UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2002
Commission file number 000-21109
CUNO INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 06-1159240
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Research Parkway, Meriden, Connecticut 06450
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(Address of principal executive offices) (Zip Code)
(203) 237-5541
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Registrant's telephone number, including area code
Not Applicable
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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 -- 16,436,857 shares as of January 31, 2002
CUNO INCORPORATED
Page
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Three months ended
January 31, 2002 and 2001 1
Consolidated Balance Sheets - January 31, 2002 and
October 31, 2001 2
Consolidated Statements of Cash Flows - Three months ended
January 31, 2002 and 2001 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
THREE MONTHS ENDED
JANUARY 31,
2002 2001
------------ ------------
Net sales $ 58,637 $ 58,586
Less costs and expenses:
Cost of products sold 32,467 33,524
Selling, general and administrative 15,888 15,435
Goodwill amortization -- 329
Research, development and engineering 3,425 3,263
------------ ------------
51,780 52,551
------------ ------------
Operating income 6,857 6,035
Nonoperating income (expense):
Interest expense (130) (148)
Interest and other income, net 171 111
------------ ------------
41 (37)
------------ ------------
Income before income taxes 6,898 5,998
Income taxes 2,379 2,170
------------ ------------
Net income $ 4,519 $ 3,828
============ ============
Basic earnings per common share $ 0.28 $ 0.24
Diluted earnings per common share $ 0.27 $ 0.23
Basic shares outstanding 16,350,394 16,274,086
Diluted shares outstanding 16,795,713 16,663,683
See accompanying notes.
-1-
CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
JANUARY 31, OCTOBER 31,
2002 2001
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 23,162 $ 25,628
Accounts receivable, less allowances for
doubtful accounts of $1,339 and $1,336, respectively 46,139 48,546
Inventories 23,663 24,590
Deferred income taxes 5,732 5,971
Prepaid expenses and other current assets 5,259 4,329
--------- ---------
Total current assets 103,955 109,064
Noncurrent assets
Deferred income taxes 1,642 2,300
Intangible assets, net 26,830 27,725
Prepaid pension costs 3,610 --
Other noncurrent assets 1,865 1,941
Property, plant and equipment, net 66,269 65,595
--------- ---------
Total assets $ 204,171 $ 206,625
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 11,524 $ 13,266
Accounts payable 17,029 16,606
Accrued payroll and related taxes 7,597 12,294
Other accrued expenses 7,522 7,265
Accrued income taxes 2,103 3,468
Current portion of long-term debt 697 728
--------- ---------
Total current liabilities 46,472 53,627
Noncurrent liabilities
Long-term debt, less current portion 2,745 2,893
Deferred income taxes 5,422 4,005
Retirement benefits 3,848 5,929
--------- ---------
Total noncurrent liabilities 12,015 12,827
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,
16,436,857 and 16,392,244 shares issued and outstanding 16 16
Treasury Stock, at cost (2,747 shares) (57) (57)
Additional paid-in-capital 44,202 42,602
Unearned compensation (1,010) (957)
Accumulated other comprehensive income (loss) --
Foreign currency translation adjustments (6,203) (5,224)
Minimum pension liability (308) (670)
Change in fair value of derivative financial instruments 158 94
--------- ---------
(6,353) (5,800)
Retained earnings 108,886 104,367
Total stockholders' equity 145,684 140,171
--------- ---------
Total liabilities and stockholders' equity $ 204,171 $ 206,625
========= =========
See accompanying notes.
-2-
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED
JANUARY 31,
2002 2001
-------- --------
OPERATING ACTIVITIES
Net income $ 4,519 $ 3,828
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,912 2,354
Noncash compensation recognized under employee stock plans 201 250
Gains on sales of property, plant and equipment (5) (39)
Pension costs (less than) in excess of funding (3,749) 236
Deferred income taxes 1,529 23
Changes in operating assets and liabilities:
Accounts receivable 588 1,744
Inventories 603 (552)
Prepaid expenses and other current assets (788) (192)
Accounts payable and accrued expenses (1,837) (3,039)
Accrued income taxes (1,478) 53
-------- --------
Net cash provided by operating activities 1,495 4,666
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 20 40
Capital expenditures (3,217) (2,424)
-------- --------
Net cash used for investing activities (3,197) (2,384)
FINANCING ACTIVITIES
Principal payments on long-term debt (188) (104)
Net (repayments) borrowings under short-term bank loans (760) 1,572
Proceeds from stock options exercised 141 46
-------- --------
Net cash (used for) provided by financing activities (807) 1,514
Effect of exchange rate changes on cash and cash equivalents 43 133
-------- --------
Net change in cash and cash equivalents (2,466) 3,929
Cash and cash equivalents -- beginning of period 25,628 13,814
-------- --------
Cash and cash equivalents -- end of period $ 23,162 $ 17,743
======== ========
See accompanying notes.
-3-
CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2002
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, 2001.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended:
JANUARY 31, JANUARY 31,
2002 2001
------------ ------------
NUMERATOR:
Net income $ 4,519,000 $ 3,828,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,393,840 16,326,565
Issued but unearned performance shares -- (1,219)
Issued but unearned restricted shares (43,446) (51,260)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,350,394 16,274,086
============ ============
Weighted average shares outstanding 16,393,840 16,326,565
Effect of dilutive employee stock options 401,873 337,118
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,795,713 16,663,683
============ ============
Basic earnings per share $ 0.28 $ 0.24
Diluted earnings per share $ 0.27 $ 0.23
4
NOTE 3 - INVENTORIES
Inventories consist of the following (amounts in thousands):
JANUARY 31, OCTOBER 31,
2002 2001
----------- -----------
Raw materials $ 9,768 $10,692
Work-in-process 2,951 2,868
Finished goods 10,944 11,030
------- -------
$23,663 $24,590
======= =======
Inventories are stated at the lower of cost or market. Inventories in
the United States are primarily valued by the last-in, first-out (LIFO) cost
method. The primary method used for all other inventories is first-in, first-out
(FIFO). An actual valuation of inventory under the LIFO method can be made only
at the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many factors beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income was comprised of the following (amounts in
thousands):
THREE MONTHS ENDED
JANUARY 31,
2002 2001
------- -------
Net income $ 4,519 $ 3,828
Other comprehensive income (loss):
Change in minimum pension liability,
net of deferred income taxes of $195 362
Change in fair value of derivative
financial instruments, net of deferred
income taxes of $52 97 --
Gains related to derivative financial
instruments reclassified into earnings
from other comprehensive income, net
of $18 tax benefit (33)
Foreign currency translation adjustments (979) 1,105
------- -------
Total comprehensive income $ 3,966 $ 4,933
======= =======
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.
5
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
JANUARY 31,
2002 2001
-------- --------
NET SALES:
Europe $ 10,831 $ 7,952
Japan 6,922 9,444
Asia/Pacific 6,243 6,237
Latin America 3,264 3,163
-------- --------
Subtotal - Foreign Sales 27,260 26,796
North America 39,107 38,121
Intercompany sales (7,730) (6,331)
-------- --------
$ 58,637 $ 58,586
======== ========
THREE MONTHS ENDED
JANUARY 31,
2002 2001
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OPERATING INCOME:
North America $ 4,397 $ 3,404
Europe 527 302
Japan 406 881
Asia/Pacific 906 934
Latin America 621 514
------- -------
Segment total 6,857 6,035
------- -------
Interest expense (130) (148)
Other, net 171 111
------- -------
Income before income taxes $ 6,898 $ 5,998
======= =======
Interest expense and other income (expense) have not been allocated to segments.
6
NOTE 6 - INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net consisted of the following
(amounts in thousands):
THREE MONTHS ENDED
JANUARY 31,
2002 2001
----- -----
Interest income $ 198 $ 208
Exchange gains (losses) 47 (75)
Gains on sales of property,
plant, and equipment 5 39
Other, net (79) (61)
----- -----
$ 171 $ 111
===== =====
NOTE 7 - NEWLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets. Under the new statement, goodwill (and other intangible
assets deemed to have indefinite lives) is no longer amortized but is subject to
annual impairment tests. Other intangible assets continue to be amortized over
their useful lives.
The Company began applying the new rules on accounting for existing
goodwill and other intangible assets beginning November 1, 2001 (first quarter
of fiscal 2002). The following compares reported results for the three months
ended January 31, 2001 to adjusted results as if the new statement was adopted
effective November 1, 2000 (in thousands, except share amounts):
REPORTED ADJUSTED
2001 2001
---- ----
Income before income taxes $ 5,998 $ 6,327
Net income $ 3,828 $ 4,143
Basic earnings per share $ 0.24 $ 0.25
Diluted earnings per share $ 0.23 $ 0.25
A reconciliation of reported net income to adjusted net income for the
three months ended January 31, 2001 (amounts in thousands) follows:
Reported net income $ 3,828
Goodwill amortization 329
Tax effect of deductible goodwill (14)
-------
Adjusted net income $ 4,143
=======
The net carrying amount of goodwill as of January 31, 2001 is $26.2
million.
7
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED JANUARY 31, 2002 VS. THREE MONTH PERIOD ENDED JANUARY
31, 2001
NET SALES
The Company had net sales of $58.6 million in the first quarter of
fiscal 2002 - essentially flat over 2001's first quarter sales of $58.6 million.
Had currency values been unchanged from the first quarter of 2001, net sales in
the first quarter of 2002 would have been $2.2 million higher, or 3.8 percent
greater overall.
The following table displays the Company's sales by geographic segment
(amounts in thousands):
THREE MONTHS ENDED CURRENCY
JANUARY 31, PERCENT ADJUSTED
2002 2001 CHANGE CHANGE
---- ---- ------ ------
North America $34,179 $32,915 3.8% 3.8%
Europe 8,661 7,625 13.6% 16.1%
Japan 6,847 9,338 (26.7%) (16.9%)
Asia/Pacific 5,741 5,659 1.4% 6.7%
Latin America 3,209 3,049 5.2% 30.3%
------- ------- ---- ----
Total sales $58,637 $58,586 0.1% 3.8%
======= ======= ==== ====
North American sales increased 3.8 percent in the first quarter of 2002
as compared to the same quarter in 2001. Strong Healthcare and Potable Water
market sales were responsible for all of the growth in North America during this
time period. Sales in Europe increased 13.6 percent as compared to the same
period in 2001, and were up 16.1 percent when expressed in local currency and
was spread broadly across all markets. Sales in Japan were down 26.7 percent as
compared to the same quarter last year, and were 16.9 percent lower when
expressed in local currency. The deteriorating economy in Japan is largely
responsible for the softening sales demand. Asia/Pacific sales were relatively
flat quarter over quarter, however sales increased 6.7 percent excluding changes
in currency values. The majority of the increase in Asia/Pacific is due to
strong sales growth in Potable Water throughout the region. First quarter 2002
Latin American sales increased 5.2 percent as compared to the same period in
2001, but were up 30.3 percent when expressed in local currency. The large
increase in local currency sales was supported by increased penetration of all
markets.
8
The following table displays the Company's sales by market (amounts in
thousands):
THREE MONTHS ENDED CURRENCY
JANUARY 31, PERCENT ADJUSTED
2002 2001 CHANGE CHANGE
---- ---- ------ ------
Potable Water $27,120 $25,198 7.6% 9.1%
Fluid Processing 15,149 18,807 (19.5%) (14.7%)
Healthcare 16,368 14,581 12.3% 18.4%
------- ------- ---- ----
Total sales $58,637 $58,586 0.1% 3.8%
======= ======= ==== ====
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 27.1 percent
in local currency) and steady sales growth in North America (up 5.9 percent)
associated with OEM customers, direct marketing companies, and appliance
manufacturers. Healthcare sales increased both domestically and internationally
and 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 $1.1 million to $26.2 million in
the first quarter of 2002 from $25.1 million in the first quarter of 2001. Gross
profit as a percentage of net sales (gross margin) increased during that same
period from 42.8 percent in 2001 to 44.6 percent in 2002. The primary factor
that contributed to the improved gross margin in 2002 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) were relatively
flat (up 2.9%) reflecting the Company's focus on restraining discretionary
spending. As further described in footnote 7, the 2002 results benefited by the
elimination of goodwill amortization ($0.3 million in the first quarter of 2001)
required by the adoption of FASB 142. Expense categories within SG&A reflected
nominal increases or decreases consistent with the Company's cost-management
strategy.
Research, development and engineering expenses increased 5.0 percent to
$3.4 million in the first quarter of 2002, 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 5.8 percent of sales
in the first quarter of fiscal 2002 compared to 5.6 percent of sales in the
first quarter of fiscal 2001.
OPERATING INCOME
As a result of the above, operating income increased $0.8 million, or
13.6 percent, to $6.9 million or 11.7 percent of sales in the first quarter of
fiscal 2002 compared to $6.0 million or 10.3 percent of sales in the first
quarter of 2001.
9
NON-OPERATING ACTIVITY
Both interest income and interest expense were relatively flat in the
first quarter of 2002 compared to the first quarter of 2001. See "Financial
Position and Liquidity" below for further discussion of the Company's cash and
debt structure. As disclosed in Note 6 to the condensed consolidated financial
statements, other income (expenses) was relatively minor in both periods as no
material activity occurred in either of the two periods.
INCOME TAXES
The Company's effective income tax rate for the first quarter of 2002
was 34.5 percent compared to 36.2 percent in the first quarter of 2001. The
decrease primarily reflects the recognition of certain tax planning initiatives,
permanent tax benefits associated with the adoption of FASB 142 (see footnote
7), 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 THREE MONTHS ENDED
JANUARY 31,
2002 2001
---- ----
OPERATING ACTIVITIES:
Net cash provided by net income plus
depreciation,
amortization and non-cash compensation $ 6,632 $ 6,432
Pension costs (less than) in excess of funding (3,749) 236
Accrued income taxes (1,478) 53
Net cash provided by operating activities 1,495 4,666
INVESTING ACTIVITIES:
Capital expenditures (3,217) (2,424)
FINANCING ACTIVITIES:
Net change in total debt (948) 1,468
The net cash provided by net income plus depreciation, amortization and
non-cash compensation is an important measurement of cash generated from the
earnings process. Net income plus depreciation, amortization and non-cash
compensation of $6.6 million increased 3.1 percent in the first three months of
2002 as compared to the same period in 2001 reflecting the Company's increased
gross profit, improved operating profit margin, and improved tax rate. The
Company made an incremental $4.0 million contribution to its US pension plans in
the first quarter of 2002 in order to bolster the funding and
10
earnings capabilities of the Plans. The use of cash of $1.5 million related to
accrued income taxes payable relates to increased profitability of the Company
and the timing of Federal income taxes paid in the US.
The increased rate of capital expenditures in 2002 primarily relates to
the continued focus on expanding and modernizing manufacturing facilities around
the globe.
OTHER MATTERS
ARGENTINE PESO DEVALUATION
A significant devaluation in the Argentine peso took place in the
Company's first quarter of 2002. The Company has a branch located in Argentina
that accounted for less than 1% of consolidated net sales in 2001. Because this
branch's operation is not material to the consolidated results, it has only a
minimal impact on the Company's overall results of operations. See "Market Risk
Disclosures" below.
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 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. 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, 2001 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.
11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report.
Exhibit 10 - Material Contracts
10.26 Employment Agreement - Frederick C. Flynn, Jr.
10.27 Employment Agreement - Thomas J. Hamlin
(b) Reports on From 8-K
No reports were filed on Form 8-K during the quarter for which this 10-Q is
filed.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUNO INCORPORATED
Date February 19, 2002
-------------------------
By /s/ Frederick C. Flynn, Jr.
---------------------------
Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer, and
Assistant Secretary
By /s/ William J. DeFrances
---------------------------
William J. DeFrances
Treasurer, Assistant Controller,
and Assistant Secretary
13