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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998 Commission file number 000-21109
CUNO INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 06-1159240
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Research Parkway, Meriden, Connecticut 06450
(Address of principal executive offices) (Zip Code)
(203) 237-5541
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, .001 Par Value -- 16,159,777 shares as of April 30 , 1998.
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CUNO INCORPORATED
Page
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income -- Three months ended April 30, 1998 and 1997 1
Consolidated Statements of Income - Six months ended April 30, 1998 and 1997 2
Consolidated Balance Sheets -- April 30, 1998 and October 31, 1997 3
Consolidated Statements of Cash Flows -- Six months ended April 30, 1998 and 1997 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
THREE MONTHS ENDED
APRIL 30,
1998 1997
-------- --------
Net sales $ 51,311 $ 46,383
Less costs and expenses:
Cost of products sold 28,441 26,061
Selling, general and administrative expenses 13,847 11,977
Research, development and engineering 2,700 2,805
-------- --------
44,988 40,843
-------- --------
Operating income 6,323 5,540
Nonoperating income (expense):
Interest income 40 30
Interest expense (309) (554)
Exchange (losses) gains (14) 48
Other 158 (3)
-------- --------
(125) (479)
-------- --------
Income before income taxes 6,198 5,061
Provision for income taxes 2,169 1,771
-------- --------
Net income $ 4,029 $ 3,290
======== ========
Basic earnings per common share $ 0.25 $ 0.24
Diluted earnings per common share $ 0.25 $ 0.24
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
SIX MONTHS ENDED
APRIL 30,
1998 1997
-------- --------
Net sales $ 95,331 $ 91,222
Less costs and expenses:
Cost of products sold 53,498 51,699
Selling, general and administrative expenses 26,193 24,600
Research, development and engineering 5,515 5,456
-------- --------
85,206 81,755
-------- --------
Operating income 10,125 9,467
Nonoperating income (expense):
Interest income 73 66
Interest expense (522) (1,145)
Exchange gains 80 22
Other 337 (45)
-------- --------
(32) (1,102)
-------- --------
Income before income taxes 10,093 8,365
Provision for income taxes 3,531 3,010
-------- --------
Net income $ 6,562 $ 5,355
======== ========
Basic earnings per common share $ 0.41 $ 0.39
Diluted earnings per common share $ 0.41 $ 0.39
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
APRIL 30, OCTOBER 31,
1998 1997
--------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 5,580 $ 3,416
Accounts receivable (less allowances for
doubtful accounts of $1,280 and $1,420, respectively) 43,778 43,105
Inventories 24,480 22,047
Deferred income taxes 5,544 5,328
Prepaid expenses and other current assets 3,327 2,542
--------- ---------
Total current assets 82,709 76,438
Noncurrent assets
Deferred income taxes 1,661 1,612
Intangible assets, net 22,364 17,923
Pension assets 1,202 1,239
Other noncurrent assets 1,519 584
Property, plant and equipment, net 51,558 48,529
--------- ---------
Total assets $ 161,013 $ 146,325
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 15,606 $ 16,998
Accounts payable 15,678 14,647
Accrued payroll and related taxes 7,220 9,801
Other accrued expenses 5,418 5,527
Accrued income taxes 2,002 2,943
Current portion of long-term debt 1,171 1,573
--------- ---------
Total current liabilities 47,095 51,489
Noncurrent liabilities
Long-term debt, less current portion 16,181 4,779
Deferred income taxes 4,083 3,990
Retirement benefits 4,347 4,177
--------- ---------
Total noncurrent liabilities 24,611 12,946
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,
16,159,777 and 16,003,694 shares issued and outstanding
(excluding 4,328 and 3,377 shares in treasury) 16 16
Additional paid-in-capital 38,538 35,741
Retained earnings 52,283 45,721
Unearned compensation (3,267) (2,646)
Minimum pension liability (1,189) (1,228)
Foreign currency translation adjustments 2,926 4,286
--------- ---------
Total stockholders' equity 89,307 81,890
--------- ---------
Total liabilities and stockholders' equity $ 161,013 $ 146,325
========= =========
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED
APRIL 30,
1998 1997
-------- --------
OPERATING ACTIVITIES
Net income $ 6,562 $ 5,355
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 3,700 3,560
(Gain) loss on sale of property, plant and equipment (330) 6
Compensation recognized under employee stock plans 1,231 658
Pension costs in excess of funding 191 582
Deferred income taxes (376) (662)
Changes in operating assets and liabilities:
Accounts receivable (1,090) (3,291)
Inventories (1,223) (2,961)
Prepaid expenses and other current assets (1,596) (180)
Payables to related party -- (7,020)
Accounts payable and accrued expenses (1,227) 2,250
Accrued income taxes (975) 1,123
-------- --------
Net cash provided by (used for) operating activities 4,867 (580)
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 618 85
Acquisition of companies, net of cash acquired (9,530) --
Capital expenditures (4,656) (2,623)
-------- --------
Net cash used for investing activities (13,568) (2,538)
FINANCING ACTIVITIES
Proceeds from long-term debt 12,792 9,000
Principal payments on long-term debt (1,674) (32,434)
Net borrowings under bank loan agreements (141) 4,319
Proceeds from issuance of common stock -- 26,100
Proceeds from stock options exercised -- 20
Dividends paid to related party -- (4,515)
-------- --------
Net cash provided by financing activities 10,977 2,490
Effect of exchange rate changes on cash and cash equivalents (112) (21)
-------- --------
Net change in cash and cash equivalents 2,164 (649)
Cash and cash equivalents -- beginning of period 3,416 5,244
-------- --------
Cash and cash equivalents -- end of period $ 5,580 $ 4,595
======== ========
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1998
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The Company 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 generally accepted accounting
principles 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 generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended April
30, 1998 are not necessarily indicative of the results that may be
expected for the year ending October 31, 1998. For further information,
refer to the consolidated financial statements and footnotes thereto
included in CUNO Incorporated's Form 10-K for the year ended October
31, 1997.
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
NOTE 2 - EARNINGS PER SHARE DATA
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. All
earnings per share amounts for all periods have been presented, and
where necessary restated, to conform with the Statement 128
requirements.
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended:
APRIL 30, April 30,
1998 1997
NUMERATOR:
Net Income $ 4,029,000 $ 3,290,000
============ ============
DENOMINATOR:
Weighted average shares outstanding 16,151,105 13,850,347
Issued but unearned performance shares (188,191) (205,846)
Issued but unearned restricted shares (52,123) (20,034)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 15,910,791 13,624,467
============ ============
Weighted average shares outstanding 16,151,105 13,850,347
Effect of dilutive employee stock options 123,004 32,735
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,274,109 13,883,082
============ ============
Basic earnings per share $ 0.25 $ 0.24
Diluted earnings per share $ 0.25 $ 0.24
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The following table sets forth the computation of basic and diluted
earnings per share for the six months ended:
APRIL 30, April 30,
1998 1997
NUMERATOR:
Net Income $ 6,562,000 $ 5,355,000
============ ============
DENOMINATOR:
Weighted average shares outstanding 16,104,161 13,829,978
Issued but unearned performance shares (184,173) (210,673)
Issued but unearned restricted shares (39,352) (27,308)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 15,880,636 13,591,997
============ ============
Weighted average shares outstanding 16,104,161 13,829,978
Effect of dilutive employee stock options 91,080 41,572
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,195,241 13,871,550
============ ============
Basic earnings per share $ 0.41 $ 0.39
Diluted earnings per share $ 0.41 $ 0.39
NOTE 3 - INVENTORIES
Inventories consist of the following:
APRIL 30, OCTOBER 31,
1998 1997
----------- -----------
Raw materials $ 8,985 $ 8,167
Work-in-process 5,160 3,661
Finished goods 10,335 10,219
------- -------
$24,480 $22,047
======= =======
Inventories are stated at the lower of cost or market. Inventories in
the United States are primarily valued on the last-in, first-out (LIFO)
cost method. The method used for all other inventories is first-in,
first-out (FIFO). An actual valuation of inventory under the LIFO
method can be made only at the end of each year based on the inventory
levels and costs at that time. Accordingly, interim LIFO calculations
must necessarily be based on management's estimates of expected
year-end inventory levels and costs. Because these are subject to many
factors beyond management's control, interim results are subject to the
final year-end LIFO inventory valuation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED APRIL 30, 1998 VS THREE MONTH PERIOD ENDED APRIL 30,
1997
NET SALES
The Company had net sales of $51.3 million in the second quarter of
fiscal 1998 representing a 10.6 percent increase over 1997's second quarter
sales of $46.4 million. The strengthening U.S. dollar had a significant
unfavorable effect on overseas results when translated from local currency into
U.S. dollars. Had currency values been unchanged from the second quarter of
fiscal 1997, net sales for the second quarter of fiscal 1998 would have been
$2.1 million higher, or 15.1 percent greater overall than the comparable period
in fiscal 1997.
Sales from U.S. operations increased $4.4 million or 19.0 percent.
Sales from overseas operations increased $0.5 million or 2.2 percent, but
increased 11.1 percent when compared in constant valued U.S. dollars. Local
currency sales in Europe increased 18.5 percent while in Japan, reflecting a
weaker overall economy, sales increased 7.6 percent. Other geographic markets
increased sales at double digit rates with the exception of Asia. The continuing
sagging economies and weak currencies in the Asian region have stymied growth
and reduced sales as compared to the same period in the prior year.
GROSS PROFIT
Gross profit as a percentage of net sales improved to 44.6 percent from
43.8 percent. This increase was significantly tempered by the strong U.S.
dollar, affecting the cost of products and components manufactured in the U.S.
and purchased by overseas affiliates. The Company has continued to focus on
improving its sales of higher margin products as well as focusing on
productivity gains and cost containment in its manufacturing plants. Due to
increased volume and the above mentioned margin improvement, gross profit
increased $2.5 million, or 12.5 percent, in the second quarter of 1998 over the
second quarter of 1997.
OPERATING EXPENSES
Operating expenses increased by $1.8 million in the second quarter of
1998 over the second quarter of 1997, representing an 11.9 percent increase.
Selling expenses have increased reflecting programs to expand the market
position of the Company. Additionally, noncash expense for employee stock plans
increased sharply in the quarter since the cost of these stock plans is directly
associated with the market value of the Company's stock. The Company's stock hit
an all time high during the second quarter of 1998.
OPERATING INCOME
As a result of the above, operating income increased $0.8 million, or
14.1 percent, to $6.3 million or 12.3 percent of sales in the second quarter of
1998 as compared to $5.5 million or 11.9 percent of sales in the second quarter
of 1997.
NONOPERATING ACTIVITY
Interest expense decreased to $0.3 million in the second quarter of
1998 from $0.6 million in the second quarter of fiscal 1997. The decrease in
interest expense primarily results from the decrease in debt associated with the
Company's public offering of common stock in May, 1997, offset by a modest
increase in debt associated with recent acquisitions -- see "Financial Position
and Liquidity" below. The proceeds of the public offering were used to retire
indebtedness and for working capital and general corporate purposes.
INCOME TAXES
The Company's effective income tax rate for both the second quarter of
1998 and 1997 was 35.0%. The mix of income attributed to various countries and
their taxing authorities in which the Company does business was comparable in
both quarters.
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SIX MONTH PERIOD ENDED APRIL 30, 1998 VS SIX MONTH PERIOD ENDED APRIL 30, 1997
NET SALES
The Company had net sales of $95.3 million in the first six months of
fiscal 1998 representing a 4.5 percent increase over 1997's sales of $91.2
million. The strengthening U.S. dollar had a significant unfavorable effect on
overseas results when translated from local currency into U.S. dollars. Had
currency values been unchanged from the first six months of fiscal 1997, net
sales for the first six months of fiscal 1998 would have been $5.1 million
higher, or 10.1 percent greater overall than the same period in fiscal 1997.
Sales from U.S. operations increased $4.2 million or 9.2%. Sales from
overseas operations were down $0.1 million or 0.2 percent, but increased 10.9
percent when compared in constant valued U.S. dollars. Local currency sales in
Europe increased 19.5 percent and in Japan 6.4 percent. Sales in other
geographic areas were adversely impacted by currency and/or economic factors in
Southeast Asia.
GROSS PROFIT
Gross profit as a percentage of net sales improved to 43.9 percent from
43.3 percent. The strength of the U.S. dollar has increased the cost of products
manufactured in the U.S. and purchased overseas, however this has been
substantially offset by an improvement in the mix of products sold and cost
management in the Company's factories. Due to increased volume and the above
mentioned margin improvement, gross profit increased $2.3 million, or 5.8
percent, in the first six months of 1998 over the first six months of 1997.
OPERATING EXPENSES
Operating expenses increased $1.7 million in the first six months of
1998 over the first six months of 1997, representing a 5.5 percent increase.
Selling expenses have increased reflecting programs to expand the market
position of the Company. Additionally, the increase reflects greater noncash
expense associated with the Company's employee stock plans. The cost of these
plans is directly related to the market value of the Company's common stock
which achieved an all time high in the second quarter of 1998.
OPERATING INCOME
As a result of the above, operating income increased $0.7 million or
7.0 percent to $10.1 million or 10.6 percent of sales in the first six months of
1998 as compared to $9.5 million or 10.4 percent of sales in the first six
months of 1997.
NONOPERATING ACTIVITY
Interest expense decreased to $0.5 million in the first six months of
1998 from $1.1 million in the first six months of fiscal 1997. The decrease in
interest expense primarily results from the decrease in debt associated with the
Company's public offering of common stock in May, 1997, offset by a modest
increase in debt associated with recent acquisitions -- see "Financial Position
and Liquidity" below. The proceeds of the public offering were used to retire
indebtedness and for working capital and general corporate purposes. During the
first quarter of 1998, the Company sold a tract of land in Australia, which was
unrelated to the business, for $0.4 million resulting in a gain of $0.3 million.
INCOME TAXES
The Company's effective income tax rate for the first six months of
1998 was 35.0% as compared to 36.0% during the first six months of 1997. The
decrease reflects a minor change in the mix of income attributed to various
countries and their taxing authorities in which the Company does business.
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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 in the
management of liquidity are cash flows generated from operating activities,
capital expenditure levels and adequate bank financing alternatives.
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 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 funds
SIX MONTHS ENDED
APRIL 30,
1998 1997
-------- --------
OPERATING ACTIVITIES:
Net cash provided by net income plus depreciation,
amortization and noncash compensation $ 11,493 $ 9,573
Payables to related party (former parent) -- (7,020)
INVESTING ACTIVITIES:
Capital expenditures (4,656) (2,623)
Acquisition of companies, net of cash acquired (9,530) --
FINANCING ACTIVITIES:
Net change in total debt 10,977 (19,115)
Proceeds from issuance of common stock -- 26,100
Dividends paid to related party -- (4,515)
The net cash provided by net income plus depreciation, amortization and
noncash compensation is an important measurement of cash generated from the
earnings process before significant noncash charges. The increase in net income
plus depreciation, amortization and noncash compensation of $1.9 million, or
20.1 percent, reflects the Company's increased sales, gross profit margin, and
general profitability. No payments were made to the Company's former parent in
the first six months of 1998 as no significant level of services have been
provided subsequent to October 31, 1997.
Capital expenditures amounted to $4.7 million for the six months ended
April 30, 1998. The increase over the prior period reflects the Company's
continued expansion and improvement of its manufacturing capabilities.
During the second quarter of fiscal 1998, the Company completed an
acquisition of Chemical Engineering Corporation, a leading manufacturer of water
treatment equipment and related systems, for a purchase price of $8.4 million in
cash (acquired assets included cash of $1.1 million). The stock purchase
agreement also provides for future contingent consideration payable over a two
year period and is dependent upon future sales levels and other performance
criteria. Any future payments will be recorded as goodwill and are not expected
to have a material impact on operating results. During the first quarter of
fiscal 1998, the Company completed two overseas acquisitions -- a distribution
business and a product line which were comprised primarily of working capital --
for an aggregate purchase price of $2.2 million. These acquisitions have been
accounted for as purchases and, accordingly, the results of their operations are
included in the Company's consolidated statements of operations from the date of
acquisition. These acquisitions did not materially affect the financial
statements of the Company in 1998 nor would they have materially affected the
financial statements of prior periods had the results of their operations been
included in those financial statements.
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During the first six months of 1997, the Company completed an offering
of two million shares of its common stock which, as of April 30, 1997, generated
net cash proceeds to the Company of $26.1 million. The proceeds were used to pay
down long term debt associated with the Company's revolving credit facility.
During the comparable period in 1998, the Company increased its total
outstanding debt, on a net basis, $11.0 million. This debt increase was used in
part to finance the aforementioned acquisitions and capital expenditures.
OTHER MATTERS
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statements (SFAS No.
130 and 131) related to reporting comprehensive income and segment disclosures.
The Company plans to adopt these statements upon their applicable effective
dates in fiscal 1999.
COMPLIANCE WITH YEAR 2000
Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications to be Year 2000 compliant. The
Company expects to incur internal staff costs as well as other expenses related
to infrastructure and facilities enhancements necessary to prepare all of its
systems for the Year 2000. The Company expects to both replace some systems and
upgrade others. Maintenance or modification costs will be expensed as incurred.
The costs of new leased software will be expensed over the term of the lease.
The total cost of this effort is still being evaluated, but is not expected to
be material to the Company. This effort will give the Company the added benefit
of new technology and better functionality for many of its operational and
administrative systems.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Corporation held its annual meeting of Stockholders on March 26,
1998.
(b) The following individuals were nominated and elected to serve a term of
three years as Directors:
Mr. Norbert A. Florek
Mr. Mark G. Kachur
Mr. Gerald C. McDonough
(c) The stockholders voted on the following matters:
1. Election of Directors -- the voting results for each nominee,
all of whom were reelected, are:
Name Votes For Votes Withheld Not Voted
---- --------- -------------- ---------
Mr. Norbert A. Florek 13,896,751 115,856 2,116,418
Mr. Mark G. Kachur 13,897,735 114,872 2,116,418
Mr. Gerald C. McDonough 13,766,137 246,470 2,116,418
2. A proposal for the appointment of Ernst & Young LLP as
independent auditors was approved by a count of 13,893,255
votes for, 86,871 votes against, 32,481 votes abstaining, and
2,116,418 shares not voted.
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report.
Exhibit 27. Financial Data Schedule (submitted electronically herewith)
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter for which this 10-Q is
filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUNO INCORPORATED
Date May 29, 1998 By /s/ Ronald C. Drabik
-------------------------- ---------------------------
Ronald C. Drabik
Senior Vice President and
Chief Financial Officer
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