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, 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 -- 16,388,720 shares as of July 31, 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 July 31, 2001 and 2000 1
Consolidated Statements of Income - Nine months ended July 31, 2001 and 2000 2
Consolidated Balance Sheets - July 31, 2001 and October 31, 2000 3
Consolidated Statements of Cash Flows - Nine months ended July 31, 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 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,
2001 2000
------------ ------------
Net sales $ 63,441 $ 62,795
Less costs and expenses:
Cost of products sold 35,154 35,680
Selling, general and administrative expenses 16,116 15,768
Research, development and engineering 3,545 3,184
------------ ------------
54,815 54,632
------------ ------------
Operating income 8,626 8,163
Nonoperating income (expense):
Interest expense (145) (128)
Interest and other income, net 306 (63)
------------ ------------
161 (191)
------------ ------------
Income before income taxes 8,787 7,972
Provision for income taxes 3,083 2,953
------------ ------------
Net income $ 5,704 $ 5,019
============ ============
Basic earnings per common share $ 0.35 $ 0.31
Diluted earnings per common share $ 0.34 $ 0.30
Basic shares outstanding 16,313,943 16,209,017
Diluted shares outstanding 16,722,906 16,672,653
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,
2001 2000
------------ ------------
Net sales $ 182,213 $ 179,439
Less costs and expenses:
Cost of products sold 102,197 102,525
Selling, general and administrative expenses 48,266 47,291
Research, development and engineering 10,147 9,684
------------ ------------
160,610 159,500
------------ ------------
Operating income 21,603 19,939
Nonoperating income (expense):
Interest expense (414) (557)
Interest and other income, net 683 53
------------ ------------
269 (504)
------------ ------------
Income before income taxes 21,872 19,435
Provision for income taxes 7,818 7,286
------------ ------------
Net income $ 14,054 $ 12,149
============ ============
Basic earnings per common share $ 0.86 $ 0.75
Diluted earnings per common share $ 0.84 $ 0.73
Basic shares outstanding 16,302,926 16,191,142
Diluted shares outstanding 16,686,552 16,610,598
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,
2001 2000
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 20,251 $ 13,814
Accounts receivable, less allowances for
doubtful accounts of $1,304 and $1,395, respectively 49,128 52,239
Inventories 24,544 24,087
Deferred income taxes 6,802 6,414
Prepaid expenses and other current assets 2,572 2,101
--------- ---------
Total current assets 103,297 98,655
Noncurrent assets
Deferred income taxes 1,328 1,168
Intangible assets, net 27,263 23,971
Other noncurrent assets 1,946 1,918
Property, plant and equipment, net 64,168 63,187
--------- ---------
Total assets $ 198,002 $ 188,899
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 12,574 $ 14,233
Accounts payable 15,904 17,978
Accrued payroll and related taxes 10,654 11,851
Other accrued expenses 8,613 7,675
Accrued income taxes 2,781 4,251
Current portion of long-term debt 729 746
--------- ---------
Total current liabilities 51,255 56,734
Noncurrent liabilities
Long-term debt, less current portion 2,954 3,422
Deferred income taxes 5,174 4,786
Retirement benefits 3,897 4,439
--------- ---------
Total noncurrent liabilities 12,025 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,
16,388,720 and 16,279,198 shares issued and outstanding 16 16
Treasury Stock, at cost (2,747 and 747 shares) (57) -
Additional paid-in-capital 42,424 39,814
Unearned compensation (1,122) (1,120)
Accumulated other comprehensive income (loss) --
Foreign currency translation adjustments (5,026) (3,546)
Change in fair value of derivative financial instruments 79 -
--------- ---------
(4,947) (3,546)
Retained earnings 98,408 84,354
Total stockholders' equity 134,722 119,518
--------- ---------
Total liabilities and stockholders' equity $ 198,002 $ 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)
NINE MONTHS ENDED
JULY 31,
2001 2000
-------- --------
OPERATING ACTIVITIES
Net income $ 14,054 $ 12,149
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,827 6,641
Noncash compensation recognized under employee stock plans 706 817
Gains on sales of property, plant and equipment (57) (25)
Pension costs (less than) in excess of funding (348) 460
Deferred income taxes (272) 1,280
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 1,998 (37)
Inventories (1,617) 2,805
Prepaid expenses and other current assets (647) (625)
Accounts payable and accrued expenses 249 55
Accrued income taxes (1,434) (149)
-------- --------
Net cash provided by operating activities 19,459 23,371
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 74 44
Proceeds from surrender of life insurance policies - 569
Acquisitions of companies, net of cash acquired (4,489) (2,885)
Capital expenditures (7,771) (8,754)
-------- --------
Net cash used for investing activities (12,186) (11,026)
FINANCING ACTIVITIES
Proceeds from long-term debt - 3,800
Principal payments on long-term debt (862) (11,673)
Net repayments under short-term bank loans (88) (411)
Retirement of Common Stock - (1,154)
Acquisition of Treasury Stock (57) -
Proceeds from stock options exercised 497 203
-------- --------
Net cash used for financing activities (510) (9,235)
Effect of exchange rate changes on cash and cash equivalents (326) (147)
-------- --------
Net change in cash and cash equivalents 6,437 2,963
Cash and cash equivalents -- beginning of period 13,814 6,186
-------- --------
Cash and cash equivalents -- end of period $ 20,251 $ 9,149
======== ========
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 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 annual 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:
JULY 31, JULY 31,
2001 2000
------------ ------------
NUMERATOR:
Net income $ 5,704,000 $ 5,019,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,386,821 16,333,841
Issued but unearned performance shares (609) (67,309)
Issued but unearned restricted shares (72,269) (57,515)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,313,943 16,209,017
============ ============
Weighted average shares outstanding 16,386,821 16,333,841
Effect of dilutive employee stock options 336,085 338,812
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,722,906 16,672,653
============ ============
Basic earnings per share $ 0.35 $ 0.31
Diluted earnings per share $ 0.34 $ 0.30
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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,
2001 2000
------------ ------------
NUMERATOR:
Net income $ 14,054,000 $ 12,149,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,361,037 16,326,762
Issued but unearned performance shares (914) (68,232)
Issued but unearned restricted shares (57,197) (67,388)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,302,926 16,191,142
============ ============
Weighted average shares outstanding 16,361,037 16,326,762
Effect of dilutive employee stock options 325,515 283,836
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,686,552 16,610,598
============ ============
Basic earnings per share $ 0.86 $ 0.75
Diluted earnings per share $ 0.84 $ 0.73
NOTE 3 - INVENTORIES
Inventories consist of the following (amounts in thousands):
JULY 31, OCTOBER 31,
2001 2000
-------- -----------
Raw materials $10,870 $10,814
Work-in-process 2,429 2,435
Finished goods 11,245 10,838
------- -------
$24,544 $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 NINE MONTHS ENDED
JULY 31, JULY 31,
2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 5,704 $ 5,019 $ 14,054 $ 12,149
Other comprehensive income (loss):
Change in fair value of derivative
financial instruments, net of deferred
income taxes of $6 and $58 (10) -- 79 --
Foreign currency translation adjustments (691) 120 (1,480) (1,983)
-------- -------- -------- --------
Total comprehensive income $ 5,003 $ 5,139 $ 12,653 $ 10,166
======== ======== ======== ========
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,
2001 2000 2001 2000
--------- --------- --------- ---------
NET SALES:
Europe $ 11,096 $ 9,655 $ 31,469 $ 27,854
Japan 8,428 10,650 26,959 29,248
Asia/Pacific 6,536 6,474 19,234 19,128
Latin America 3,142 3,014 9,350 10,472
--------- --------- --------- ---------
Subtotal - Foreign Sales 29,202 29,793 87,012 86,702
North America 42,590 40,930 119,579 116,695
Intercompany sales (8,351) (7,928) (24,378) (23,958)
--------- --------- --------- ---------
$ 63,441 $ 62,795 $ 182,213 $ 179,439
========= ========= ========= =========
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THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2001 2000 2001 2000
-------- -------- -------- --------
OPERATING INCOME:
North America $ 5,379 $ 5,488 $ 12,848 $ 12,772
Europe 895 540 1,819 743
Japan 893 908 2,616 2,395
Asia/Pacific 928 887 2,807 2,706
Latin America 531 340 1,513 1,323
-------- -------- -------- --------
Segment total 8,626 8,163 21,603 19,939
-------- -------- -------- --------
Interest expense (145) (128) (414) (557)
Other, net 306 (63) 683 53
-------- -------- -------- --------
Income before income taxes $ 8,787 $ 7,972 $ 21,872 $ 19,435
======== ======== ======== ========
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 NINE MONTHS ENDED
JULY 31, JULY 31,
2001 2000 2001 2000
------ ------ ------ ------
Interest income $ 271 $ 44 $ 658 $ 152
Exchange gains (losses) 22 (29) 56 (52)
Gains on sales of property,
plant, and equipment 17 7 57 25
Other, net (4) (85) (88) (72)
----- ----- ----- -----
$ 306 $ (63) $ 683 $ 53
===== ===== ===== =====
NOTE 7 - NEWLY ISSUED ACCOUNTING STANDARDS
FASB 133
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 accumulated other 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
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recorded in income along with the portions of the changes in the fair values of
the hedged items that 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 income
taxes. Changes in fair values of derivatives not qualifying as hedges are
reported in income.
FASB 141 & 142
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Under the new statements, goodwill (and
other intangible assets deemed to have indefinite lives) will no longer be
amortized but will be subject to annual impairment tests. Other intangible
assets will be amortized over their useful lives.
The Company will apply the new rules on accounting for existing goodwill and
other intangible assets beginning November 1, 2001 (first quarter of fiscal
2002). The Company is in the process of determining the impact of applying these
new Statements.
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 JULY 31, 2001 VS. THREE MONTH PERIOD ENDED JULY 31,
2000
NET SALES
The Company had net sales of $63.4 million in the third quarter of
fiscal 2001 representing a 1.0 percent increase over 2000's third quarter sales
of $62.8 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
$3.5 million higher, or 6.6 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
2001 2000 CHANGE CHANGE
------- ------- ------- --------
North America $37,394 $35,203 6.2% 6.2%
Europe 9,034 8,429 7.2% 16.9%
Japan 8,298 10,475 (20.8%) (9.1%)
Asia/Pacific 5,768 5,731 0.6% 10.2%
Latin America 2,947 2,957 (0.3%) 31.2%
------- ------- ---- ----
Total sales $63,441 $62,795 1.0% 6.6%
======= ======= ==== ====
North American sales increased 6.2 percent in the second quarter of
2001 as compared to the same quarter in 2000. The Healthcare and Potable Water
markets were responsible for the majority of the growth in North America during
this time period. Sales in Europe increased 7.2 percent as compared to the same
period in 2000, and were up 16.9 percent when expressed in local currency. All
three markets within Europe displayed sales gains. Sales in Japan were down 20.8
percent as compared to the same quarter last year, and were 9.1 percent lower
when expressed in local currency. The unsettled economy in Japan is largely
responsible for the softening sales demand. Asia/Pacific sales were relatively
flat quarter over quarter, however sales increased 10.2 percent excluding
changes in currency values. The majority of the increase in Asia/Pacific is due
to sales growth throughout Australia and strong Fluid Processing sales
throughout Asia/Pacific. Second quarter Latin American sales decreased 0.3
percent as compared to the same period in 2000, but were up 31.2 percent when
expressed in local currency. The large increase in local currency sales was in
part due to the timing of certain large shipments.
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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
2001 2000 CHANGE CHANGE
------- ------- ------- --------
Potable Water $27,845 $26,065 6.8% 8.9%
Fluid Processing 17,680 19,868 (11.0%) (3.7%)
Healthcare 17,916 16,862 6.3% 15.2%
------- ------- ---- ----
Total sales $63,441 $62,795 1.0% 6.6%
======= ======= ==== ====
The slowing economies in the US and certain international markets
(primarily Japan) have impacted all of the Company's markets to some extent;
however, Fluid Processing is the Company's most cyclical market and is most
impacted by the economic slowdown. The strength in the Potable Water market was
broad geographically, driven largely by strong overseas sales (up 11.5 percent
in local currency) and steady sales growth in North America (up 8.5 percent)
associated with OEM customers, direct marketing companies, and appliance
manufacturers. Healthcare sales continue to benefit from a continued focus by
management on competitively favorable product lines and market niches.
GROSS PROFIT
The Company's gross profit increased $1.2 million to $28.3 million in
the third quarter of 2001 from $27.1 million in the third 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 44.6 percent in 2001. The primary factor
that contributed to the improved gross margin in 2001 was the market mix of
sales (increased Healthcare sales which generally carry higher margins combined
with decreased Fluid Processing sales which generally carry lower margins).
OPERATING EXPENSES
Selling, general and administrative expenses (SG&A) increased 2.2
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 increased 11.3 percent to $3.5 million in the third
quarter of 2001, reflecting the Company's continued focus on the development of
new products and technologies. As a percentage of sales, research, development
and engineering expenses were 5.6 percent of sales in the third quarter of
fiscal 2001 compared to 5.1 percent of sales in the third quarter of fiscal
2000.
OPERATING INCOME
As a result of the above, operating income increased $0.5 million, or
5.7 percent, to $8.6 million or 13.6 percent of sales in the third quarter of
fiscal 2001 compared to $8.2 million or 13.0 percent of sales in the third
quarter of 2000.
NON-OPERATING ACTIVITY
Interest income increased by $0.2 million in the third quarter of 2001
compared to the third quarter 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 third quarter of 2001
was 35.1 percent compared to 37.0 percent in the third 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.
NINE MONTH PERIOD ENDED JULY 31, 2001 VS. NINE MONTH PERIOD ENDED JULY 31, 2000
NET SALES
The Company had net sales of $182.2 million in the first nine months of
fiscal 2001 representing a 1.5 percent increase over 2000's comparable sales of
$179.4 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 nine months of 2000, net sales in the first nine months of 2001 would have
been $9.2 million higher, or 6.6 percent greater overall.
The following table displays the Company's sales by geographic segment
(amounts in thousands):
NINE MONTHS ENDED CURRENCY
JULY 31, PERCENT ADJUSTED
2001 2000 CHANGE CHANGE
-------- -------- ------- --------
North America $103,259 $ 99,579 3.7% 3.7%
Europe 26,174 23,751 10.2% 20.3%
Japan 26,623 28,691 (7.2%) 3.9%
Asia/Pacific 17,211 17,231 (0.1%) 11.1%
Latin America 8,946 10,187 (12.2%) 4.1%
-------- -------- ---- ----
Total sales $182,213 $179,439 1.5% 6.6%
======== ======== ==== ====
North American sales increased 3.7 percent in the first nine months of
2001 as compared to the same period in 2000. Both the Potable Water and
Healthcare markets were responsible for this growth. Sales in Europe increased
20.3 percent when expressed in local currency. All three markets displayed
strong gains in sales. Sales in Japan were down 7.2 percent as compared to the
same period last year, but were 3.9 percent higher when expressed in local
currency. Local currency sales increased, albeit modestly, in all markets.
Asia/Pacific sales were relatively flat as compared to the same period last year
but, excluding changes in currency values over the period, increased 11.1
percent. The majority of the increase in Asia/Pacific is due to growing sales in
both the Potable Water and Healthcare segments throughout the Asian and Pacific
markets. Sales in Latin America decreased 12.2 percent but increased 4.1 percent
in local currency driven predominantly by strong Potable Water sales.
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The following table displays the Company's sales by market (amounts in
thousands):
NINE MONTHS ENDED CURRENCY
JULY 31, PERCENT ADJUSTED
2001 2000 CHANGE CHANGE
-------- -------- ------- --------
Potable Water $ 78,952 $ 74,334 6.2% 8.3%
Fluid Processing 54,635 58,562 (6.7%) (0.1%)
Healthcare 48,626 46,543 4.5% 12.4%
-------- -------- ---- ----
Total sales $182,213 $179,439 1.5% 6.6%
======== ======== ==== ====
The slowing economies in the US and certain international markets
(primarily Japan) have impacted all of the Company's markets to some extent,
however Fluid Processing is the Company's most cyclical market and is most
impacted by the economic slowdown. The strength in the Potable Water market was
broad geographically - all geographic segments had positive sales growth during
the period. Growth in North America continues to benefit from existing OEM
customers, direct marketing companies, and appliance manufacturers. Healthcare
sales continue to benefit from a continued focus by management on competitively
favorable niches.
GROSS PROFIT
The Company's gross profit increased $3.1 million to $80.0 million in
the first nine months of 2001 from $76.9 million in the first nine months of
2000. Gross profit as a percentage of net sales (gross margin) increased during
that same period from 42.9 percent in 2000 to 43.9 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 (SG&A) increased 2.1
percent in the first nine 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 increased $0.5 million and were 5.6 percent of sales in the first nine
months of fiscal 2001 compared to 5.4 percent of sales in the first nine months
of fiscal 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 $1.7 million, or
8.3 percent, to $21.6 million or 11.9 percent of sales in the first nine months
of fiscal 2001 compared to $19.9 million or 11.1 percent of sales in the first
nine months of 2000.
NON-OPERATING ACTIVITY
Interest income increased by $0.5 million in the first nine months of
2001 compared to the first nine 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 nine months of
2001 was 35.7 percent compared to 37.5 percent in the first nine 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 NINE MONTHS ENDED
JULY 31,
2001 2000
--------- --------
OPERATING ACTIVITIES:
Net cash provided by net income plus depreciation,
amortization and non-cash compensation $ 21,587 $ 19,607
Accounts receivable 1,998 (37)
Inventories (1,617) 2,805
Accrued income taxes (1,434) (149)
Net cash provided by operating activities 19,459 23,371
INVESTING ACTIVITIES:
Proceeds from surrender of life insurance policies -- 569
Acquisitions of companies, net of cash acquired (4,489) (2,885)
Capital expenditures (7,771) (8,754)
FINANCING ACTIVITIES:
Net change in total debt (950) (8,284)
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 $21.6 million increased 10.1 percent in the first nine months of
2001 as compared to the same period in 2000 reflecting the Company's increased
gross profit, improved operating profit margin, and improved non-operating
performance as discussed above. Accounts receivable continue to provide positive
cash from operating activities despite the Company's rising sales volume. This
results from a continued focus by the Company on improving the efficiency of
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international accounts receivable management. The increase in inventories over
the nine months ended July 31, 2001 primarily relates to the timing of certain
sales shipments. The use of cash of $1,434 related to accrued income taxes
payable relates to increased profitability of the Company and the timing of
Federal income taxes paid in the US.
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 reduced rate of capital expenditures in
2001 primarily relates to the timing of certain capital projects.
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 US 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. Further, 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 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 August 21, 2001
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By /s/ Frederick C. Flynn, Jr.
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Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer, and
Assistant Secretary
By /s/ William J. DeFrances
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William J. DeFrances
Treasurer, Assistant Controller,
and Assistant Secretary
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