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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 JANUARY 31, 1999 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 -- 16,164,745 shares as of January 31, 1999.
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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 January 31, 1999 and 1998 1
Consolidated Balance Sheets - January 31, 1999 and October 31, 1998 2
Consolidated Statements of Cash Flows - Three months ended January 31, 1999 and 1998 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 6
Part II. Other Information 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
JANUARY 31,
1999 1998
------------ ------------
Net sales $ 50,626 $ 44,020
Less costs and expenses:
Cost of products sold 30,760 25,057
Selling, general and administrative expenses 14,320 12,346
Research, development and engineering 2,852 2,815
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47,932 40,218
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Operating income 2,694 3,802
Nonoperating income (expense):
Interest expense (358) (213)
Other income, net 169 306
------------ ------------
(189) 93
------------ ------------
Income before income taxes 2,505 3,895
Provision for income taxes 917 1,362
------------ ------------
Net income $ 1,588 $ 2,533
============ ============
Basic earnings per common share $ 0.10 $ 0.16
Diluted earnings per common share $ 0.10 $ 0.16
Basic shares outstanding 16,034,555 15,850,480
Diluted shares outstanding 16,199,556 16,109,631
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
JANUARY 31, OCTOBER 31,
1999 1998
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 3,041 $ 4,433
Accounts receivable, less allowances for
doubtful accounts of $1,017 and $1,179, respectively 42,176 45,963
Inventories 25,876 27,646
Deferred income taxes 6,843 7,420
Prepaid expenses and other current assets 3,283 2,550
--------- ---------
Total current assets 81,219 88,012
Noncurrent assets
Deferred income taxes 2,016 2,016
Intangible assets, net 22,043 22,715
Pension intangible asset 615 467
Other noncurrent assets 2,087 2,284
Property, plant and equipment, net 56,783 56,072
--------- ---------
Total assets $ 164,763 $ 171,566
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 17,429 $ 16,955
Accounts payable 15,034 15,655
Accrued payroll and related taxes 7,113 8,476
Other accrued expenses 7,618 9,032
Accrued income taxes -- 293
Current portion of long-term debt 3,229 6,437
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Total current liabilities 50,423 56,848
Noncurrent liabilities
Long-term debt, less current portion 14,838 15,437
Deferred income taxes 3,679 3,671
Retirement benefits 5,817 5,309
--------- ---------
Total noncurrent liabilities 24,334 24,417
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,
16,164,745 and 16,162,661 shares issued and outstanding
(excluding 4,328 and 4,328 shares in treasury) 16 16
Additional paid-in-capital 37,801 37,780
Unearned compensation (2,429) (2,742)
Accumulated other comprehensive income 954 3,171
Retained earnings 53,664 52,076
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Total stockholders' equity 90,006 90,301
--------- ---------
Total liabilities and stockholders' equity $ 164,763 $ 171,566
========= =========
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED
JANUARY 31,
1999 1998
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OPERATING ACTIVITIES
Net income $ 1,588 $ 2,533
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,054 1,822
Noncash compensation recognized under employee stock plans 240 452
Gain on sale of property, plant and equipment (1) (303)
Pension costs in excess of funding 427 321
Deferred income taxes 520 229
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 2,660 121
Inventories 792 (872)
Prepaid expenses and other current assets (561) (1,086)
Accounts payable and accrued expenses (2,485) (3,274)
Accrued income taxes (510) 302
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Net cash provided by operating activities 4,724 245
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment -- 481
Acquisition of companies, net of cash acquired -- (2,209)
Capital expenditures (3,085) (1,777)
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Net cash used for investing activities (3,085) (3,505)
FINANCING ACTIVITIES
Proceeds from long-term debt 1,600 3,892
Principal payments on long-term debt (5,347) (754)
Net borrowings under bank loans 658 1,078
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Net cash (used for) provided by financing activities (3,089) 4,216
Effect of exchange rate changes on cash and cash equivalents 58 (164)
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Net change in cash and cash equivalents (1,392) 792
Cash and cash equivalents -- beginning of period 4,433 3,416
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Cash and cash equivalents -- end of period $ 3,041 $ 4,208
======= =======
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
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 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 three-month period
ended January 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending October 31, 1999. 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, 1998.
In connection with the adoption of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", certain reclassifications
have been made to the prior year amounts to conform with the current
presentation.
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,
1999 1998
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NUMERATOR:
Net income $ 1,588,000 $ 2,533,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,168,961 16,057,216
Issued but unearned performance shares (91,553) (180,155)
Issued but unearned restricted shares (42,853) (26,581)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,034,555 15,850,480
============ ============
Weighted average shares outstanding 16,168,961 16,057,216
Effect of dilutive employee stock options 30,595 52,415
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,199,556 16,109,631
============ ============
Basic earnings per share $ 0.10 $ 0.16
Diluted earnings per share $ 0.10 $ 0.16
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NOTE 3 - INVENTORIES
Inventories consist of the following:
JANUARY 31, OCTOBER 31,
1999 1998
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Raw materials $ 9,809 11,139
Work-in-process 3,152 3,703
Finished goods 12,915 12,804
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$25,876 $27,646
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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).
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 - NEW ACCOUNTING STANDARD
The Company has adopted Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" effective November 1, 1998. This Statement
requires that all components of comprehensive income and total comprehensive
income be reported and that changes be shown in a financial statement displayed
with the same prominence as other financial statements. The Company has elected
to disclose this information in its Statement of Stockholders' Equity. Total
comprehensive income (loss) was comprised of the following (in thousands of
dollars):
THREE MONTHS ENDED
JANUARY 31, JANUARY 31,
1999 1998
----------- -----------
Net income $ 1,588 $ 2,533
Foreign currency translation adjustments (2,217) (1,110)
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Total comprehensive (loss) income $ (629) $ 1,423
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NOTE 5 - OTHER INCOME, NET
Other income, net as reported in the accompanying Consolidated
Statements of Income consisted of the following (amounts in thousands):
THREE MONTHS ENDED
JANUARY 31, JANUARY 31,
1999 1998
----------- -----------
Interest income $ 45 $ 33
Exchange gains 213 94
Gain on sale of property, plant and equipment 1 303
Other expenses (90) (124)
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$ 169 $ 306
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED JANUARY 31, 1999 VS. THREE MONTH PERIOD ENDED JANUARY
31, 1998
NET SALES
The Company had net sales of $50.6 million in the first quarter of
fiscal 1999 representing a 15.0 percent increase over 1998's first quarter sales
of $44.0 million. Currency values had an immaterial effect on overseas net sales
(quarter over quarter) when translated from local currency into US dollars.
Sales from US operations increased $5.9 million or 26.6 percent led by
a strong performance in the Water Group. The Water Group's recently introduced
range of new appliance filters designed to target the OEM market, as well as the
purchase of Chemical Engineering Corporation, a manufacturer of water treatment
equipment in March 1998, are primarily responsible for the increase. Sales from
overseas operations increased $0.7 million or 3.1 percent. Local currency sales
in Europe, Australia and Brazil increased 4.6 percent, 16.9 percent and 12.0
percent, respectively. The continuing depressed economies in the Asian region
have reduced sales in Japan and Singapore as compared to the same period in the
prior year.
GROSS PROFIT
The Company's gross profit increased $0.9 million to $19.9 million in
the first quarter of 1999 from $19.0 million in the first quarter of 1998. Gross
profit as a percentage of net sales decreased to 39.2 percent from 43.1 percent.
This decrease is attributable to a higher mix of Water Group sales that
generally carry a lower gross margin than sales to either the healthcare or
fluid processing markets; start-up costs primarily associated with a new product
in the Water Group; and, higher manufacturing costs in the US membrane operation
associated with the introduction of new manufacturing processes. Additionally,
pricing pressure on certain products sold in Japan also contributed to the
decline in gross margin.
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OPERATING EXPENSES
Selling, general, and administrative expenses increased by $2.0 million
in the first quarter of 1999 over the fist quarter of 1998, representing a 16.0
percent increase. Approximately $1.0 million of the increase relates to normal
operating expenses attributed to companies acquired subsequent to the first
quarter of 1998, but prior to the first quarter of 1999. Results of operations
for acquired companies are included in the accompanying financial statements
from the date of acquisition. Research, development and engineering expenses
were relatively flat quarter over quarter.
OPERATING INCOME
As a result of the above, operating income decreased $1.1 million, or
29.1 percent, to $2.7 million or 5.3 percent of sales in the first quarter of
1999 as compared to $3.8 million or 8.6 percent of sales in the first quarter of
1998.
NONOPERATING ACTIVITY
Interest expense increased to $0.4 million in the first quarter of 1999
from $0.2 million in the first quarter of fiscal 1998. The increase in interest
expense primarily results from an increase in debt associated with acquisitions
and the expansion of the Company's manufacturing capabilities throughout fiscal
year 1998. As detailed in Note 5 to the condensed financial statements, other
income in the first quarter of 1998 benefited from the sale of a tract of land
in Australia, which was unrelated to the business, resulting in a gain of $0.3
million.
INCOME TAXES
The Company's effective income tax rate for the first quarter of 1999
was 36.6% compared to 35.0% in the first quarter of 1998. The increase reflects
a change in the mix of income attributed to various countries and their taxing
authorities 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 in 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 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.
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Set forth below is selected key cash flow data (in thousands of
dollars):
Source/(Use) of Cash
THREE MONTHS ENDED
JANUARY 31,
1999 1998
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OPERATING ACTIVITIES:
Net cash provided by net income plus depreciation,
amortization and non-cash compensation $ 3,882 $ 4,807
Accounts receivable 2,660 121
Inventories 792 (872)
Net cash provided by operating activities 4,724 245
INVESTING ACTIVITIES:
Capital expenditures (3,085) (1,777)
Acquisition of companies, net of cash acquired -- (2,209)
FINANCING ACTIVITIES:
Net change in total debt (3,089) 4,216
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. The decrease in net income
plus depreciation, amortization and non-cash compensation of $0.9 million
reflects the Company's reduced gross profit margin and increased selling,
general and administrative expenses as discussed previously above. Accounts
receivable were reduced $2.7 million during the first quarter of 1999 due
largely to a concentrated effort by management to improve collections worldwide.
Inventories were reduced $0.8 million in the first quarter of 1999 (vs. an
increase of $0.9 million in the first quarter of 1998) due to a reduction of
inventory in the Water Group which was built-up during the fourth quarter of
1998 to support the first quarter launch of new products.
Capital expenditures amounted to $3.1 million in the first quarter of
1999 which were primarily comprised of purchases of machinery and equipment.
During the first quarter of fiscal 1998, the Company completed two overseas
acquisitions -- a distribution business in Europe and a product line in
Australia 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.
Due largely to the Company's strong cash flows from operating
activities ($4.7 million) in the first quarter of 1999, the Company was able to
reduce its long-term debt, on a net basis, by $3.1 million.
OTHER MATTERS
BRAZILIAN REAL DEVALUATION
A significant devaluation in the Brazilian real took place late in the
Company's first quarter. The Company has a subsidiary located in Brazil which
accounted for approximately 7% of consolidated net sales in 1998. Although this
event had a minimal impact on this subsidiary's results of operations in the
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first quarter, any future effects on the business climate in the region are yet
to be determined. A significant portion of the products sold by the subsidiary
in Brazil are manufactured locally - this should help to minimize the impact of
the devaluation on future earnings. See "Market Risk Disclosures" below.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement requires that business
enterprises report in their footnotes certain revenue, expense, profit and asset
information by operating segment and other related disclosures. Operating
segments are components of an enterprise whose performance is regularly reviewed
by management. As required, the Company expects to adopt this standard in its
1999 fourth quarter reporting cycle.
In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits". This statement does not change the measurement or recognition of
pension and other postretirement benefit plans, but it does revise the
disclosure requirements. The adoption of this statement will have no impact on
the Company's consolidated results of operations, financial position or cash
flows. As required, the Company plans to adopt this statement in its 1999 fourth
quarter reporting cycle.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement requires all derivatives to be recorded on the balance sheet at fair
value and provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. The Company is studying
the application of this new statement. The adoption of this statement is not
expected to have a material impact on the consolidated results of operations,
financial position or cash flows. As required, the Company plans to adopt this
statement upon its applicable effective date in fiscal 2000.
COMPLIANCE WITH YEAR 2000
The Company has substantially completed its internal program to
remediate its Year 2000 requirements. It has completed the remediation of its
information technology systems and has made substantial progress in remediating
its non-information technology. All non-information technology remediation is
expected to be completed in the third quarter of 1999. The Company continues to
communicate with its suppliers, customers and other service providers to
determine the extent of the Company's exposure to the failure of third parties
to remediate their own Year 2000 needs.
The most likely worst case scenario would be that a failure by the
Company or one or more of its vendors or suppliers to adequately and timely
address the Year 2000 issue could interrupt manufacturing of the Company's
products for an indeterminable period of time. The Company is identifying
alternative vendors should a vendor's ability to meet the Company's raw material
and supply requirements be impacted by the Year 2000 issue. In conjunction with
this effort, the Company continuously monitors its action plans to address its
Year 2000 requirements, including contingencies to address unforeseen problems.
This is potentially a significant issue for most, if not all, companies, with
implications which can not be anticipated or predicted with any degree of
certainty.
The risk to CUNO resulting from the failure of the Company's own
information systems or third parties to attain Year 2000 readiness is similar to
other manufacturing firms and business enterprises. These risks include (1)
disruptions in information systems used for transaction processing, (2)
disruptions in factories and facilities used in the manufacturing process, (3)
disruptions in the supply of raw materials
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and other components from major vendors, and (4) disruptions in the shipment of
manufactured goods to major customers due to their Year 2000 noncompliance.
The Company is expensing software maintenance or modification costs as
incurred. The costs of new leased software is being expensed over the term of
the lease while items of a capital nature are being depreciated over their
estimated useful lives. For expenditures related to Year 2000 to date, the
Company has expensed approximately $50,000 in maintenance or modification costs
(excluding operating lease payments for new systems implemented as part of the
spin-off) and capitalized approximately $100,000. Based on information currently
available, the total remaining maintenance or modification costs are not
expected to be material, while future purchases of a capital nature are expected
to be approximately $300,000.
The costs of this project and its completion date are based on
management's best estimates, which were derived from numerous assumptions about
future events, including the availability of certain resources, third party
remediation plans, and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
plans.
EUROPEAN ECONOMIC AND MONETARY UNION
On January 1, 1999, the Euro became the official currency of the
European Economic and Monetary Union (the "Union"). Companies in the Union may
begin conducting their business operations in the new currency, however the
previous local currencies in those countries may continue to be used as legal
tender through January 1, 2002.
The Company has completed its plans and implemented its program to
accommodate the new currency. Software used by the Company at its European
facilities, as well as new software being implemented, is capable of handling
multi-currencies, including the Euro. As such, the Company is able to accept
customer or supplier orders in either the new Euro or the previous local
currency. The Company is addressing the Euro's impact on its operations (e.g.
banking, payroll processing, pricing, currency hedging requirements, etc.) The
estimated costs of required system modifications and other operational changes
are not expected to be material to the Company.
MARKET RISK DISCLOSURES
Other than the "Brazilian Real Devaluation" discussed previously above,
there have been no material changes in the information reported in the Company's
Form 10-K for the year ended October 31, 1998 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, 1998, could cause the Company's actual results or
performance to differ materially from those expressed herein. The Company
assumes no obligation to update the information contained in this quarterly
report.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report.
Exhibit 10 - Material Contracts
10.21 Termination and Change of Control Agreement - Frederick C.
Flynn, Jr. dated January 21, 1999
10.22 Ronald C. Drabik - Agreement and General Release
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 March 4, 1999
----------------------
By /s/ Frederick C. Flynn, Jr.
---------------------------
Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer,
Treasurer and Assistant Secretary
By /s/ Timothy B. Carney
---------------------------
Timothy B. Carney
Vice President, Controller,
and Assistant Secretary
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