MARKET DATA
The Company's Common Stock is quoted on the NASDAQ market under the symbol CUNO.
The following table shows the quarterly high and low prices for the last two
fiscal years ended October 31:
QUARTER 2001 2000
High Low High Low
First $ 31.00 $ 24.00 $ 25.75 $ 19.50
Second 29.00 22.13 29.50 20.94
Third 31.00 23.50 30.25 22.06
Fourth 30.65 22.75 31.00 22.06
As of October 31, 2001 CUNO had approximately 6,000 shareholders of
record.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2001 - 1999
YEAR ENDED OCTOBER 31, 2001 COMPARED TO YEAR ENDED OCTOBER 31, 2000
NET SALES
Net sales of $244.4 million in fiscal year 2001 represented a 0.6
percent increase over net sales of $243.1 million in fiscal year 2000. The
effects of foreign currency fluctuations reduced net sales in fiscal year 2001
by $11.3 million as compared to fiscal year 2000. Had currency values remained
unchanged from fiscal year 2000, net sales in fiscal year 2001 would have been
$255.8 million, or 5.2% greater than the prior year.
CUNO's operations are affected by global and regional economic factors.
However, the global diversity of the Company's business has helped limit the
impact of any one industry or the economy of any single country on its
consolidated results. The following table displays the Company's sales by
geographic operating segment (dollars in thousands):
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
2001 2000 CHANGE CHANGE
North America $139,745 $135,495 3.1% 3.1%
Europe 35,323 31,501 12.1% 18.5%
Japan 34,390 39,894 (13.8%) (3.9%)
Asia/Pacific 23,074 22,791 1.2% 11.1%
Latin America 11,917 13,393 (11.0%) 10.9%
--------------- ----------
Total Sales $244,449 $243,074 0.6% 5.2%
Sales growth in the Company's North American operations was led by
Healthcare (up 12.0 percent) and, to a lesser extent, the Water Group (up 6.4
percent), a worldwide division of CUNO comprised of the potable water segment of
the business. Sales into the healthcare market have increased year over year due
primarily to an increase in sales to a large diagnostic customer. The Water
Group continues to record strong sales with its series of new filters designed
for OEM customers who serve various channels of distribution with final sales to
U.S. consumers.
The Company's overseas sales decreased $2.9 million or 2.7 percent in
fiscal 2001 compared to 2000. Had the value of overseas currencies remained
unchanged in fiscal 2001 as compared to fiscal 2000, sales for these operations
would have increased $8.4 million or 7.8 percent. In Europe, sales increased
18.5 percent in local currency with this gain spread broadly across the three
markets. Sales by the European Water Group increased 30.4 percent due to
increased marketing efforts. Sales in Japan were down 3.9 percent on a local
currency basis as compared to the same period last year. All markets in Japan
have been impacted by the continued downturn in the Japanese economy. Local
currency sales growth in Asia/Pacific of 11.1 percent was due in large part to
strong gains in the Healthcare market as well as a strong economy in Australia.
Local currency sales in Latin America increased 10.9 percent in fiscal 2001
reflecting strong, broad improvements across all markets.
8
The following table displays the Company's sales by market (dollars in
thousands):
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
2001 2000 CHANGE CHANGE
Potable Water $107,263 $101,483 5.7% 7.7%
Fluid Processing 71,898 78,781 (8.7%) (2.6%)
Healthcare 65,288 62,810 3.9% 11.1%
-------- -------- --- ----
Total Sales $244,449 $243,074 0.6% 5.2%
======== ======== === ====
On a currency-adjusted basis, all geographic operating segments
continued to achieve sales increases in the potable water segment. This dollar
increase was driven by strong sales in North America associated with OEM
customers, direct marketing companies, and appliance manufacturers, as well as
increased foreign potable water sales (up 14.8 percent on a currency adjusted
basis). Fluid processing is the Company's most cyclical market and has been most
impacted by the U.S. economic slowdown. Healthcare sales continue to benefit
from a continued focus by management on competitively favorable niches. On a
currency-adjusted basis, international healthcare sales increased $4.5 million
or 10.6 percent over fiscal year 2000.
GROSS PROFIT
The Company's gross profit increased $3.9 million to $108.4 million in
fiscal year 2001 from $104.5 million in 2000. Gross profit as a percentage of
net sales increased from 43.0 percent in 2000 to 44.3 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 ("SG&A") expenses increased $0.6
million in fiscal year 2001 over fiscal 2000, representing a 0.9 percent
increase. Expense categories within SG&A reflected nominal increases or
decreases consistent with the Company's cost-management strategy. Research,
development and engineering expenses increased 6.5 percent to $13.7 million in
fiscal 2001, reflecting the Company's continued focus on developing new products
and technologies. As a percentage of sales, research h, development and
engineering expenses were 5.6 percent of sales in fiscal 2001 compared to 5.3
percent of sales in fiscal 2000.
OPERATING INCOME
As a result of the above, operating income increased $2.5 million, or
8.9 percent, to $30.4 million or12.4 percent of sales in fiscal 2001 as compared
to $27.9 million or 11.5 percent of sales in fiscal 2000.
NONOPERATING ACTIVITY
Interest income increased by $0.6 million to $0.9 million in fiscal
year 2001 reflecting the Company's increased level of invested cash. (see
Liquidity and Capital Resources below). No other material nonoperating activity
occurred in either of the two fiscal years.
INCOME TAXES
The Company's effective income tax rate for fiscal year 2001 was 35.0%
as compared to 36.8% in fiscal year 2000. The tax rate in 2001 was favorably
impacted by the utilization and benefit of operating loss carryforwards,
marginally lower worldwide tax rates, and a change in the mix of income
attributed to the various countries in which the Company does business.
9
YEAR ENDED OCTOBER 31, 2000 COMPARED TO YEAR ENDED OCTOBER 31, 1999
NET SALES
Net sales of $243.1 million in fiscal year 2000 represented a 10.2
percent increase over net sales of $220.6 million in fiscal year 1999. The
majority of this increase can be attributed to an increase in the unit volume
(vs. price) of worldwide sales. The effects of foreign currency fluctuations
reduced net sales in fiscal year 2000 by $4.5 million as compared to fiscal year
1999. Had currency values remained unchanged from fiscal year 1999, net sales in
fiscal year 2000 would have been $247.6 million, or 12.2% greater than the prior
year.
CUNO's operations are affected by global and regional economic factors.
However, the global diversity of the Company's business has helped limit the
impact of any one industry or the economy of any single country on its
consolidated results. The following table displays the Company's sales by
geographic operating segment (dollars in thousands):
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
2000 1999 CHANGE CHANGE
North America $135,494 $124,990 8.4% 8.4%
Europe 31,501 32,985 (4.5%) 10.1%
Japan 39,895 29,373 35.8% 25.0%
Asia/Pacific 22,791 22,270 2.3% 7.0%
Latin America 13,393 10,966 22.1% 30.9%
-------------- ------------
Total Sales $243,074 $220,584 10.2% 12.2%
Sales growth in the Company's North American operations was led by the
Water Group (up 16.2 percent), a worldwide division of CUNO comprised of the
potable water segment of the business. The Water Group continues to record
strong sales with its series of new filters designed for OEM customers who serve
various channels of distribution with final sales to U.S. consumers.
Additionally, sales into the fluid processing market have continued to improve
in the U.S. while sales into the healthcare market have declined year over year
due mostly to a decline in sales to a large diagnostic customer.
The Company's overseas sales increased $12.0 million or 12.5 percent in
2000 compared to 1999. Had the value of overseas currencies remained unchanged
in fiscal 2000 as compared to fiscal 1999, sales for these operations would have
increased $16.5 million or 17.2 percent. In Europe, sales increased 10.1 percent
in local currency with this gain spread broadly across the three markets. Sales
in Japan were 35.8 percent higher as compared to the same period last year, and
25.0 percent higher when expressed in local currency, reflecting strong
double-digit sales growth in all three markets. Local currency sales growth in
Asia/Pacific of 7.0 percent was due in large part to strong gains in the potable
water market as well as a general recovery of the Southeast Asian economy. Local
currency sales in Latin America increased 30.9 percent in fiscal 2000 reflecting
strong, broad improvements across all markets.
10
The following table displays the Company's sales by market (dollars in
thousands):
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
2000 1999 CHANGE CHANGE
Potable Water $101,483 $87,649 15.8% 17.1%
Fluid Processing 78,781 72,269 9.0% 11.0%
Healthcare 62,810 60,666 3.5% 6.7%
----------- ----------
Total Sales $243,074 $220,584 10.2% 12.2%
=========== ========== ==== ====
On a currency-adjusted basis, all geographic operating segments
experienced sales increases in the potable water segment. This dollar increase
was driven by strong sales (up 16.2 percent) in North America associated with
OEM customers, direct marketing companies, and appliance manufacturers, as well
as increased foreign potable water sales (up 21.7 percent on a currency-adjusted
basis). The increase in fluid processing sales primarily reflects the
strengthening worldwide demand in the electronics and oil & gas markets. A
decline in sales to a large diagnostic customer in North America was the primary
reason for decreased North American healthcare sales in fiscal 2000 as compared
to fiscal 1999. However, on a currency-adjusted basis, international healthcare
sales increased $6.7 million or 17.8 percent over fiscal year 1999.
GROSS PROFIT
The Company's gross profit increased $7.9 million to $104.5 million in
fiscal year 2000 from $96.6 million in 1999. Gross profit as a percentage of net
sales was relatively flat - 43.8 percent in 1999 vs. 43.0 percent in 2000. The
primary factor that contributed to the lower gross margin in 2000 was lower
sales volume in the North American healthcare market which generally carries a
higher margin than most products in the other markets. Also, the Company's gross
profit was negatively impacted by a strong U.S. dollar prevailing throughout
much of fiscal 2000. The strong U.S. dollar negatively impacts the cost of
products and components manufactured in the US and shipped to overseas
subsidiaries.
OPERATING EXPENSES
Selling, general and administrative expenses increased $2.5 million in
fiscal year 2000 over fiscal year 1999, representing a 4.0 percent increase.
Selling expenses accounted for $1.7 million of this growth, primarily reflecting
the continued growth of programs that support the worldwide growth of the Water
Group. Noncash compensation associated with employee stock plans decreased $0.5
million, reflecting a planned vesting of a significant program in fiscal year
1999. All other expense categories reflected minor increases consistent with
normal incentive and inflation-based increases. Research, development and
engineering expenses increased $1.2 million or 10.2 percent reflecting the
Company's continued focus on the development of new products and technologies.
OPERATING INCOME
As a result of the above, operating income increased $4.3 million, or
18.1 percent, to $27.9 million or 11.5 percent of sales in fiscal year 2000 as
compared to $23.7 million or 10.7 percent of sales in fiscal year 1999.
NONOPERATING ACTIVITY
Interest expense decreased by $0.5 million to $0.7 million in fiscal
year 2000 reflecting the Company's continued reduction in the level of debt
outstanding (see Liquidity and Capital Resources below). No other material
nonoperating activity occurred in either of the two fiscal years.
INCOME TAXES
The Company's effective income tax rate for fiscal year 2000 was 36.8%
as compared to 34.9% in fiscal year 1999. The tax rate in 1999 was favorably
impacted by tax benefits related to 1996 spin-off expenses that were previously
considered nondeductible. This one-time benefit served to reduce the 1999
effective tax rate by 1.8%. Most other factors were not significant and, on a
net basis, were relatively consistent year over year.
LIQUIDITY AND CAPITAL RESOURCES
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 from operating activities,
capital expenditure levels and adequate external financing alternatives.
11
The Company manages its worldwide cash requirements with consideration
of the cost effectiveness of the available funds from the many subsidiaries
through which it conducts its business. Management believes that its existing
cash position and other 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):
YEAR ENDED
OCTOBER 31,
SOURCE / (USE) OF CASH 2001 2000
OPERATING ACTIVITIES:
Net cash provided by net income plus depreciation,
amortization and non-cash compensation $ 29,986 $ 27,203
Inventory (1,654) 3,511
Accounts receivable 2,890 (4,160)
Accounts payable and accrued expenses 90 3,698
Net cash provided by operating activities 27,944 34,523
INVESTING ACTIVITIES:
Acquisitions of companies, net of cash acquired (4,489) (2,885)
Proceeds from surrender of life insurance policies -- 569
Capital expenditures (11,028) (12,143)
FINANCING ACTIVITIES:
Net change in total debt (606) (11,103)
Retirement of Common Stock -- (1,154)
The net cash provided by net income plus depreciation, amortization and
non-cash compensation is an important measurement of cash generated from the
earnings process before significant non-cash charges. Net income plus
depreciation, amortization and non-cash compensation of $30.0 million increased
10.2 percent in fiscal 2001 as compared to fiscal 2000 primarily reflecting the
Company's increased gross profit and improved operating profit margin as
discussed above. The reduction in cash provided by inventories reflects changes
in the timing of production and certain sales shipments. The improvement in cash
provided by accounts receivable reflects the Company's continued strong
management of collection efforts. The reduction in cash provided by accounts
payable and accrued expenses relates to the overall timing of the Company's cash
disbursements.
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 cost of
$4.5 million. These acquisitions did 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 previous 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. Capital expenditures amounted to
$11.0 million in 2001 compared to $12.1 million in 2000. Expenditures in both
periods were primarily comprised of building additions and purchases of
machinery and equipment for the expansion of manufacturing capabilities.
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.
12
Other selected financial data at October 31, follows (amounts in thousands):
2001 2000
Long term debt, less current portion $ 2,893 $ 3,422
Stockholders' equity 140,171 119,518
Ratio of long term debt to total capitalization 2% 3%
MARKET RISK DISCLOSURES
FOREIGN CURRENCY RISK
Approximately 43% of the Company's operations consist of sales and
manufacturing activities in foreign countries. The Company manufactures a
significant portion of its products in the U.S. and sells some of these products
to affiliated companies overseas. As a result, the Company's financial results
could be significantly affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in the foreign markets in which the
Company distributes its products. The Company's currency exposures vary, but are
concentrated in the Japanese yen, Singapore dollar, Australian dollar, British
pound, Brazilian real, Argentine peso, and the Euro.
The Company utilizes forward foreign exchange contracts to hedge
specific exposures relating to intercompany payments (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 matched to the underlying transaction being hedged, and are
typically under one year. 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.
The Company utilizes bank loans and other debt instruments throughout
its worldwide operations. To mitigate foreign currency risk, such debt is
generally denominated in the underlying local currency of the branch or
subsidiary. In certain limited and specific instances, the Company will manage
risk by denominating a portion of debt outstanding in a currency other than the
local currency.
INTEREST RATE RISK
The Company's interest income and expense are most sensitive to changes
in the general level of U.S. and Japanese interest rates. In this regard,
changes in these interest rates may affect the interest paid on debt. To
mitigate the impact of fluctuations in U.S. and Japanese interest rates, the
Company periodically evaluates alternative interest rate arrangements.
Below is a table detailing, by maturity date, the Company's debt
portfolio and the associated interest rates for the fiscal years ended October
31, (dollars in thousands):
FAIR
2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE
Bank loans $ 13,266 -- -- -- -- $13,266 $13,266
Avg. Interest Rate 0.67%
Long-term Debt:
Fixed Rate $ 728 $ 844 $ 843 $ 168 $ 165 $ 873 $ 3,621 $ 3,888
Avg. Interest Rate 5.83% 5.79% 5.79% 4.97% 4.97% 5.01% 5.54%
13
OTHER MATTERS
INFLATION
Inflation had a negligible effect on the Company's operations during
fiscal years 2001 and 2000. The Company estimates that inflationary effects, in
the aggregate, were generally recovered or offset through increased pricing or
cost reductions in both fiscal years.
FORWARD LOOKING INFORMATION
Because CUNO wants to provide shareholders with more meaningful and
useful information, this annual report contains statements relating to future
events and the predicted performance of CUNO which may constitute
forward-looking statements, as defined under the Private Securities Litigation
Act. CUNO has tried, wherever possible, to identify these "forward looking"
statements by using words such as "anticipate," "believe," "estimate," "expect"
and similar expressions. These statements reflect the Company's current beliefs
and are based on information currently available to it. Accordingly, these
statements are subject to risks and uncertainties which could cause the
Company's actual results, performance or achievements to differ materially from
those expressed in, or implied by, these statements. These risks and
uncertainties include the following: limited history as a stand-alone company;
economic and political conditions in the foreign countries in which the Company
conducts a substantial part of its operations and other risks associated with
international operations including taxation policies, exchange rate fluctuations
and the risk of expropriation; the Company's ability to protect its technology,
proprietary products and manufacturing techniques; volumes of shipments of the
Company's products, changes in the Company's product mix and product pricing;
costs of raw materials; the rate of economic and industry growth in the United
States and the other countries in which the Company conducts its business;
changes in technology, changes in legislative, regulatory or industrial
requirements and risks generally associated with new product introductions and
applications; and domestic and international competition in the Company's global
markets. CUNO undertakes no obligation to publicly release revisions to the
forward-looking statements to reflect new events or circumstances.
14
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
CUNO Incorporated
We have audited the accompanying consolidated balance sheets of CUNO
Incorporated as of October 31, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended October 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CUNO
Incorporated at October 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 2001 in conformity with accounting principles generally accepted in
the United States.
[ERNST AND YOUNG LLP SIGNATURE]
Hartford, Connecticut
December 11, 2001
15
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share amounts)
YEAR ENDED OCTOBER 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Net sales $ 244,449 $ 243,074 $ 220,584
Operating expenses:
Cost of products sold 136,069 138,589 124,034
Selling, general and administrative 64,240 63,665 61,193
Research, development and engineering 13,729 12,893 11,704
------------ ------------ ------------
214,038 215,147 196,931
------------ ------------ ------------
Operating income 30,411 27,927 23,653
Nonoperating income:
Interest expense (545) (695) (1,202)
Other income 931 363 323
------------ ------------ ------------
386 (332) (879)
------------ ------------ ------------
Income before income taxes 30,797 27,595 22,774
Income taxes (benefit):
Current 11,576 7,490 7,632
Deferred (792) 2,658 311
------------ ------------ ------------
10,784 10,148 7,943
------------ ------------ ------------
Net income $ 20,013 $ 17,447 $ 14,831
=========== ============ ============
Basic earnings per common share $ 1.23 $ 1.08 $ 0.92
Diluted earnings per common share $ 1.20 $ 1.05 $ 0.91
Basic shares outstanding 16,308,563 16,195,843 16,064,159
Diluted shares outstanding 16,689,934 16,629,233 16,336,373
------------ ------------ ------------
See accompanying Notes
16
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
- --------------------------------------------------------------------------------
OCTOBER 31, 2001 2000
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 25,628 $ 13,814
Accounts receivable (less allowances for doubtful accounts
of $1,336 and $1,395, respectively) 48,546 52,239
Inventories 24,590 24,087
Deferred income taxes 5,971 6,414
Prepaid expenses and other current assets 4,329 2,101
----------- ----------
Total current assets 109,064 98,655
Noncurrent assets
Deferred income taxes 2,300 1,168
Intangible assets, net 27,725 23,971
Other noncurrent assets 1,941 1,918
Property, plant and equipment, net 65,595 63,187
--------- ---------
Total assets $ 206,625 $ 188,899
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 13,266 $ 14,233
Accounts payable 16,606 17,978
Accrued payroll and related taxes 12,294 11,851
Other accrued expenses 7,265 7,675
Accrued income taxes 3,468 4,251
Current portion of long-term debt 728 746
----------- ----------
Total current liabilities 53,627 56,734
Noncurrent liabilities
Long-term debt, less current portion 2,893 3,422
Deferred income taxes 4,005 4,786
Retirement benefits 5,929 4,439
----------- ----------
Total noncurrent liabilities 12,827 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;
16,392,244 and 16,279,198 shares issued and outstanding 16 16
Treasury Stock, at cost (2,747 and 747 shares) (57) --
Additional paid-in-capital 42,602 39,814
Unearned compensation (957) (1,120)
Accumulated other comprehensive (loss) income:
Foreign currency translation adjustments (5,224) (3,546)
Change in fair value of derivative financial instruments 94 --
Minimum pension liability (670) --
Retained earnings 104,367 84,354
----------- ----------
Total stockholders' equity 140,171 119,518
----------- ----------
Total liabilities and stockholders' equity $ 206,625 $ 188,899
=========== ==========
See accompanying Notes.
17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
- --------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL UNEARNED OTHER COM- TOTAL
COMMON TREASURY PAID-IN COMPEN- PREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL SATION INCOME (LOSS) EARNINGS EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1998 $ 16 $ -- $37,780 $(2,742) $ 3,171 $ 52,076 $ 90,301
------ ------- ------- -------- -------- -------- ---------
Net income 14,831 14,831
Other comprehensive income:
Foreign currency translation adjustments (3,255) (3,255)
Minimum pension liability adjustment,
net of income taxes of $724 524 524
----------
Comprehensive income 12,100
Amortization of unearned compensation 1,184 1,184
Shares awarded under employee stock plans 2,501 (2,209) 292
Shares issued to employee benefit plans 599 599
Stock options exercised 118 118
Unearned compensation adjustments (1,081) 1,081 --
Other (138) 118 (20)
------ ------- ------- -------- -------- -------- ---------
BALANCE AT OCTOBER 31, 1999 16 -- 39,779 (2,568) 440 66,907 104,574
------ ------- ------- -------- -------- -------- ---------
Net income 17,447 17,447
Other comprehensive income-
Foreign currency translation adjustments (3,986) (3,986)
----------
Comprehensive income 13,461
Amortization of unearned compensation 610 610
Shares awarded under employee stock plans 816 (96) 720
Shares issued to employee benefit plans 650 650
Stock options exercised 254 254
Retirement of Common Stock (1,154) (1,154)
Unearned compensation adjustments (934) 934 --
Tax benefit on stock-based compensation 403 403
------ ------- ------- -------- -------- -------- ---------
BALANCE AT OCTOBER 31, 2000 16 -- 39,814 (1,120) (3,546) 84,354 119,518
------ ------- ------- -------- -------- -------- ---------
Net income 20,013 20,013
Other comprehensive income-
Foreign currency translation adjustments (1,678) (1,678)
Change in fair value of derivative
financial instruments, net of deferred
income taxes of $50 94 94
Minimum pension liability adjustment,
net of income taxes of $418 (670) (670)
----------
Comprehensive income 17,759
Amortization of unearned compensation 727 727
Shares awarded under employee stock plans 1,532 (564) 968
Shares issued to employee benefit plans 632 632
Stock options exercised 496 496
Purchase of Treasury Stock (57) (57)
Tax benefit on stock-based compensation 128 128
------ ------- ------- -------- -------- -------- ---------
BALANCE AT OCTOBER 31, 2001 $ 16 $(57) $42,602 $(957) $(5,800) $104,367 $140,171
====== ======= ======= ======== ======== ======== =========
See accompanying Notes.
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 20,013 $ 17,447 $ 14,831
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,052 8,866 8,275
Noncash compensation recognized under employee stock plans 921 890 1,379
Gain on sales of property, plant and equipment (59) (17) (44)
Pension costs in excess of (less than) funding (347) 304 (214)
Deferred income taxes (792) 2,658 393
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 2,890 (4,160) (4,940)
Inventories (1,654) 3,511 (2,135)
Accounts payable and accrued expenses 90 3,698 3,740
Accrued income taxes (474) 887 3,583
Prepaid expenses and other (1,696) 439 (474)
--------- -------- ---------
Net cash provided by operating activities 27,944 34,523 24,394
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 104 72 61
Proceeds from surrender of life insurance policies -- 569 --
Acquisition of companies, net of cash acquired (4,489) (2,885) (1,000)
Capital expenditures (11,028) (12,143) (11,695)
--------- -------- ---------
Net cash used for investing activities (15,413) (14,387) (12,634)
FINANCING ACTIVITIES
Proceeds from long-term debt -- 5,200 6,100
Principal payments on long-term debt (969) (12,159) (17,068)
Net repayments under short-term bank loans 363 (4,144) 908
Retirement of Common Stock -- (1,154) --
Acquisition of Treasury Stock (57) -- --
Proceeds from stock options exercised 496 254 118
--------- -------- ---------
Net cash used for financing activities (167) (12,003) (9,942)
Effect of exchange rate changes on cash and cash equivalents (550) (505) (65)
--------- -------- ---------
Net change in cash and cash equivalents 11,814 7,628 1,753
Cash and cash equivalents at beginning of year 13,814 6,186 4,433
--------- -------- ---------
Cash and cash equivalents at end of year $ 25,628 $ 13,814 $ 6,186
========= ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 572 $ 760 $ 1,236
Income taxes 12,261 6,286 2,523
========= ======== =========
See accompanying Notes
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CUNO INCORPORATED
NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION:
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 potable water, healthcare, and fluid processing markets throughout
the world.
CONSOLIDATION:
The accounts of the Company and all of its subsidiaries are included in
the consolidated financial statements. All significant intercompany accounts and
transactions are eliminated in consolidation.
CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents. Cash equivalents
consist of time deposits in financial institutions.
INVENTORIES:
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 method used for all other inventories is first-in, first-out (FIFO).
Approximately 48 and 42 percent of worldwide inventories in 2001 and 2000,
respectively, are accounted for using the LIFO method. Inventories as of October
31 consisted of the following (in thousands):
2001 2000
Raw materials $10,692 $10,814
Work in process 2,868 2,435
Finished goods 11,030 10,838
--------- --------
$24,590 $24,087
========= ========
If all inventories were valued by the FIFO method, which approximates
replacement cost, inventories would have been $2,900,000 higher in 2001 and
$2,805,000 higher in 2000.
INTANGIBLES:
Intangible assets as of October 31 follow (in thousands):
2001 2000
Goodwill, less accumulated amortization
(2001 - $9,105; 2000 - $8,321) $26,336 $23,222
Pension intangible asset 720 --
Other intangibles, less accumulated amortization
(2001 - $24,850; 2000 - $24,770) 669 749
-------- --------
$27,725 $23,971
======== =========
Goodwill, which is the excess of cost over the fair value of net assets
acquired, has historically been amortized on a straight-line basis over periods
ranging from 10 to 40 years. See "Newly Issued Accounting Standards" below.
Other intangibles, including patents, know-how and trademarks, are
stated at their appraised value on the acquisition date less accumulated
amortization, which is provided using the straight-line method over periods
ranging from 10 to 25 years.
20
PROPERTIES AND DEPRECIATION:
Property, plant and equipment are recorded at cost. Buildings and
equipment are depreciated principally by the straight-line method over their
useful lives, ranging from 10 to 40 years for buildings and 3 to 20 years for
machinery and equipment.
IMPAIRMENT OF LONG-LIVED ASSETS:
In the event that facts and circumstances indicate that the carrying
value of intangibles and long-lived assets or other assets may be impaired, an
evaluation is performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down is required.
INCOME TAXES:
The Company uses the liability method in measuring the provision for
income taxes and recognizing deferred income tax assets and liabilities in the
balance sheet. Deferred income tax assets and liabilities principally arise from
differences between the tax basis of an asset or liability and its reported
amount in the consolidated financial statements. Deferred income tax balances
are determined using provisions of currently enacted tax laws; the effects of
future changes in tax laws or rates are not anticipated.
Provisions are made for income taxes on undistributed earnings of
foreign subsidiaries which are expected to be remitted to the Company in the
near term. Upon distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to both U.S. income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to the various
foreign countries. Determination of the amount of any unrecognized deferred U.S.
income tax liability is not practicable because of the complexities associated
with its hypothetical calculation.
TRANSLATION OF FOREIGN CURRENCIES:
Revenue and expense accounts are translated at the average exchange
rate for the year while all assets and liability accounts are translated at the
end of year exchange rate. Resulting translation adjustments are recorded as a
separate component of accumulated other comprehensive income.
REVENUE RECOGNITION:
Revenue is recognized when the earning process is complete and the
risks and rewards of ownership have transferred to the customer, which is
considered to have occurred upon shipment of the finished product. Shipping and
handling costs associated with sales are charged to cost of sales.
RESEARCH AND DEVELOPMENT:
Costs associated with the development of new products and improvements
to existing products are charged to operations as incurred. Research and
development costs were $7,343,000, $6,508,000, and $5,599,000 in 2001, 2000 and
1999, respectively.
ADVERTISING:
Advertising costs are expensed as incurred and included in "selling,
general and administrative expenses." Advertising expenses were $2,774,000,
$3,203,000, and $3,469,000 in 2001, 2000, and 1999, respectively.
EMPLOYEE STOCK OPTIONS:
The Company accounts for employee stock options under the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. Accounting for the issuance of stock
options under the provisions of APB Opinion No. 25 typically does not result in
compensation expense for the Company since the exercise price of options is
normally established at the market price of the Company's Common Stock on the
date granted.
21
OTHER INCOME:
Other income as reported in the accompanying Consolidated Statements of
Income for the years ended October 31 consisted of the following (amounts in
thousands):
2001 2000 1999
Interest income $ 944 $ 364 $ 199
Exchange gains 46 5 120
Gains on sales of property, plant and equipment 59 17 44
Other expenses (118) (23) (40)
------ ------ ------
Total $ 931 $ 363 $ 323
====== ====== ======
EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share for the years ended October 31:
2001 2000 1999
NUMERATOR:
Net Income $ 20,013,000 $ 17,447,000 $ 14,831,000
============= ============ =============
DENOMINATORS:
Weighted average shares outstanding 16,367,826 16,326,697 16,233,591
Issued but unearned performance shares (762) (67,636) (110,322)
Issued but unearned restricted shares (58,501) (63,218) (59,110)
------------- ------------ -------------
Denominator for basic earnings per share 16,308,563 16,195,843 16,064,159
============= ============ =============
Weighted average shares outstanding 16,367,826 16,326,697 16,233,591
Effect of dilutive employee stock options 322,108 302,536 102,782
------------- ------------ -------------
Denominator for diluted earnings per share 16,689,934 16,629,233 16,336,373
Basic earnings per share $ 1.23 $ 1.08 $ 0.92
Diluted earnings per share $ 1.20 $ 1.05 $ 0.91
============= ============ =============
FOREIGN CURRENCY EXCHANGE CONTRACTS:
The Company utilizes forward foreign exchange contracts to hedge
specific exposures relating primarily to export sales with pre-established U.S.
dollar amounts at specified dates. A forward foreign exchange contract obligates
the Company to exchange predetermined amounts of specified foreign currencies at
specified exchange rates on specified dates. Open, matured and terminated
contracts are marked to market for changes in the spot exchange rate with
resulting gains and losses recognized in the Financial Statements. See
"Newly Issued Accounting Standards" below.
USES OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
NEWLY ISSUED ACCOUNTING STANDARDS:
FASB 133
As of November 1, 2000, the Company adopted Financial Accounting
Standards Board ("FASB") 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 from the financial instruments held at the time did not change.
22
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 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.
Statement 141 and 142
In June 2001, the FASB issued Statement No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets." Under the
latter new statement, 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 No. 142 to existing goodwill and other
intangible assets beginning November 1, 2001 (first quarter of fiscal 2002) and
No. 141 to all future acquisitions. No impairment will result from the initial
adoption of No. 142. Further, had No. 142 been in effect as of the beginning of
fiscal 2001, amortization expense would have been reduced by $1,316,000 and net
income would have been increased by $1,260,000 or approximately $0.07 per share.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of October 31 is comprised of the
following (in thousands):
2001 2000
Land and land improvements $ 6,064 $ 6,335
Buildings 30,326 29,691
Machinery and equipment 82,907 77,728
Construction in progress 15,086 11,844
-------- ---------
134,383 125,598
Less accumulated depreciation 68,788 62,411
-------- ---------
$ 65,595 $ 63,187
======== =========
Depreciation expense was $7,898,000 in 2001, $7,649,000 in 2000, and
$6,939,000 in 1999.
NOTE 3 - DEBT
Debt amounted to $3,621,000 and $4,168,000 at October 31, 2001 and
2000, respectively, and primarily relates to debt instruments used to finance
certain capital expenditures and acquisitions, including certain debt which has
been discounted at 6.0 percent and is payable over five years. Principal
payments due after October 31, 2001 are: 2002 - $728,000; 2003 - $844,000; 2004
- - $843,000; 2005 - $168,000; 2006 - $165,000 and thereafter - $873,000.
Outstanding bank loans at October 31, 2001 and 2000 had weighted
average interest rates of 0.67 and 1.3 percent in 2001 and 2000, respectively.
The bank loans and unused short-term lines of credit are payable upon demand and
are unsecured. There are no significant commitment fees related to the bank
loans or unused lines of credit.
The Company had available uncommitted, unused short-term lines of
credit in various countries totaling approximately $16.3 million at October 31,
2001. Borrowings under the unused short-term lines of credit are subject to the
bank's approval.
23
NOTE 4 - CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, par value $.001 per share, and 2,000,000 shares of
Preferred Stock, par value $.001 per share.
COMMON STOCK
Subject to preferences that may be applicable to any outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Holders of Common Stock are entitled to one vote per share
in all matters to be voted upon by shareholders. In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of the Company's
liabilities and the liquidation preferences of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive rights and no rights to convert their
Common Stock into any other securities, and there are no redemption provisions
with respect to such shares. All of the outstanding shares of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may issue in the
future.
PREFERRED STOCK
The authorized class of Preferred Stock may be issued in series from
time to time with such designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions thereof as the Board of Directors
determines. The rights, priorities, preferences, qualifications, limitations and
restrictions of different series of Preferred Stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions and other matters. The
Board of Directors may authorize the issuance of Preferred Stock which ranks
senior to the Common Stock with respect to the payment of dividends and the
distribution of assets upon liquidation. In addition, the Board is authorized to
fix the limitations and restrictions, if any, upon the payment of dividends on
Common Stock to be effective while any shares of Preferred Stock are
outstanding.
STOCKHOLDER RIGHTS PLAN
The Company has a Stockholder Rights Plan, pursuant to which a
preferred share purchase right (a "Right") is associated with, and trades with,
each share of Common Stock outstanding. Each Right, when it becomes exercisable,
entitles its holder to purchase from the Company one-hundredth of a share of
Series A Junior Participating Preferred Stock ("Series A Preferred Stock"), par
value $.001 per share, of the Company at a price of $60 per one-hundredth share,
subject to adjustment. The Rights are not exercisable until the earlier of (i)
the acquisition of 15% or more of the Company's Common Stock by a person or
group of affiliated persons (an "Acquiring Person"); or (ii) 10 days following
the commencement or announcement of an intention to make a tender or exchange
offer which would result in a person or group becoming an Acquiring Person. Each
holder of a Right will have the right to receive, upon exercise, the number of
shares of Common Stock or one-hundredths of a share of Series A Preferred Stock
having a value (immediately prior to such triggering event) equal to two times
the exercise price of such Right. In the event that the Company is acquired in a
merger or acquisition, as defined, each holder of a Right shall have the right
to receive, upon exercise, common shares of the acquiring company having a value
equal to two times the exercise price of the Right. The Rights expire on August
8, 2006.
NOTE 5 - OPERATING LEASES
The Company has certain lease agreements for various facilities and
equipment. Rent expense under operating leases was approximately $2,430,000 in
2001, $2,694,000 in 2000, and $2,812,000 in 1999.
Future minimum lease payments under noncancellable operating leases
with an initial term of one year or more at October 31, 2001 were as follows:
2002 - $2,087,000; 2003 - $1,752,000; 2004 - $1,500,000; 2005 - $1,452,000; and
2006 - $1,475,000.
24
NOTE 6 - BENEFIT PLANS
The Company has noncontributory defined benefit plans for substantially
all of its U.S. employees. Pension benefits for the hourly employees covered by
these plans are expressed as a flat benefit rate times years of continuous
service. Benefits for salaried employees are based upon a percentage of the
employee's average compensation during the preceding ten years, reduced by 50
percent of the Social Security Retirement Benefit. The Company funds amounts at
least sufficient to exceed the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional amounts as
may be deemed appropriate.
The Company also has contributory defined benefit pension plans
covering its employees in Japan. Benefits under these plans are based on years
of service and compensation in the period immediately preceding retirement.
Funding is predicated on minimum contributions as required by local laws and
regulations plus additional amounts, if any, as may be deemed appropriate.
The following table sets forth the funded status and amounts recognized
in the Consolidated Balance Sheets at October 31, 2001 and 2000 for the
Company's U.S. and Japanese defined benefit pension plans (in thousands):
2001 2000
PLANS WHOSE PLANS WHOSE ASSETS PLANS WHOSE
ACCUMULATED BENEFITS EXCEED ACCUMULATED ACCUMULATED BENEFITS
EXCEED ASSETS BENEFITS EXCEED ASSETS
Projected benefit obligation $(38,806) $(21,162) $(13,051)
========== ========== =========
Market value of plan assets $ 27,009 $ 23,277 $ 6,908
========== ========== =========
Projected benefit obligation less than
(in excess of) plan assets (11,797) 2,115 (6,143)
Unrecognized net (gain) loss 7,426 (3,871) 1,592
Unrecognized prior service cost 1,304 1,349 201
Unrecognized transition obligation (666) -- 318
Additional minimum liability (2,196) -- --
---------- ---------- ---------
Net pension liability $ (5,929) $ (407) $ (4,032)
========== ========== =========
In fiscal 2001, all of the Company's pension plans had accumulated
benefit obligations in excess of their assets. The Company's net pension
liability at the end of fiscal 2001 was adversely impacted by weakened equity
markets and lower interest rates. The Company believes these two factors are
temporary in nature and should not adversely impact the Plans over their long
term estimated lives.
Plan assets at October 31, 2001 are invested in publicly traded and
restricted mutual funds, various corporate and government bonds, guaranteed
income contracts and listed stocks, including common stock of the Company having
a market value of $1,297,000 (50,000 shares) at that date.
A summary of the various components of net periodic pension cost for
defined benefit plans and cost information for other plans for the three-year
period is shown below (in thousands):
2001 2000 1999
DEFINED BENEFIT PLANS:
Service cost $ 1,794 $ 1,915 $ 2,043
Interest cost 1,947 1,908 1,702
Expected return on plan assets (1,750) (2,000) (3,043)
Net amortization and deferral (647) (60) 1,433
-------- -------- -------
Net pension expense $ 1,344 $ 1,763 $ 2,135
======== ======== ========
25
A summary of the changes in the projected benefit obligation is shown
below (amounts in thousands):
2001 2000
Benefit obligation - beginning of year $ 34,213 $ 33,643
Service cost 1,794 1,915
Interest cost 1,947 1,908
Benefits and expenses paid (1,520) (1,819)
Actuarial assumption changes 4,645 (948)
Plan amendments (950) --
Foreign currency exchange rate changes (1,323) (486)
--------- ---------
Benefit obligation - end of year $ 38,806 $ 34,213
========= =========
A summary of the changes in the plan assets is shown below (amounts in
thousands):
2001 2000
Plan assets - beginning of year $ 30,185 $ 28,441
Actual return on assets (2,645) 2,329
Employer contributions 1,770 1,561
Benefits and expenses paid (1,520) (1,819)
Foreign currency exchange rate changes (781) (327)
--------- ---------
Plan assets - end of year $ 27,009 $ 30,185
========= =========
Assumptions used in the accounting for the defined benefit plans as of
October 31 were:
2001 2000
DOMESTIC PLANS
Weighted-average discount rate 7.25% 7.75%
Rates of increase in compensation levels 4.50% 5.00%
Expected long-term rate of return on assets 9.75% 10.00%
FOREIGN PLAN (JAPAN)
Weighted-average discount rate 2.50% 2.75%
Rates of increase in compensation levels 2.75% 3.00%
Expected long-term rate of return on assets 5.00% 5.00%
The changes in the actuarial assumptions referred to above had no
impact on pension expense for 2001. Due to assumptions inherent in the actuarial
computations, it is reasonably possible that future actual expenses will differ
from current actuarial estimates.
The Company sponsors a defined contribution plan that provides all U.S.
employees of the Company an opportunity to accumulate funds for their
retirement. The Company currently matches 50% of employee contributions up to 6%
of qualified wages. Company matching contributions charged to income amounted to
$678,000, $638,000, and $567,000 in 2001, 2000, and 1999, respectively. Company
matching contributions are made annually in shares of the Company's Common Stock
subsequent to the Plan's calendar year end.
26
NOTE 7 - INCOME TAXES
The components of income before income taxes and the provision for
income taxes are summarized as follows (in thousands):
2001 2000 1999
Income before income taxes
Domestic $ 22,109 $ 19,675 $ 16,887
Foreign 8,688 7,920 5,887
-------- --------- ---------
30,797 27,595 22,774
Income taxes (benefit)
Current
Domestic - Federal 7,159 3,108 4,290
- State and local 915 567 916
Foreign 3,767 3,815 2,629
Operating loss carryforwards (265) -- (203)
-------- --------- ---------
11,576 7,490 7,632
Deferred
Domestic - Federal (645) 2,518 36
- State and local (147) 449 (1)
Foreign -- (309) 276
-------- --------- ---------
(792) 2,658 311
-------- --------- ---------
10,784 10,148 7,943
-------- --------- ---------
Net Income
Domestic 14,827 13,033 11,646
Foreign 5,186 4,414 3,185
-------- --------- ---------
$ 20,013 $ 17,447 $ 14,831
========= ========= =========
A reconciliation of the statutory U.S. federal rate to the effective
income tax rate follows:
2001 2000 1999
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State and local taxes on income, net of domestic
federal income tax benefit 1.6 2.4 2.5
Impact of foreign subsidiaries on effective rate 1.0 1.2 1.2
Benefit of operating loss carryforwards (0.9) -- (0.3)
Tax credits (2.3) (2.7) (2.2)
Prior year tax provision adjustments (0.2) 0.4 (1.8)
Goodwill amortization with no tax benefit 1.0 1.2 1.5
All other (0.2) (.7) (1.0)
------ ----- ------
Effective income tax rate 35.0% 36.8% 34.9%
====== ===== ======
27
Significant components of the Company's deferred income tax liabilities
and assets as of October 31 are as follows (in thousands):
2001 2000
Deferred income tax liabilities:
Property, plant and equipment $5,136 $5,135
Other -- 34
------- ------
Total deferred income tax liabilities 5,136 5,169
Deferred income tax assets:
Pension liability 1,986 1,433
Employee benefits 2,655 2,492
Net operating loss carryforwards 116 350
Other accruals and reserves 1,845 1,559
Inventories 1,334 1,288
Other 1,582 1,193
------- ------
Total deferred income tax assets 9,518 8,315
Less: valuation allowance for deferred income tax assets 116 350
------- ------
Deferred income tax assets, after valuation allowance 9,402 7,965
------- ------
Net deferred income tax assets $4,266 $2,796
======= ======
The valuation allowance for deferred income tax assets as of October
31, 1999 was $189,000. The decrease in the valuation allowance during fiscal
2001 relates to the utilization of net operating loss carry forwards in Italy
and Germany. Although realization of the net deferred income tax asset of
$9,402,000 is not assured, management believes it is more likely than not that
all of such net deferred income tax assets will be realized. The amount of the
net deferred income tax assets considered realizable, however, could be reduced
if estimates of future taxable income are reduced.
The net operating loss carryforwards in Germany are available
indefinitely; the net operating loss carryforwards in Italy expire in 2005.
NOTE 8 - ACQUISITIONS
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 cost of
$4.5 million. These acquisitions do not have a material effect on the Company's
historical financial statements or its pro forma operating results. The amount
of goodwill recorded in connection with these acquisitions amounted to $4.3
million. In the second quarter of fiscal 2000, the Company made a contingent
consideration payment of $2.9 million related to the previous 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 fiscal 2000, CUNO elected to
surrender these policies for their cash surrender value upon settlement.
28
NOTE 9 - SEGMENT FINANCIAL 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 products.
Operating segment data include the results of all subsidiaries,
consistent with the management reporting of these operations. Financial
information by geographic operating segment as of and for each of the years
ended October 31 is summarized below (amounts in thousands):
2001 2000 1999
NET SALES:
Europe $ 42,337 $ 36,724 $ 40,696
Japan 34,807 40,593 30,143
Asia/Pacific 25,427 25,322 24,315
Latin America 12,406 13,788 11,287
--------- --------- ---------
Subtotal - Foreign Sales 114,977 116,427 106,441
North America 160,824 157,846 146,248
Elimination of intercompany sales (31,352) (31,199) (32,105)
--------- --------- ---------
Consolidated $ 244,449 $ 243,074 $ 220,584
========= ========= =========
Each geographic operating segment primarily sells its products to
external customers within its country of domicile.
One of the Company's customers accounted for approximately 11.5% of
fiscal 2001 sales. The Company believes that no other customer accounts for more
than ten percent of sales.
2001 2000 1999
OPERATING INCOME:
North America $ 19,032 $ 17,503 $ 15,313
Europe 2,465 1,330 2,384
Japan 3,380 3,504 1,083
Asia/Pacific 3,543 3,662 3,190
Latin America 1,991 1,928 1,683
-------- -------- ---------
Segment total 30,411 27,927 23,653
-------- -------- ---------
Interest expense (545) (695) (1,202)
Other income, net 931 363 323
-------- -------- ---------
Income before income taxes $ 30,797 $ 27,595 $ 22,774
======== ======== =========
Segment operating income consists of net sales less operating expenses.
Interest expense and other income, net have not been allocated to segments.
29
2001 2000 1999
ASSETS:
North America $ 144,484 $ 153,830 $ 144,385
Europe 30,236 18,972 24,028
Japan 27,868 31,824 31,558
Asia/Pacific 12,601 11,923 13,239
Latin America 6,441 6,345 5,763
General Corporate 25,628 13,814 6,186
Eliminations and other (40,633) (47,809) (40,817)
---------- ---------- ----------
Consolidated $ 206,625 $ 188,899 $ 184,342
========== ========== ==========
General corporate assets (principally cash and investments) are not
allocated to segments.
Eliminations and other is primarily comprised of intercompany
receivables and investments in subsidiaries, both of which are eliminated in the
Company's consolidated financial statements.
2001 2000 1999
CAPITAL EXPENDITURES:
North America $ 7,842 $10,185 $10,127
Europe 754 450 648
Japan 812 675 390
Asia/Pacific 975 511 429
Latin America 645 322 101
------- ------- --------
Consolidated $11,028 $12,143 $11,695
======= ======= ========
2001 2000 1999
DEPRECIATION AND AMORTIZATION:
North America $6,878 $6,996 $6,274
Europe 894 668 804
Japan 541 540 524
Asia/Pacific 428 460 500
Latin America 311 202 173
--------- ------- -------
Consolidated $9,052 $8,866 $8,275
========= ======= =======
CUNO sells its products into three principle markets. The potable water
market includes applications designed for residential, commercial, and food
service customers. The fluid processing market includes customers in industries
as diverse as chemical, petrochemical, oil & gas, paints and resins, and
electronics. The healthcare market customers include food & beverage providers
which require absolute clarity and stability of their products and
pharmaceutical and biotechnology companies which require cost-efficient
filtration and high levels of purity for production of sterile, contaminate free
drugs and diagnostic test kits.
30
The Company's sales by market are summarized for each of the years
ended October 31 (amounts in thousands):
2001 2000 1999
NET SALES:
Potable Water $107,263 $101,483 $ 87,649
Fluid Processing 71,898 78,781 72,269
Healthcare 65,288 62,810 60,666
-------- -------- ---------
Consolidated $244,449 $243,074 $220,584
======== ======== =========
NOTE 10 - STOCK OPTIONS AND AWARDS
The Company has a stock option and award plan which allows for granting
a number of stock incentive instruments, including nonqualified and incentive
stock options, restricted stock, performance shares and stock appreciation
rights which may be granted as part of a stock option or as a separate right to
the holders of any rights previously granted. The plan permits the granting of
such stock awards of up to 2,200,000 shares of Common Stock. Accordingly, such
shares have been authorized and reserved.
The options are exercisable at various dates and have varying
expiration dates. Approximately 488,000 shares of Common Stock are reserved for
issuance to key employees and nonemployee directors under the provisions of
these option and award plans as of October 31, 2001.
Awards of performance shares totaled 6,333 in 1999. No such awards were
made in 2001 or 2000. Awards of restricted shares totaled 20,219, 5,500 and
111,402 in 2001, 2000, and 1999, respectively. When rights or awards are
granted, associated compensation expense is accrued from the date of the grant
to the date such options or awards are exercisable. Shares earned under the plan
are based on a formula which may be adjusted at the discretion of the Company's
Compensation Committee.
A summary of stock option activity follows:
OPTIONS EXERCISE PRICE
Outstanding at October 31, 1998 492,002 5.96 - 21.50
---------- -------------
Options granted 209,000 14.13 - 15.00
Options exercised (9,144) 5.96 - 15.13
Options forfeited (16,500) 14.13 - 15.13
---------- -------------
Outstanding at October 31, 1999 675,358 7.94 - 21.50
---------- -------------
Options granted 211,250 19.75 - 30.06
Options exercised (16,350) 15.13 - 15.25
Options forfeited (20,500) 14.13 - 27.50
---------- -------------
Outstanding at October 31, 2000 849,758 7.94 - 30.06
---------- -------------
Options granted 204,410 25.05 - 30.00
Options exercised (34,722) 14.13 - 21.50
Options forfeited (11,250) 14.13 - 27.88
---------- -------------
Outstanding at October 31, 2001 1,008,196 7.94 - 30.06
---------- -------------
31
The weighted-average grant-date fair value of options granted was
$12.93, $5.69, and $8.86 in 2001, 2000, and 1999, respectively. The following
table summarizes information concerning currently outstanding options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------- ---------------------------------------
WEIGHTED-
RANGE OF AVERAGE WEIGHTED- WEIGHTED-
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
$ 5 -$10 26,438 2.50 $ 8.79 26,438 $ 8.79
10 - 15 230,598 6.11 13.18 142,098 12.59
15 - 20 521,750 6.43 17.30 407,250 15.93
20 - 25 7,500 6.77 21.28 7,000 21.50
25 - 30 219,160 9.01 27.63 -- --
30 - 35 2,750 9.52 30.02 -- --
--------- ----------
1,008,196 582,786
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), which also requires that the information
be determined as if the Company had accounted for its employee stock options
granted subsequent to October 31, 1995, under the fair-value method of SFAS 123.
The fair value for these options was estimated at the date of grant using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rates ranging from 3.8% to 6.5%, no dividend yield, expected volatility of the
market price of Company Common Stock ranging from 14% to 69%, and an expected
option life of five years.
The risk-free interest rate is based on short-term treasury bill rates.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
The Company's pro forma information compared to as reported information
follows (dollars in thousands):
2001 2000 1999
Net Income: As reported $20,013 $17,447 $14,831
Pro forma 18,822 16,602 13,968
Basic earnings per share: As reported 1.23 1.08 0.92
Pro forma 1.15 1.03 0.87
Diluted earnings per share: As reported 1.20 1.05 0.91
Pro forma 1.13 1.00 0.86
These pro forma effects may not be representative of the effects on
future years because of the prospective application required by SFAS 123, and
the fact that options vest over several years and new grants generally are
made each year.
32
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures of financial instruments:
CASH AND CASH EQUIVALENTS:
The carrying amounts reported for cash and cash equivalents approximate
fair value.
LONG AND SHORT-TERM DEBT:
The carrying amounts of the Company's borrowings under its short-term
credit agreements approximate their fair value. The fair values of the long-term
debt are estimated using discounted cash flow analysis, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements. The
fair value of the Company's long-term debt approximates its carrying value
because of the variable interest rate of the majority of the debt.
The carrying amounts and fair values of the Company's financial
instruments follows:
OCTOBER 31,
2001 2000
-----------------------------------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
Cash and cash equivalents $25,628 $25,628 $13,814 $13,814
Bank loans 13,266 13,266 14,233 14,233
Long-term debt 3,621 3,888 4,168 3,566
The carrying amounts of accounts receivable and accounts payable and
accrued expenses approximate fair value because of the short-term nature of
those transactions.
FOREIGN CURRENCY EXCHANGE CONTRACTS:
The Company utilizes forward foreign exchange contracts to hedge
specific exposures relating to intercompany payments (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 matched to the underlying transaction being hedged, and are
typically under one year. 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.
At October 31, 2001 and 2000, the Company held contracts for $6,288,880
and $3,041,000 respectively, with fair values of $6,414,442 and $3,181,000,
respectively. The fair value of foreign currency exchange contracts is estimated
based on quoted exchange rates at year end.
NOTE 12 - CONTINGENCIES
The Company is, from time to time, 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.
33
NOTE 13 - QUARTERLY DATA (UNAUDITED)
A summary of the Company's quarterly data follows (in thousands, except
per-share amounts):
2001 FIRST SECOND THIRD FOURTH TOTAL
Net sales $ 58,586 $ 60,186 $ 63,441 $ 62,236 $244,449
Gross profit 25,062 26,667 28,287 28,364 108,380
Net income 3,828 4,522 5,704 5,959 20,013
Basic earnings per share $ 0.24 $ 0.28 $ 0.35 $ 0.37 $ 1.23
Diluted earnings per share $ 0.23 $ 0.27 $ 0.34 $ 0.36 $ 1.20
2000
Net sales $ 57,734 $ 58,910 $ 62,795 $ 63,635 $243,074
Gross profit 24,325 25,474 27,115 27,571 104,485
Net income 3,258 3,872 5,019 5,298 17,447
Basic earnings per share $ 0.20 $ 0.24 $ 0.31 $ 0.33 $ 1.08
Diluted earnings per share $ 0.20 $ 0.23 $ 0.30 $ 0.32 $ 1.05
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
necessarily equal the total for the year.
34
SUMMARY OF FINANCIAL DATA
(in thousands, except per share data and ratios)
2001 2000 1999 1998(1) 1997
INCOME DATA
Net sales $244,449 $243,074 $220,584 $198,845 $187,478
Gross profit 108,380 104,485 96,550 86,304 81,312
Operating income 30,411 27,927 23,653 11,923 20,231
Income before income taxes 30,797 27,595 22,774 11,249 18,593
Net income 20,013 17,447 14,831 6,355 12,085
Basic earnings per share 1.23 1.08 0.92 0.40 0.83
Diluted earnings per share 1.20 1.05 0.91 0.39 0.81
OTHER FINANCIAL DATA
Total assets 206,625 188,899 184,342 171,566 146,325
Working capital 55,437 41,921 35,309 31,164 24,949
Net plant investment 65,595 63,187 60,352 56,072 48,529
Capital expenditures 11,028 12,143 11,695 11,860 7,589
Long-term debt 2,893 3,422 8,761 15,437 4,779
Stockholders' equity 140,171 119,518 104,574 90,301 81,890
RATIOS
Gross profit to net sales 44.3% 43.0% 43.8% 43.4% 43.4%
Operating income to net sales 12.4% 11.5% 10.7% 6.0% 10.8%
Net income to net sales 8.2% 7.2% 6.7% 3.2% 6.4%
Effective income tax rate 35.0% 36.8% 34.9% 43.5% 35.0%
Net income to average stockholders' equity 15.4% 15.6% 15.2% 7.4% 19.3%
Ratio of current assets to current liabilities 2.0:1 1.7:1 1.6:1 1.5:1 1.5:1
Ratio of long-term debt to stockholders' equity
plus long-term debt 2.0% 2.8% 7.7% 14.7% 5.5%
(1) Included in the 1998 results are an unusual charge for inventory write-down
reducing gross profit by $2,245 and reorganization and other unusual charges of
$7,439, reducing operating income by $9,684 and net income by $6,937 (net of
income taxes of $2,747), or $0.43 per share.
35