1.8% 6.6%
======== ======== ====== =====
North American sales increased 2.3 percent in the first six months of
2001 as compared to the same period in 2000. The potable water market was
responsible for nearly all of this growth. Sales in Europe increased 11.9
percent as compared to the same period in 2000, but were up 22.3 percent when
expressed in local currency. All three markets displayed strong double-digit
gains in sales. Sales in Japan were only 0.6 percent higher as compared to the
same period last year, but 10.9 percent higher when expressed in local currency.
Local currency sales increased in all three markets. Asia/Pacific sales
decreased by 0.5 percent as compared to the same period last year but, excluding
changes in currency values over the period, increased 11.5 percent. The majority
of the increase in Asia/Pacific is due to expanding sales in both the potable
water and healthcare segments throughout the Asian and Pacific markets. Sales in
Latin America decreased 17.0 percent (7.1 percent in local currency). This
decrease is primarily 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):
SIX MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2001 2000 CHANGE CHANGE
---- ---- ------ ------
Potable Water $ 51,107 $ 48,269 5.9% 8.0%
Fluid Processing 36,955 38,694 (4.5%) 1.8%
Healthcare 30,710 29,681 3.5% 10.8%
-------- -------- ----- -----
Total sales $118,772 $116,644 1.8% 6.6%
======== ======== ===== =====
On a currency adjusted basis, all geographic operating segments
achieved sales increases in the potable water market. This strength was
primarily driven by increased overseas sales (up 18.9 percent) as well as
increased sales in North America (up 5.9 percent) associated with OEM customers,
direct marketing companies, and appliance manufacturers. Fluid processing sales
were adversely affected by the slowing economies in the US and overseas as well
as a large one-time contract completed and shipped in the first quarter of
fiscal 2000. Healthcare sales continue to benefit from a continued focus by
management on competitively favorable niches.
GROSS PROFIT
The Company's gross profit increased $1.9 million to $51.7 million in
the first six months of 2001 from $49.8 million in the first six months of 2000.
Gross profit as a percentage of net sales (gross margin) increased during that
same period from 42.7 percent in 2000 to 43.6 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 increased healthcare sales in 2001 which generally
carry a higher margin.
OPERATING EXPENSES
Selling, general and administrative expenses increased 2.0 percent in
the first six months of 2001 compared to the prior period reflecting the
Company's continued 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 were 5.6 percent of sales in both the first six months of 2001 and
2000. 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 $1.2 million, or
10.2 percent, to $13.0 million or 10.9 percent of sales in the first six months
of fiscal 2001 compared to $11.8 million or 10.1 percent of sales in the first
six months of 2000.
NON-OPERATING ACTIVITY
Interest income increased by $0.3 million in the first six months of
2001 compared to the first six months of 2000 as the Company maintained higher
levels of invested cash. See "Financial Position and Liquidity" below. As
disclosed in Note 6 to the condensed consolidated financial statements, other
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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 six months of
2001 was 36.2 percent compared to 37.8 percent in the first six months of 2000.
The decrease primarily reflects the recognition of incremental tax credits,
certain tax planning initiatives, and a change in the mix of income attributed
to the various countries in which the Company does business.
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 SIX MONTHS ENDED
APRIL 30,
2001 2000
---- ----
OPERATING ACTIVITIES:
Net cash provided by net income plus
depreciation,
Amortization and non-cash compensation $ 13,302 $ 11,941
Accounts receivable 995 2,264
Inventories (2,645) (376)
Accounts payable and accrued expenses 1,985 (333)
Net cash provided by operating activities 11,441 13,579
INVESTING ACTIVITIES:
Proceeds from surrender of life insurance policies -- 569
Acquisitions of companies, net of cash acquired (4,489) (2,885)
FINANCING ACTIVITIES:
Net change in total debt (482) (4,511)
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 $13.3 million increased 11.4 percent in the first six months 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 six months 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
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management. The increase in inventory over the six months ended April 30, 2001
primarily relates to the timing of certain sales shipments. This use of cash was
offset by a corresponding source of cash in accounts payable and accrued
expenses.
In the second quarter of fiscal 2001, CUNO closed on two acquisitions -
a product line in Australia and a distributor in Europe for a total of $4.5
million. These acquisitions do not have a material effect on the Company's
historical financial statements or pro forma operating results. 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.
The Company paid all outstanding borrowings under its revolving credit
facility in fiscal 2000. No amounts have been outstanding under the revolving
credit facility in fiscal 2001. 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
- -------------
MARKET RISK DISCLOSURES
The Company's earnings and cash flows are subject to fluctuations due
to changes in foreign currency exchange rates. The Company utilizes forward
foreign exchange contracts to hedge certain firm sales commitments and
anticipated, but not yet committed, intercompany sales (primarily parent company
export sales to subsidiaries at pre-established U.S. dollar prices) and other
specific and identified exposures. The terms of the forward foreign exchange
contracts are generally matched to the underlying transaction being hedged, and
are typically under 90 days. Because such contracts are directly associated with
identified transactions, they are an effective hedge against fluctuations in the
value of the foreign currency underlying the transaction. The Company generally
does not hedge overseas sales denominated in foreign currencies or translation
exposures. The Company does not enter into financial instruments for speculation
or trading purposes.
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 4. Submission of Matters to a Vote of Security Holders
(a) The Corporation held its annual meeting of Stockholders on March 14,
2001.
(b) The following individuals were nominated and elected to serve a term of
three years as Directors: Mr. Mark G. Kachur Mr. David L. Swift
(c) The stockholders voted on the following matters:
1. Election of Directors -- the voting results for each nominee,
all of whom were reelected, are as follows:
Name Votes For Votes Withheld Not Voted
---- --------- -------------- ---------
Mr. Mark G. Kachur 13,340,743 1,015,269 1,976,308
Mr. David L. Swift 14,348,950 7,062 1,976,308
2. A proposal for the appointment of Ernst & Young LLP as
independent auditors was approved by a count of 14,392,501
votes for, 5,716 votes against, 22,547 votes abstaining, and
1,911,556 shares not voted.
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 May 30, 2001
--------------------------
By /s/ Frederick C. Flynn, Jr.
---------------------------
Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer, and
Assistant Secretary
By /s/ William J. DeFrances
William J. DeFrances
Treasurer, Assistant Controller,
and Assistant Secretary
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