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, 2002 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 -- 16,542,359 shares as of April 30, 2002
CUNO INCORPORATED
Page
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Three months ended April 30, 2002
and 2001 1
Consolidated Statements of Income - Six months ended April 30, 2002 and
2001 2
Consolidated Balance Sheets - April 30, 2002 and October 31, 2001 3
Consolidated Statements of Cash Flows - Six months ended April 30, 2002
and 2001 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
THREE MONTHS ENDED
APRIL 30,
2002 2001
------------- -------------
Net sales $ 63,116 $ 60,186
Less costs and expenses:
Cost of products sold 34,925 33,519
Selling, general and administrative 16,150 16,057
Goodwill amortization -- 329
Research, development and engineering 3,696 3,339
------------ ------------
54,771 53,244
------------ ------------
Operating income 8,345 6,942
Nonoperating income (expense):
Interest expense (111) (121)
Interest and other income, net 27 266
------------ ------------
(84) 145
------------ ------------
Income before income taxes 8,261 7,087
Income taxes 2,847 2,565
------------ ------------
Net income $ 5,414 $ 4,522
============ ============
Basic earnings per common share $ 0.33 $ 0.28
Diluted earnings per common share $ 0.32 $ 0.27
Basic shares outstanding 16,480,817 16,320,750
Diluted shares outstanding 16,962,435 16,688,637
See accompanying notes.
-1-
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
SIX MONTHS ENDED
APRIL 30,
2002 2001
------------ -------------
Net sales $ 121,753 $ 118,772
Less costs and expenses:
Cost of products sold 67,392 67,043
Selling, general and administrative expenses 32,038 31,492
Goodwill amortization -- 658
Research, development and engineering 7,121 6,602
------------ ------------
106,551 105,795
------------ ------------
Operating income 15,202 12,977
Nonoperating income (expense):
Interest expense (241) (269)
Interest and other income, net 198 377
------------ ------------
(43) 108
------------ ------------
Income before income taxes 15,159 13,085
Provision for income taxes 5,226 4,735
------------ ------------
Net income $ 9,933 $ 8,350
============ ============
Basic earnings per common share $ 0.61 $ 0.51
Diluted earnings per common share $ 0.59 $ 0.50
Basic shares outstanding 16,415,606 16,297,418
Diluted shares outstanding 16,852,399 16,670,836
See accompanying notes.
-2-
CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
APRIL 30, OCTOBER 31,
2002 2001
--------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 25,040 $ 25,628
Accounts receivable, less allowances for
doubtful accounts of $1,407 and $1,336, respectively 50,474 48,546
Inventories 24,534 24,590
Deferred income taxes 6,177 5,971
Prepaid expenses and other current assets 5,544 4,329
--------- ---------
Total current assets 111,769 109,064
Noncurrent assets
Deferred income taxes 1,698 2,300
Intangible assets, net 27,336 27,725
Prepaid pension costs 4,033 --
Other noncurrent assets 1,520 1,941
Property, plant and equipment, net 69,546 65,595
--------- ---------
Total assets $ 215,902 $ 206,625
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 11,516 $ 13,266
Accounts payable 18,017 16,606
Accrued payroll and related taxes 9,930 12,294
Other accrued expenses 8,571 7,265
Accrued income taxes 1,536 3,468
Current portion of long-term debt 713 728
--------- ---------
Total current liabilities 50,283 53,627
Noncurrent liabilities
Long-term debt, less current portion 2,000 2,893
Deferred income taxes 5,652 4,005
Retirement benefits 3,774 5,929
--------- ---------
Total noncurrent liabilities 11,426 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,
16,542,359 and 16,392,244 shares issued and outstanding 17 16
Treasury Stock, at cost (2,747 shares) (57) (57)
Additional paid-in-capital 46,039 42,602
Unearned compensation (857) (957)
Accumulated other comprehensive income (loss) --
Foreign currency translation adjustments (5,072) (5,224)
Minimum pension liability (308) (670)
Change in fair value of derivative financial instruments 131 94
--------- ---------
(5,249) (5,800)
Retained earnings 114,300 104,367
--------- ---------
Total stockholders' equity 154,193 140,171
--------- ---------
Total liabilities and stockholders' equity $ 215,902 $ 206,625
========= =========
See accompanying notes.
-3-
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED
APRIL 30,
2002 2001
---- ----
OPERATING ACTIVITIES
Net income $ 9,933 $ 8,350
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,913 4,489
Noncash compensation recognized under employee stock plans 402 463
Gains on sales of property, plant and equipment (15) (40)
Pension funding in excess of expense (4,373) (106)
Deferred income taxes 1,403 (173)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (2,732) 995
Inventories 5 (2,645)
Prepaid expenses and other current assets (655) (903)
Accounts payable and accrued expenses 1,716 1,985
Accrued income taxes (1,328) (974)
-------- --------
Net cash provided by operating activities 8,269 11,441
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 74 54
Acquisition of companies, net of cash acquired (503) (4,489)
Capital expenditures (7,645) (4,964)
-------- --------
Net cash used for investing activities (8,074) (9,399)
FINANCING ACTIVITIES
Principal payments on long-term debt (921) (845)
Net (repayments) borrowings under short-term bank loans (1,242) 363
Proceeds from stock options exercised 1,184 401
-------- --------
Net cash used for financing activities (979) (81)
Effect of exchange rate changes on cash and cash equivalents 196 (211)
-------- --------
Net change in cash and cash equivalents (588) 1,750
Cash and cash equivalents -- beginning of period 25,628 13,814
-------- --------
Cash and cash equivalents -- end of period $ 25,040 $ 15,564
======== ========
See accompanying notes.
-4-
CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 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. Our 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. 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. 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 our 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:
APRIL 30, APRIL 30,
2002 2001
---- ----
NUMERATOR:
Net income $ 5,414,000 $ 4,522,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,520,621 16,369,726
Issued but unearned performance shares -- (914)
Issued but unearned restricted shares (39,804) (48,062)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,480,817 16,320,750
============ ============
Weighted average shares outstanding 16,520,621 16,369,726
Effect of dilutive employee stock options 441,814 318,911
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,962,435 16,688,637
============ ============
Basic earnings per share $ 0.33 $ 0.28
Diluted earnings per share $ 0.32 $ 0.27
5
The following table sets forth the computation of basic and diluted
earnings per share for the six months ended:
APRIL 30, APRIL 30,
2002 2001
---- ----
NUMERATOR:
Net income $ 9,933,000 $ 8,350,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,457,231 16,348,146
Issued but unearned performance shares -- (1,067)
Issued but unearned restricted shares (41,625) (49,661)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,415,606 16,297,418
============ ============
Weighted average shares outstanding 16,457,231 16,348,146
Effect of dilutive employee stock options 395,168 322,690
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,852,399 16,670,836
============ ============
Basic earnings per share $ 0.61 $ 0.51
Diluted earnings per share $ 0.59 $ 0.50
During the first six months of fiscal 2002, 106,923 stock options were
exercised (net of shares used to pay individual taxes) providing $1,184,000 in
net cash proceeds to the Company.
NOTE 3 - INVENTORIES
Inventories consist of the following (amounts in thousands):
APRIL 30, OCTOBER 31,
2002 2001
------- -------
Raw materials $10,430 $10,692
Work-in-process 2,912 2,868
Finished goods 11,192 11,030
------- -------
$24,534 $24,590
======= =======
Inventories are stated at the lower of cost or market. Inventories in
the United States are valued primarily 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 our
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.
6
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income was comprised of the following (amounts in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 5,414 $ 4,522 $ 9,933 $ 8,350
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 $8, $64, $44, and $64 (15) 89 82 89
Gains related to derivative financial
instruments reclassified into earnings
from other comprehensive income, net
of $7 and $25 tax benefit (12) -- (45) --
Foreign currency translation adjustments 1,131 (1,894) 152 (789)
-------- -------- -------- --------
Total comprehensive income $ 6,518 $ 2,717 $ 10,484 $ 7,650
======== ======== ======== ========
NOTE 5 - SEGMENT DATA
For management reporting and control, the Company is divided into five
geographic operating segments as presented below. Each segment has general
operating autonomy over its markets.
Operating segment data includes the results of all subsidiaries,
consistent with the management reporting of these operations. Financial
information by geographic operating segments is summarized below (amounts in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2002 2001 2002 2001
---- ---- ---- ----
NET SALES:
Europe $ 12,106 $ 11,508 $ 22,937 $ 20,373
Japan 7,616 9,087 14,538 18,531
Asia/Pacific 6,919 6,462 13,162 12,699
Latin America 3,091 3,045 6,355 6,208
--------- --------- --------- ---------
Subtotal - Foreign Sales 29,732 30,102 56,992 57,811
North America 42,473 38,867 81,580 76,989
Intercompany sales (9,089) (8,783) (16,819) (16,028)
--------- --------- --------- ---------
$ 63,116 $ 60,186 $ 121,753 $ 118,772
========= ========= ========= =========
7
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2002 2001 2002 2001
---- ---- ---- ----
OPERATING INCOME:
North America $ 5,526 $ 4,061 $ 9,923 $ 7,467
Europe 774 622 1,301 923
Japan 646 842 1,052 1,723
Asia/Pacific 912 948 1,818 1,881
Latin America 487 469 1,108 983
-------- -------- -------- --------
Segment total 8,345 6,942 15,202 12,977
-------- -------- -------- --------
Interest expense (111) (121) (241) (269)
Other, net 27 266 198 377
-------- -------- -------- --------
Income before income taxes $ 8,261 $ 7,087 $ 15,159 $ 13,085
======== ======== ======== ========
Interest expense and other income (expense) have not been allocated to segments.
NOTE 6 - INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net consisted of the following
(amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2002 2001 2002 2001
---- ---- ---- ----
Interest income $ 133 $ 179 $ 331 $ 387
Exchange gains (losses) (88) 109 (41) 34
Gains on sales of property,
plant, and equipment 10 1 15 40
Other, net (28) (23) (107) (84)
----- ----- ----- -----
$ 27 $ 266 $ 198 $ 377
===== ===== ===== =====
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.
We began applying the new rules on accounting for existing goodwill and
other intangible assets beginning November 1, 2001. The following compares
reported results to adjusted results as if the new statement was adopted
effective November 1, 2000 (in thousands, except share amounts):
8
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
REPORTED ADJUSTED REPORTED ADJUSTED
2001 2001 2001 2001
---- ---- ---- ----
Income before income taxes $ 7,087 $ 7,416 $ 13,085 $ 13,743
Net income $ 4,522 $ 4,837 $ 8,350 $ 8,980
Basic earnings per share $ 0.28 $ 0.30 $ 0.51 $ 0.55
Diluted earnings per share $ 0.27 $ 0.29 $ 0.50 $ 0.54
A reconciliation of reported net income to adjusted net income (amounts
in thousands) follows:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, 2001 APRIL 30, 2001
Reported net income $ 4,522 $ 8,350
Goodwill amortization 329 658
Tax effect of deductible goodwill (14) (28)
------- -------
Adjusted net income $ 4,837 $ 8,980
======= =======
The net carrying amount of goodwill as of April 30, 2002 is $26.7
million.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
effective for fiscal years beginning after December 15, 2001. SFAS No. 144
supersedes SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and provides a single accounting model
for long-lived assets to be disposed. We will adopt the statement in fiscal year
2003, which begins November 1, 2002. We are currently assessing the impact of
this new standard on our consolidated financial statements.
NOTE 8 - CONTINGENCIES
The Company is subject to various legal actions, governmental audits,
and proceedings relating to various matters incidental to its business including
product liability and environmental claims. While the outcome of such matters
cannot be predicted with certainty, in the opinion of management, after
reviewing such matters and consulting with our 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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED APRIL 30, 2002 VS. THREE MONTH PERIOD ENDED APRIL 30,
2001
NET SALES
Net sales were $63.1 million in the second quarter of fiscal 2002
representing a 4.9 percent increase over 2001's second quarter sales of $60.2
million. This increase can generally be attributed to an increase in the unit
volume of worldwide sales. Had currency values been unchanged from the second
quarter of 2001, net sales in the second quarter of 2002 would have been $1.4
million higher, or 7.1 percent greater overall.
The following table displays the Company's sales by geographic segment
(amounts in thousands):
THREE MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2002 2001 CHANGE CHANGE
---- ---- ------ ------
North America $36,858 $32,951 11.9% 11.9%
Europe 9,603 9,515 0.9% 4.1%
Japan 7,538 8,987 (16.1%) (8.5%)
Asia/Pacific 6,189 5,784 7.0% 7.2%
Latin America 2,928 2,949 (0.7%) 11.6%
------- ------- ------- ------
Total sales $63,116 $60,186 4.9% 7.1%
======= ======= ======= ======
North American sales increased 11.9 percent in the second 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. The Water Group (which addresses the potable water
market) continues to record strong sales of its series of filters designed for
customers who serve various channels of distribution with final sales to US
residential consumers. Europe increased 0.9 percent as compared to the same
period in 2001, and was up 4.1 percent when expressed in local currency.
Healthcare sales were particularly strong in the quarter reflecting greater
demand in the pharmaceutical industry. Sales in Japan were down 16.1 percent as
compared to the same quarter last year, and were 8.5 percent lower when
expressed in local currency. The poor economy in Japan is largely responsible
for the lower sales demand. It is still unclear when the overall Japanese
economy, and more specifically certain segments in which we compete, will
significantly improve. Asia/Pacific sales were up 7.0 percent and increased 7.2
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, in particular, residential products in Australia. First quarter 2002
Latin American sales were relatively flat, but were up 11.6 percent when
expressed in local currency despite the economic troubles in Argentina (see
"Argentina Peso Devaluation" in the "Other Matters" section below for a
discussion of our exposure to Argentina). The large increase in local currency
sales was supported by increased sales to the food and beverage industry which
supports such products as beer, wine, soft drinks, and bottled water.
10
The following table displays the Company's sales by market (amounts in
thousands):
THREE MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2002 2001 CHANGE CHANGE
---- ---- ------ ------
Potable Water $29,541 $25,909 14.0% 14.5%
Fluid Processing 16,499 18,148 (9.1%) (5.7%)
Healthcare 17,076 16,129 5.9% 9.7%
------- ------- ------ ------
Total sales $63,116 $60,186 4.9% 7.1%
======= ======= ====== ======
The slowing economies in the US and certain international markets
(primarily Japan) have impacted all of our 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 9.5 percent in local
currency) and strong sales growth in North America (up 15.5 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
Gross profit increased $1.5 million to $28.2 million in the second
quarter of 2002 from $26.7 million in the second quarter of 2001. Gross profit
as a percentage of net sales (gross margin) increased during that same period
from 44.3 percent in 2001 to 44.7 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 up 0.6%
reflecting our continued focus on restraining discretionary spending. As further
described in Note 7, the 2002 results benefited by the elimination of goodwill
amortization ($0.3 million in the second quarter of 2001) required by the
adoption of FASB 142. Expense categories within SG&A reflected nominal increases
or decreases consistent with our cost-management strategy.
Research, development and engineering expenses increased 10.7 percent
to $3.7 million in the second quarter of 2002, reflecting our continued focus on
the development of new products and technologies. As a percentage of sales,
research, development and engineering expenses were 5.9 percent of sales in the
second quarter of fiscal 2002 compared to 5.5 percent of sales in the second
quarter of fiscal 2001.
OPERATING INCOME
As a result of the above, operating income increased $1.4 million, or
20.2 percent, to $8.3 million or 13.2 percent of sales in the second quarter of
fiscal 2002 compared to $6.9 million or 11.5 percent of sales in the second
quarter of 2001.
11
NON-OPERATING ACTIVITY
Interest expense was relatively flat in the second quarter of 2002
compared to the second 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) in 2002 includes a foreign exchange loss of $0.1 million which
is primarily attributed to the devaluation of the peso in Argentina. See
"Argentine Peso Devaluation" below for a discussion of our exposure in
Argentina. Interest income was down due to lower average interest rates in 2002,
partially offset by higher average net investment levels.
INCOME TAXES
The Company's effective income tax rate for the second quarter of 2002
was 34.5 percent compared to 36.2 percent in the second 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 Note 7),
and a change in the mix of income attributed to the various countries in which
the Company does business.
SIX MONTH PERIOD ENDED APRIL 30, 2002 VS. SIX MONTH PERIOD ENDED APRIL 30, 2001
NET SALES
Net sales were $121.8 million in the first six months of fiscal 2002
representing a 2.5 percent increase over 2001's comparable sales of $118.8
million. This increase can generally be attributed to an increase in the unit
volume of worldwide sales. Had currency values been unchanged from the first six
months of 2001, net sales in 2002 would have been $3.5 million higher, or 5.5
percent greater overall.
The following table displays the Company's sales by geographic segment
(amounts in thousands):
SIX MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2002 2001 CHANGE CHANGE
---- ---- ------ ------
North America $ 71,035 $ 65,866 7.8% 7.8%
Europe 18,265 17,140 6.6% 9.4%
Japan 14,385 18,325 (21.5%) (12.8%)
Asia/Pacific 11,930 11,443 4.3% 7.0%
Latin America 6,138 5,998 2.3% 21.1%
-------- -------- ----- -----
Total sales $121,753 $118,772 2.5% 5.5%
======== ======== ===== =====
North American sales increased 7.8 percent in the first six months of
2002 as compared to the same period in 2001. Strong Healthcare and Potable Water
market sales were responsible for all of the growth in North America during this
time period. The Water Group (which addresses the potable water market)
continues to record strong sales of its series of filters designed for customers
who serve various channels of distribution with final sales to US residential
consumers. Sales in Europe increased 6.6 percent as compared to the same period
in 2001, and were up 9.4 percent when expressed in local currency. Healthcare
sales, particularly to the pharmaceutical industry, increased during the period.
Sales in Japan were down 21.5 percent as compared to the same period last year,
and were 12.8 percent
12
lower when expressed in local currency. The weak economy in Japan is largely
responsible for the depressed sales demand. Asia/Pacific sales experienced
modest growth period over period; however, sales increased 7.0 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. Despite the
economic troubles in Argentina (see "Argentina Peso Devaluation" in the "Other
Matters" section below for a discussion of our exposure to Argentina), Latin
American sales increased 2.3 percent as compared to the same period in 2001, but
were up 21.1 percent when expressed in local currency. The large increase in
local currency sales was supported by increased penetration of all markets, with
particular strength in the food and beverage industry which supports such
products as beer, wine, soft drinks, and bottled water.
The following table displays the Company's sales by market (amounts in
thousands):
SIX MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2002 2001 CHANGE CHANGE
---- ---- ------ ------
Potable Water $ 56,661 $ 51,107 10.9% 11.8%
Fluid Processing 31,648 36,955 (14.4%) (10.3%)
Healthcare 33,444 30,710 8.9% 13.9%
-------- -------- ------- -------
Total sales $121,753 $118,772 2.5% 5.5%
======== ======== ======= =======
The weak economies in the US and certain international markets
(primarily Japan) have impacted all of our 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 17.7 percent in
local currency) and steady sales growth in North America (up 10.7 percent)
associated with OEM customers, direct marketing companies, and appliance
manufacturers. Healthcare sales increased both domestically and internationally
and continue to benefit from the ongoing focus by management on competitively
favorable product lines and market niches.
GROSS PROFIT
Gross profit increased $2.6 million to $54.4 million in the first six
months of 2002 from $51.7 million in the first six months of 2001. Gross profit
as a percentage of net sales (gross margin) increased during that same period
from 43.6 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 1.7%) reflecting our continued focus on restraining discretionary
spending. As further described in Note 7, the 2002 results benefited by the
elimination of goodwill amortization ($0.7 million in the first six months of
2001) required by the adoption of FASB 142. Expense categories within SG&A
reflected nominal increases or decreases consistent with our cost-management
strategy.
Research, development and engineering expenses increased 7.9 percent to
$7.1 million in the first six months of 2002, reflecting our continued focus on
the development of new products and technologies. As a percentage of sales,
research, development and engineering expenses were 5.8
13
percent of sales in the first six months of fiscal 2002 compared to 5.6 percent
of sales in the first six months of fiscal 2001.
OPERATING INCOME
As a result of the above, operating income increased $2.2 million, or
17.1 percent, to $15.2 million or 12.5 percent of sales in the first six months
of fiscal 2002 compared to $13.0 million or 10.9 percent of sales in the first
six months of 2001.
NON-OPERATING ACTIVITY
Interest expense was relatively flat in the first six months of 2002
compared to the first six months of 2001. See "Financial Position and Liquidity"
below for further discussion of the Company's cash and debt structure. Interest
income was down due to lower average interest rates in 2002, partially offset by
higher average net investment levels.
INCOME TAXES
The Company's effective income tax rate for the first six months of
2002 was 34.5 percent compared to 36.2 percent in the first six months of 2001.
The decrease primarily reflects the recognition of certain tax planning
initiatives, permanent tax benefits associated with the adoption of FASB 142
(see Note 7), and a change in the mix of income attributed to the various
countries in which the Company does business.
FINANCIAL POSITION AND LIQUIDITY
We assess liquidity in terms of the Company's ability to generate cash
to fund our 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.
We manage our worldwide cash requirements considering the cost
effectiveness of the funds available from the many subsidiaries through which we
conduct our business. We believe that our existing cash and cash equivalents
position ($25.0 million at April 30, 2002) and available sources of liquidity
(approximately $26.3 million of available, uncommitted, unused worldwide
short-term lines of credit) are sufficient to meet current and anticipated
requirements for the foreseeable future. We do not rely on commercial paper or
off-balance sheet financing arrangements for our liquidity needs.
In March 2002, we closed on a $12 million committed unsecured credit
facility that renews annually. Borrowings under this facility are subject to
various financial covenants and bear interest at a floating interim rate based
upon LIBOR. There were no borrowings outstanding under this facility at April
30, 2002.
We continue to invest in R&D to provide future sources of revenue
through the development of new products, as well as through additional uses for
existing products. Our efforts are spread across the various markets in which we
compete, with particular emphasis on new products and technologies in Healthcare
and the improvement in design and function of products within Potable Water. We
consider R&D and the development of new products and technologies an integral
part of our growth strategy and a core competence of the Company.
14
Likewise, we continue to invest in capital expenditures in order to
expand and modernize manufacturing facilities around the globe. We are currently
expanding manufacturing lines in Brazil and China in order to meet product
demands around the globe. In addition, new manufacturing lines and processes are
being installed in the US to benefit the Water Group, Fluid Processing, and
Healthcare operations.
Set forth below is selected cash flow data (in thousands of dollars):
Source/(Use) of Cash SIX MONTHS ENDED
APRIL 30,
2002 2001
---- ----
OPERATING ACTIVITIES:
Net cash provided by net income plus
depreciation, Amortization and non-cash
compensation $ 14,248 $ 13,302
Pension funding in excess of expense (4,373) (106)
Accounts receivable (2,732) 995
Inventory 5 (2,645)
Net cash provided by operating activities 8,269 11,441
INVESTING ACTIVITIES:
Capital expenditures (7,645) (4,964)
Acquisition of companies, net of cash acquired (503) (4,489)
FINANCING ACTIVITIES:
Net change in total debt (2,163) (482)
Proceeds from stock options exercised 1,184 401
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 $14.2 million increased 7.1 percent in the first six months of
2002 as compared to the same period in 2001 reflecting our increased sales,
gross profit, improved operating profit margin, and improved tax rate. We made
an incremental $4.0 million contribution to our US pension plans in the first
quarter of 2002 to bolster the funding and earnings capabilities of the plans.
The use of cash for accounts receivable (accounts receivable up 4.0 percent) in
2002 reflects the increased level of sales during the period. The increase in
inventory during the first six months of 2001 primarily related to the timing of
certain sales shipments.
The increased rate of capital expenditures in 2002 primarily relates to
the continued focus on expanding and modernizing manufacturing facilities around
the globe. More specifically, we are currently expanding manufacturing lines in
Brazil and China. In addition, new manufacturing lines and processes are being
installed in the US to benefit the Water Group, Fluid Processing, and Healthcare
operations. In the second quarter of fiscal 2002, we completed a product line
acquisition in Australia for $0.5 million. In the second quarter of 2001, we
closed on two acquisitions - a product line in Australia and a distributor in
Europe for a total of $4.5 million. These acquisitions did not have a material
effect on the Company's historical financial statements nor pro forma operating
results.
Due in part to our increased stock price, during the first six months
of fiscal 2002, 106,923 stock options were exercised (net of shares used to pay
individual taxes) providing $1,184,000 in net cash proceeds.
15
OTHER MATTERS
ARGENTINE PESO DEVALUATION
A significant devaluation in the Argentine peso took place in our first
quarter of 2002. We have 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 our consolidated results, it has only a minimal impact on our
overall results of operations. See "Market Risk Disclosures" below.
WAR ON TERRORISM AND ITS IMPACT ON CUNO
Other than the general economic downturn, the terrorist attacks on
September 11, 2001 did not materially impact our business. Going forward, our
exposure in the Middle East is very limited - fiscal 2001 sales were less than 2
percent of total worldwide sales and we have no fixed assets in the region.
Partly as a result of the terrorist attacks, the cost of insurance has
risen substantially and the availability of insurance has become more
restrictive. We maintain insurance coverage with such deductibles and
self-insurance as considered adequate for our needs. Such coverage reflects
market conditions (including cost and availability) existing at the time it is
written and the relationship of insurance coverage to self-insurance varies
accordingly. We consider the impact of these changes as we continually assess
the best way to provide for our insurance needs now and in the future.
ESTIMATES AND ASSUMPTIONS
In preparing financial information, we use estimates and assumptions
that may affect reported amounts and disclosures. Estimates are used when
accounting for depreciation, amortization, employee benefits, contingencies and
asset valuation allowances (including those for bad debts and allowances for
deferred income tax assets). For example, in determining annual pension costs,
we must estimate future rates of return on plan assets and future compensation
rates. We are also subject to various risks and uncertainties that may cause
actual results to differ from estimated results, such as changes in the
industry, overall economy, competition, foreign exchange rates, litigation, and
legislation.
MARKET RISK DISCLOSURES
The overall objective of our financial risk management program is to
seek a reduction in the potential negative earnings effects from changes in
foreign exchange and interest rates arising from business activities. We manage
these financial exposures through operational means and by utilizing available
financial instruments. Practices may change as economic conditions change.
Foreign Currency Risk
Our earnings and cash flows are subject to fluctuations due to changes
in foreign currency exchange rates. We utilize forward foreign exchange
contracts to hedge specific exposures relating to intercompany payments, 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.
16
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. All of our foreign exchange
contracts are accounted for at fair value based on readily available market
price quotations. We generally do not hedge overseas sales denominated in
foreign currencies or translation exposures. Further, we do not enter into
financial instruments for speculation or trading purposes.
We utilize bank loans and other debt instruments throughout our
worldwide operations. To mitigate foreign currency risk, such debt is generally
denominated in the underlying local currency of the affiliate. In certain
limited and specific circumstances, we will manage risk by denominating a
portion of debt outstanding in a currency other than the local currency.
Contractual Obligations and Commercial Commitments
Below is a table detailing, by maturity date, our Contractual
Obligations and Commercial Commitments as of October 31, 2001 (amounts in
millions):
OBLIGATIONS AND
COMMITMENTS 2002 2003 2004 2005 2006 THEREAFTER
----------- ---- ---- ---- ---- ---- ----------
Bank loans $13.3 $ -- $ -- $ -- $ -- $ --
Long-term debt 0.7 0.8 0.8 0.2 0.2 0.9
Operating leases 2.1 1.8 1.5 1.5 1.5 --
---------------------------------------------------------------
Total $16.1 $2.6 $2.3 $1.7 $1.7 $0.9
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 Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. Also, we want to
provide stockholders and investors with more meaningful and useful information
and therefore, this quarterly report describes our beliefs 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, 2001, could
cause the Company's actual results or performance to differ materially from
those expressed herein. We assume no obligation to update the information
contained in this quarterly report.
17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) We held our annual meeting of Stockholders on March 27, 2002.
(b) The following individuals were nominated and elected to serve a term of
three years as Directors:
Mr. Frederick C. Flynn, Jr.
Mr. C. Edward Midgley
(c) The stockholders voted on the following matters:
1. Election of Directors -- the voting results for each nominee, all of
whom were reelected, are as follows:
Name Votes For Votes Withheld Not Voted
Mr. Frederick C. Flynn, Jr. 14,739,238 124,810 1,576,452
Mr. C. Edward Midgley 14,702,036 162,012 1,576,452
2. A proposal for the re-approval of the performance goals in the
Executive Management Incentive Plan was approved by a count of
13,125,308 votes for, 1,678,259 votes against, 60,481 votes
abstaining, and 1,576,452 shares not voted.
3. A proposal for the appointment of Ernst & Young LLP as
independent auditors was approved by a count of 14,679,372
votes for, 135,525 votes against, 49,151 votes abstaining,
1,576,452 shares not voted.
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report.
(b) Reports on From 8-K
No reports were filed on Form 8-K during the quarter for which this 10-Q is
filed.
18
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 22, 2002
-----------------
By /s/ Frederick C. Flynn, Jr.
---------------------------
Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer,
Controller, and Assistant Secretary
By /s/ William J. DeFrances
----------------------------
William J. DeFrances
Treasurer, Assistant Controller,
and Assistant Secretary
19