Exhibit 13
Market Data
The Company's Common Stock is quoted on the NASDAQ market under the symbol CUNO.
The following table shows the quarterly high and low prices for the last two
fiscal years ended October 31:
QUARTER 2002 2001
- ---------- ----------------- -------------------
High Low High Low
------- ------- ------- -------
First $ 35.71 $ 25.85 $ 31.00 $ 24.00
Second 38.35 33.40 29.00 22.13
Third 37.55 29.84 31.00 23.50
Fourth 33.43 28.99 30.65 22.75
As of October 31, 2002 CUNO had approximately 5900 shareholders of record.
1
SUMMARY OF FINANCIAL DATA(1)
(in thousands, except per share data and ratios)
2002 2001 2000 1999 1998 (2)
INCOME DATA
Net Sales $258,201 $244,449 $243,074 $220,584 $198,845
Gross Profit 115,751 108,380 104,485 96,550 86,304
Operating Income 34,885 30,411 27,927 23,653 11,923
Income before Income Taxes 34,770 30,797 27,595 22,774 11,249
Net Income 22,956 20,013 17,447 14,831 6,355
Basic Earnings per Share 1.39 1.23 1.08 0.92 0.40
Diluted Earnings per Share 1.36 1.20 1.05 0.91 0.39
OTHER FINANCIAL DATA
Total Assets 236,879 206,043 188,899 184,342 171,566
Working Capital 72,571 55,750 41,921 35,309 31,164
Net Plant Investment 74,759 65,595 63,187 60,352 56,072
Capital Expenditures 17,600 11,028 12,143 11,695 11,860
Long-Term Debt 2,030 2,893 3,422 8,761 15,437
Stockholders' Equity 162,413 140,171 119,518 104,574 90,301
RATIOS
Gross Profit to Net Sales 44.8% 44.3% 43.0% 43.8% 43.4%
Operating Income to Net Sales 13.5% 12.4% 11.5% 10.7% 6.0%
Net Income to Net Sales 8.9% 8.2% 7.2% 6.7% 3.2%
Effective Income Tax Rate 34.0% 35.0% 36.8% 34.9% 43.5%
Net Income to Average
Stockholders' Equity 15.2% 15.4% 15.6% 15.2% 7.4%
Ratio of Current Assets to
Current Liabilities 2.3:1 2.0:1 1.7:1 1.6:1 1.5:1
Ratio of Long-Term Debt to
Stockholders' Equity
Plus Long-Term Debt 1.2% 2.0% 2.8% 7.7% 14.7%
(1) We adopted FASB 142 in 2002, see Note 1. Goodwill amortization was $1,316,
$1,140, $840, and $654 in 2001, 2000, 1999, and 1998, respectively.
(2) Included in the 1998 results are an unusual charge for inventory write-down
reducing gross profit by $2,245 and reorganization and other unusual charges of
$7,439, reducing operating income by $9,684 and net income by $6,937 (net of
income taxes of $2,747), or $0.43 per share.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2002 - 2000
YEAR ENDED OCTOBER 31, 2002 COMPARED TO YEAR ENDED OCTOBER 31, 2001
BUSINESS ENVIRONMENT
Our operations are affected by global economic and political factors.
However, our geographic and market diversity helps limit the impact of any one
market or the economy of any single country on our consolidated results. The
downturn in the North American economy, including conditions in certain markets
in which we compete, negatively impacted our consolidated results and is likely
to continue to present challenges to our business near term.
NET SALES
Net sales of $258.2 million in fiscal year 2002 represented a 5.6 percent
increase over net sales of $244.4 million in fiscal year 2001. This increase can
generally be attributed to an increase in the unit volume of worldwide sales.
The effects of foreign currency fluctuations reduced net sales in fiscal year
2002 by $2.1 million as compared to fiscal year 2001. Had currency values
remained unchanged from fiscal year 2001, net sales in fiscal year 2002 would
have been $260.3 million, or 6.5 percent greater than the prior year.
The following table displays our sales by geographic operating segment
(dollars in thousands):
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
2002 2001 CHANGE CHANGE
---- ---- ------ ------
North America $149,784 $139,745 7.2% 7.2%
Europe 40,369 35,323 14.3% 10.2%
Japan 30,648 34,390 (10.9%) (5.9%)
Asia/Pacific 26,179 23,074 13.5% 12.2%
Latin America 11,221 11,917 (5.8%) 12.2%
-------- --------
Total sales $258,201 $244,449 5.6% 6.5%
Sales growth of 7.2 percent in our North American operations was led by
both Healthcare (up 9.2 percent) and Potable Water (up 9.9 percent). Potable
Water continues to record strong sales with its series of new filters designed
for customers who serve various channels of distribution with final sales
primarily to U.S. residential consumers. Sales into the healthcare market
improved year over year due mostly to broad-based volume increases.
Our international sales increased $3.7 million or 3.5 percent in 2002
compared to 2001. Had the value of foreign currencies remained unchanged in
fiscal 2002 as compared to fiscal 2001, sales for these operations would have
increased $5.8 million or 5.6 percent. In Europe, sales increased 10.2 percent
in local currency; this gain was spread broadly across our three markets. Strong
Healthcare sales to the pharmaceutical market contributed to this growth. Sales
by the European Potable Water group increased 27.5 percent due to increased
marketing and sales efforts. Sales in Japan were down 5.9 percent on a local
currency basis as compared to the same period last year. All markets have been
impacted by the continued weakness in the Japanese economy. Local currency sales
growth in Asia/Pacific of 12.2 percent was broad-based with a majority of the
increase coming from strong sales growth in Potable Water throughout the region.
Despite the economic troubles in Argentina (see "Argentine Peso Devaluation" in
the "Other Matters" section below for a discussion of our exposure to
Argentina), local currency sales in Latin America increased 12.2 percent in
fiscal 2002. The sales increase reflects strong, broad improvements in all
markets, led by a 21.5 percent increase in Healthcare sales in the region.
8
The following table displays our sales by market (dollars in thousands):
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
2002 2001 CHANGE CHANGE
Potable Water $119,456 $107,263 11.4% 11.6%
Fluid Processing 68,714 71,898 (4.4%) (3.1%)
Healthcare 70,031 65,288 7.3% 8.7%
-------- --------
Total Sales $258,201 $244,449 5.6% 6.5%
======== ======== ===== =====
The weak economies in the U.S. and certain international markets
(primarily Japan) impacted all of our markets to some extent; however, Fluid
Processing is our most cyclical market and has been most impacted by the recent
economic slowdown. The strength in the Potable Water market was broad
geographically, driven largely by strong international sales (up 21.3 percent in
local currency) and strong sales growth in North America (up 9.9 percent)
associated with OEM customers, direct marketing companies, and appliance
manufacturers. Healthcare sales increased both domestically and internationally
and continue to benefit from our ongoing focus on competitively favorable
product lines, market niches, and new products.
GROSS PROFIT
Our gross profit increased $7.4 million to $115.8 million in fiscal year
2002 from $108.4 million in 2001. Gross profit as a percentage of net sales
increased from 44.3 percent in 2001 to 44.8 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). In
addition, various supply chain management initiatives designed to lower our
production costs and ongoing programs to modernize our manufacturing facilities
to gain efficiencies contributed to our improved gross margin.
OPERATING EXPENSES
Selling, general and administrative (SG&A) expenses increased $3.3 million
in fiscal year 2002 over fiscal 2001, representing a 5.2 percent increase.
Generally, expense categories within SG&A reflected nominal changes consistent
with our focus on restraining discretionary spending. The cost of obtaining
insurance has risen sharply and we continually take steps to control these
expenses by reviewing deductible levels, evaluating levels of self-insurance,
and aggressively marketing our policies. As a percentage of sales, SG&A expenses
were relatively flat year over year, representing 25.6 percent of sales in 2002
compared to 25.7 percent of sales in 2001. As further described in Note 1 to the
Financial Statements, the 2002 results benefitted from the elimination of
goodwill amortization ($1.3 million in 2001) required by the adoption of SFAS
142.
Research, development and engineering expenses increased 6.8 percent to
$14.7 million in fiscal year 2002, reflecting our continued emphasis on the
development of new products and technologies. As a percentage of sales,
research, development and engineering expenses were 5.7 percent of sales in
fiscal year 2002 compared to 5.6 percent of sales in fiscal year 2001. Our plans
are to continue to devote significant resources to research and development in
order to develop new technologies, enhance existing products, and develop
additional new products.
OPERATING INCOME
As a result of the above, our operating income increased $4.5 million, or
14.7 percent, to $34.9 million or 13.5 percent of sales in fiscal year 2002 as
compared to $30.4 million or 12.4 percent of sales in fiscal year 2001.
NONOPERATING ACTIVITY
Interest income decreased by $0.3 million to $0.6 million in fiscal year
2002 due primarily to lower average interest rates worldwide, partially offset
by higher average net investment levels (see Liquidity and Capital Resources
below). No other material nonoperating activity occurred in either of the two
fiscal years.
INCOME TAXES
Our effective income tax rate for fiscal year 2002 was 34.0% as compared
to 35.0% in fiscal year 2001. The tax rate in 2002 was favorably impacted by
permanent tax benefits associated with the adoption of SFAS 142 (see
9
Note 1), certain tax planning initiatives, marginally lower worldwide tax rates,
and a change in the mix of income attributed to the various countries in which
we do business.
YEAR ENDED OCTOBER 31, 2001 COMPARED TO YEAR ENDED OCTOBER 31, 2000
NET SALES
Net sales of $244.4 million in fiscal year 2001 represented a 0.6 percent
increase over net sales of $243.1 million in fiscal year 2000. The effects of
foreign currency fluctuations reduced net sales in fiscal year 2001 by $11.3
million as compared to fiscal year 2000. Had currency values remained unchanged
from fiscal year 2000, net sales in fiscal year 2001 would have been $255.8
million, or 5.2% greater than the prior year.
The following table displays our sales by geographic operating segment
(dollars in thousands):
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
2001 2000 CHANGE CHANGE
North America $139,745 $135,495 3.1% 3.1%
Europe 35,323 31,501 12.1% 18.5%
Japan 34,390 39,894 (13.8%) (3.9%)
Asia/Pacific 23,074 22,791 1.2% 11.1%
Latin America 11,917 13,393 (11.0%) 10.9%
-------- --------
Total Sales $244,449 $243,074 0.6% 5.2%
======== ======== ==== ====
Sales growth in our North American operations was led by Healthcare (up
12.0 percent) and, to a lesser extent, Potable Water (up 6.4 percent). Sales
into the healthcare market have increased year over year due primarily to an
increase in sales to a large diagnostic customer. Potable Water continues to
record strong sales with its series of new filters designed for OEM customers
who serve various channels of distribution with final sales to U.S. consumers.
Our international sales decreased $2.9 million or 2.7 percent in fiscal
2001 compared to 2000. Had the value of foreign currencies remained unchanged in
fiscal 2001 as compared to fiscal 2000, sales for these operations would have
increased $8.4 million or 7.8 percent. In Europe, sales increased 18.5 percent
in local currency with this gain spread broadly across the three markets. Sales
by the European Potable Water segment increased 30.4 percent due to increased
marketing efforts. Sales in Japan were down 3.9 percent on a local currency
basis as compared to the same period last year. All markets in Japan have been
impacted by the continued downturn in the Japanese economy. Local currency sales
growth in Asia/Pacific of 11.1 percent was due in large part to strong gains in
the Healthcare market as well as a strong economy in Australia. Local currency
sales in Latin America increased 10.9 percent in fiscal 2001 reflecting strong,
broad improvements across all markets.
The following table displays our sales by market (dollars in thousands):
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
2001 2000 CHANGE CHANGE
Potable Water $107,263 $101,483 5.7% 7.7%
Fluid Processing 71,898 78,781 (8.7%) (2.6%)
Healthcare 65,288 62,810 3.9% 11.1%
-------- --------
Total Sales $244,449 $243,074 0.6% 5.2%
======== ======== ===== =====
On a currency-adjusted basis, all geographic operating segments continued
to achieve sales increases in the Potable Water market. This dollar increase was
driven by strong sales in North America associated with OEM customers, direct
marketing companies, and appliance manufacturers, as well as increased
international Potable Water sales (up 14.8 percent on a currency adjusted
basis). Fluid Processing is our most cyclical market and has
10
been most impacted by the U.S. economic slowdown. Healthcare sales continue to
benefit from a continued focus by management on competitively favorable niches.
On a currency adjusted basis, international Healthcare sales increased $4.5
million or 10.6 percent over fiscal year 2000.
GROSS PROFIT
Our gross profit increased $3.9 million to $108.4 million in fiscal year
2001 from $104.5 million in 2000. Gross profit as a percentage of net sales
increased from 43.0 percent in 2000 to 44.3 percent in 2001. The primary factor
that contributed to the improved gross margin in 2001 was the market mix of
sales (increased Healthcare sales which generally carry higher margins combined
with decreased Fluid Processing sales which generally carry lower margins).
OPERATING EXPENSES
Selling, general and administrative ("SG&A") expenses increased $0.6
million in fiscal year 2001 over fiscal 2000, representing a 0.9 percent
increase. Expense categories within SG&A reflected nominal increases or
decreases consistent with our cost-management strategy. Research, development
and engineering expenses increased 6.5 percent to $13.7 million in fiscal 2001,
reflecting our continued focus on developing new products and technologies. As a
percentage of sales, research, development and engineering expenses were 5.6
percent of sales in fiscal 2001 compared to 5.3 percent of sales in fiscal 2000.
OPERATING INCOME
As a result of the above, operating income increased $2.5 million, or 8.9
percent, to $30.4 million or 12.4 percent of sales in fiscal 2001 as compared to
$27.9 million or 11.5 percent of sales in fiscal 2000.
NONOPERATING ACTIVITY
Interest income increased by $0.6 million to $0.9 million in fiscal year
2001 reflecting our increased level of invested cash. (see Liquidity and Capital
Resources below). No other material nonoperating activity occurred in either of
the two fiscal years.
INCOME TAXES
Our effective income tax rate for fiscal year 2001 was 35.0% as compared
to 36.8% in fiscal year 2000. The tax rate in 2001 was favorably impacted by the
utilization and benefit of operating loss carryforwards, marginally lower
worldwide tax rates, and a change in the mix of income attributed to the various
countries in which we do 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 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 ($40,872,000 at October 31, 2002) and available sources of liquidity
(approximately $29,827,000 of available, uncommitted, unused worldwide
short-term lines of credit) are sufficient to meet current and anticipated cash
requirements for the foreseeable future. We do not have any commercial paper or
off-balance sheet financing arrangements for our liquidity needs nor do we have
any investments in special purpose entities ("SPE's").
In March 2002, we established a $12 million 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 October 31, 2002.
We continue to invest in research and development 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.
Likewise, we continue to invest in capital projects to expand and
modernize manufacturing facilities around the globe. We are currently expanding
manufacturing lines in Brazil and China in order to meet product
11
demands around the globe. In addition, new manufacturing lines and processes are
being installed in the U.S. to benefit the Potable Water, Fluid Processing, and
Healthcare operations.
Set forth below is selected key cash flow data (in thousands of dollars):
YEAR ENDED
SOURCE / (USE) OF CASH OCTOBER 31,
- ----------------------
OPERATING ACTIVITIES: 2002 2001
---- ----
Net cash provided by net income plus depreciation,
amortization and non-cash compensation $ 32,062 $ 29,986
Pension funding in excess of expense (4,435) (347)
Accounts receivable (2,031) 2,890
Net cash provided by operating activities 29,120 27,944
INVESTING ACTIVITIES:
Acquisitions of companies, net of cash acquired (700) (4,489)
Capital expenditures (17,600) (11,028)
FINANCING ACTIVITIES:
Proceeds from stock options exercised 1,664 496
Net cash provided by net income plus depreciation, amortization and
non-cash compensation is an important measurement of cash generated from the
earnings process before significant non-cash charges. Net income plus
depreciation, amortization and non-cash compensation of $32.1 million increased
6.9 percent in fiscal 2002 as compared to fiscal 2001 reflecting our increased
sales volume, increased gross profit, improved operating profit margin, and
improved tax rate as discussed above.
The funded status of our pension plans is dependent upon many factors,
including returns on invested assets and the level of market interest rates.
Recent declines in the value of securities traded in equity markets coupled with
declines in long-term interest rates have had a negative impact on the funded
status of our Plans. We made an incremental contribution of $4.0 million to our
U.S. defined benefit pension Plans during the first quarter of 2002. This
contribution was in addition to our normal funding policy for the Plans and was
approved by our Board of Directors. In November 2002, we made another
incremental contribution of $6.0 million to our U.S. defined benefit pension
Plans.
The use of cash for accounts receivable, which increased 4.8 percent in
2002, reflects the increased level of sales during in 2002 compared to 2001. The
changes in accrued income taxes and in accounts payable and accrued expenses
during 2002 primarily relates to the timing of cash disbursements and inventory
purchases.
In fiscal 2002, we completed a product line acquisition in Australia and
the acquisition of a distributor in Europe for total consideration of $0.7
million. In fiscal 2001, we completed two acquisitions - a product line in
Australia and a distributor in Europe for total consideration of $4.5 million.
These acquisitions did not have a material effect on our historical financial
statements or pro forma operating results.
Capital expenditures amounted to $17.6 million in 2002 compared to $11.0
million in 2001. The increased rate of capital expenditures in 2002 primarily
relates to the continued focus on expanding and modernizing manufacturing
facilities globally. More specifically, we are currently expanding manufacturing
lines in Brazil and China. In addition, new manufacturing lines and processes
are being installed in the U.S. to benefit the Potable Water, Fluid Processing,
and Healthcare operations.
Due in part to our increased stock price, during fiscal 2002, 141,088
stock options were exercised (net of shares used to pay individual taxes)
providing approximately $1,664,000 in net cash proceeds.
Other selected financial data at October 31, follows (amounts in
thousands):
2002 2001
---- ----
Long term debt, less current portion $2,030 $2,893
Stockholders' equity 162,413 140,171
Ratio of long term debt to total capitalization 1% 2%
12
MARKET RISK DISCLOSURES
FOREIGN CURRENCY RISK
Approximately 45% of our operations consist of sales and manufacturing
activities in foreign countries. We manufacture a significant portion of our
products in the U.S. and sell some of these products to affiliated companies
overseas. As a result, the Company's financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which we distribute and sell our
products. Our currency exposures vary, but are concentrated in the Japanese yen,
Singapore dollar, Australian dollar, British pound, Brazilian real, Argentine
peso, Chinese Renminbi and the Euro.
We utilize forward foreign exchange contracts to hedge specific exposures
relating to intercompany payments (primarily parent company export sales to
subsidiaries at pre-established U.S. dollar prices) and other specific and
identified exposures. The terms of the forward foreign exchange contracts are
matched to the underlying transaction being hedged, and are typically under one
year. Because such contracts are directly associated with identified
transactions, they are an effective hedge against fluctuations in the value of
the foreign currency underlying the transaction. We do not hedge overseas sales
denominated in foreign currencies or translation exposures. 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 branch or subsidiary. In
certain limited and specific instances, we may manage risk by denominating a
portion of debt outstanding in a currency other than the local currency.
INTEREST RATE RISK
Our interest income and expense are most sensitive to changes in the
general level of U.S. and Japanese interest rates. In this regard, changes in
these interest rates may affect the interest paid on debt. To mitigate the
impact of fluctuations in U.S. and Japanese interest rates, we periodically
evaluate alternative interest rate arrangements.
Below is a table detailing, by maturity date, the Company's debt portfolio
and the associated interest rates for the fiscal years ended October 31,
(dollars in thousands):
FAIR
2003 2004 2005 2006 2007 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
Bank loans $16,374 -- -- -- -- -- $16,374 $16,374
Avg. Interest Rate 2.04% 2.04%
Long-term Debt:
Fixed Rate $ 714 $ 862 $ 139 $ 135 $ 131 $ 763 $ 2,744 $ 3,155
Avg. Interest Rate 0.52% 0.82% 4.71% 4.70% 4.69% 4.82% 2.43%
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 2002. 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. Our exposure in the
Middle East is very limited - fiscal 2002 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.
13
CRITICAL ACCOUNTING POLICIES
Preparation of our financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Note 1 of the Notes to Consolidated
Financial Statements describes the significant accounting policies used in
preparation of the consolidated financial statements. Management believes the
most complex and sensitive judgments, because of their significance to the
consolidated financial statements, result primarily from the need to make
estimates about the effects of matters that are inherently uncertain.
Estimates are used when accounting for depreciation, amortization,
employee benefits, contingencies and asset valuation allowances (including those
for bad debts and 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 markets we serve, economic conditions, competition,
foreign exchange rates, litigation and legislation. Actual results in these
areas could differ from management's estimates.
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.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Below is a table detailing, by maturity date, our contractual obligations
and commercial commitments as of October 31, 2002 (amounts in thousands):
OBLIGATIONS AND
COMMITMENTS 2003 2004 2005 2006 2007 THEREAFTER
Bank loans $16,374 $ -- $ -- $-- $-- $ --
Long-term debt 714 862 139 135 131 763
Operating leases 2,151 1,917 1,470 1,310 1,394 --
------- ------ ------ ------ ------ -----
Total $19,239 $2,779 $1,609 $1,445 $1,525 $ 763
======= ====== ====== ====== ====== =====
COMPANY RISK FACTORS
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Approximately 45% of our net sales are derived from international
operations. Consequently, our reported financial results may be adversely
affected by significant fluctuations in the value of the U.S. dollar in
comparison to local currencies in the countries in which we operate outside the
U.S. We manufacture products in Japan, China, Brazil, France, Singapore and
Australia. Our international operations may be affected by economic, political
and governmental conditions in some of the countries where we have manufacturing
facilities or where our products are sold. In addition, changes in economic or
political conditions in any of the countries in which we operate could result in
unfavorable taxation policies, exchange rates, new or additional currency or
exchange controls, governmental regulations, credit risks, or other restrictions
being imposed on the operations of the Company or expropriation.
PATENTS AND PROPRIETARY TECHNIQUES
We have a broad patent portfolio as well as other proprietary information
and manufacturing techniques and have applied, and will continue to apply, for
patents to protect our technology. Our success depends in part upon our ability
to protect our technology and proprietary products under U.S. and foreign patent
and other intellectual property laws. Trade secrets and confidential know-how
which are not patented are protected through confidentiality agreements,
contractual provisions and internal Company administrative procedures. There can
be no assurance that such arrangements will provide meaningful protection for
the Company in the event of any unauthorized use or disclosure. There can be no
assurance that third parties will not assert infringement claims against the
Company or that a license or similar agreement will be available on reasonable
terms in the event of an unfavorable ruling on any such claim. In addition, any
such claim may require the Company to incur litigation expenses or subject the
Company to liabilities.
14
TECHNOLOGICAL AND REGULATORY CHANGE
The filtration and separations industry is characterized by changing
technology, competitively imposed process standards and regulatory requirements,
each of which influences the demand for our products and services. Changes in
legislative, regulatory or industrial requirements or competitive technologies
may render certain of our filtration and separations products and processes
obsolete. Acceptance of new products may also be affected by the adoption of new
government regulations requiring stricter standards. The Company's ability to
anticipate changes in technology and regulatory standards and to develop and
introduce new and enhanced products successfully on a timely basis are
significant factors in our ability to grow and to remain competitive. Similar to
all companies, we are also subject to the risks generally associated with new
product introductions and applications, including possible lack of market
acceptance, delays in product development and failure of products to operate
properly.
COMPETITION
The filtration and separations markets in which we compete are highly
competitive. We compete with many domestic and international companies in the
global markets. The principal methods of competition in the markets in which we
compete are product specifications, product performance, quality, knowledge,
reputation, technology, distribution capabilities, service and price.
KEY CUSTOMERS AND SUPPLIERS
We have multi-year contracts in place with several of our major customers
and suppliers. Such contracts help us effectively plan and manage our
operations. We are sensitive to the changing needs of our customers and the
ongoing performance of our suppliers. When appropriate, we will negotiate
contracts to insure the continuation of beneficial, long-term relationships.
However, there is no assurance that such contracts will not be terminated
prematurely or will be renewed by such third parties.
INFLATION
Inflation had a negligible effect on our operations during fiscal years
2002, 2001, and 2000. We estimate that inflationary effects, in the aggregate,
were generally recovered or offset through increased pricing or cost reductions
in both fiscal years.
FORWARD LOOKING INFORMATION
Because we want to provide shareholders with more meaningful and useful
information, this annual report contains statements relating to future events
and the predicted performance of CUNO which may constitute forward-looking
statements, as defined under the Private Securities Litigation Act. We have
tried, wherever possible, to identify these "forward looking" statements by
using words such as "anticipate," "believe," "estimate," "expect" and similar
expressions. These statements reflect our current beliefs and are based on
information currently available to us. Accordingly, these statements are subject
to risks and uncertainties which could cause our actual results, performance or
achievements to differ materially from those expressed in, or implied by, these
statements. These risks and uncertainties include the following: economic and
political conditions in the foreign countries in which we conduct a substantial
part of our operations and other risks associated with international operations
including taxation policies, exchange rate fluctuations and the risk of
expropriation; our ability to protect our technology, proprietary products and
manufacturing techniques; volumes of shipments of our products, changes in our
product mix and product pricing; customer relationships; costs of raw materials;
the rate of economic and industry growth in the United States and the other
countries in which we conduct our business; changes in technology, changes in
legislative, regulatory or industrial requirements and risks generally
associated with new product introductions and applications; and domestic and
international competition in our global markets. We assume no obligation to
publicly release revisions to the forward-looking statements to reflect new
events or circumstances.
-15-
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
CUNO Incorporated
We have audited the accompanying consolidated balance sheets of CUNO
Incorporated as of October 31, 2002 and 2001, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended October 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CUNO Incorporated at October 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended October 31, 2002 in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the financial statements, effective
November 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ ERNST & YOUNG LLP
Hartford, Connecticut
December 5, 2002
16
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share amounts)
YEAR ENDED OCTOBER 31, 2002 2001 2000
================================================================================================
Net sales $ 258,201 $ 244,449 $ 243,074
Operating expenses:
Cost of products sold 142,450 136,069 138,589
Selling, general and administrative 66,204 62,924 62,525
Goodwill amortization -- 1,316 1,140
Research, development and engineering 14,662 13,729 12,893
- ------------------------------------------------------------------------------------------------
223,316 214,038 215,147
- ------------------------------------------------------------------------------------------------
Operating income 34,885 30,411 27,927
Nonoperating income:
Interest expense (417) (545) (695)
Other income 302 931 363
- ------------------------------------------------------------------------------------------------
(115) 386 (332)
- ------------------------------------------------------------------------------------------------
Income before income taxes 34,770 30,797 27,595
Income tax expense 11,814 10,784 10,148
- ------------------------------------------------------------------------------------------------
Net income $ 22,956 $ 20,013 $ 17,447
================================================================================================
Basic earnings per common share $ 1.39 $ 1.23 $ 1.08
Diluted earnings per common share $ 1.36 $ 1.20 $ 1.05
Basic shares outstanding 16,477,637 16,308,563 16,195,843
Diluted shares outstanding 16,884,585 16,689,934 16,629,233
================================================================================================
See accompanying Notes.
17
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
OCTOBER 31, 2002 2001
====================================================================================================================
ASSETS
Current assets
Cash and cash equivalents $ 40,872 $ 25,628
Accounts receivable (less allowances for doubtful accounts
of $1,406 and $1,336, respectively) 50,862 48,546
Inventories 26,173 24,590
Deferred income taxes 7,998 6,284
Prepaid expenses and other current assets 4,233 4,329
- --------------------------------------------------------------------------------------------------------------------
Total current assets 130,138 109,377
Noncurrent assets
Deferred income taxes 1,482 1,405
Intangible assets, net 28,758 27,725
Other noncurrent assets 1,742 1,941
Property, plant and equipment, net 74,759 65,595
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 236,879 $ 206,043
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 16,374 $ 13,266
Accounts payable 16,256 16,606
Accrued payroll and related taxes 13,633 12,294
Other accrued expenses 10,093 7,265
Accrued income taxes 497 3,468
Current portion of long-term debt 714 728
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 57,567 53,627
Noncurrent liabilities
Long-term debt, less current portion 2,030 2,893
Deferred income taxes 5,924 3,423
Retirement benefits 8,945 5,929
- --------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 16,899 12,245
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;
16,566,625 and 16,392,244 shares issued and outstanding 17 16
Treasury Stock, at cost (2,747 shares) (57) (57)
Additional paid-in-capital 46,375 42,602
Unearned compensation (551) (957)
Accumulated other comprehensive (loss) income:
Foreign currency translation adjustments (5,533) (5,224)
Fair value of derivative financial instruments (8) 94
Minimum pension liability (5,153) (670)
- --------------------------------------------------------------------------------------------------------------------
(10,694) (5,800)
Retained earnings 127,323 104,367
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 162,413 140,171
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 236,879 $ 206,043
- --------------------------------------------------------------------------------------------------------------------
====================================================================================================================
See accompanying Notes.
18
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
ACCUMULATED
ADDITIONAL UNEARNED OTHER COM- TOTAL STOCK-
COMMON TREASURY PAID-IN COMPEN- PREHENSIVE RETAINED HOLDERS'
STOCK STOCK CAPITAL SATION INCOME(LOSS) EARNINGS EQUITY
-----------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1999 $16 $ - $ 39,779 $(2,568) $ 440 $ 66,907 $104,574
Net income 17,447 17,447
Other comprehensive income-
Foreign currency translation adjustments (3,986) (3,986)
--------
Comprehensive income 13,461
Amortization of unearned compensation 610 610
Shares awarded under employee stock plans 816 (96) 720
Shares issued to employee benefit plans 650 650
Stock options exercised 254 254
Retirement of Common Stock (1,154) (1,154)
Unearned compensation adjustments (934) 934 -
Tax benefit on stock-based compensation 403 403
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 2000 16 - 39,814 (1,120) (3,546) 84,354 119,518
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 20,013 20,013
Other comprehensive income-
Foreign currency translation adjustments (1,678) (1,678)
Change in fair value of derivative
financial instruments, net of deferred
income taxes of $50 94 94
Minimum pension liability adjustment,
net of income taxes of $418 (670) (670)
--------
Comprehensive income 17,759
Amortization of unearned compensation 727 727
Shares awarded under employee stock plans 1,532 (564) 968
Shares issued to employee benefit plans 632 632
Stock options exercised 496 496
Purchase of Treasury Stock (57) (57)
Tax benefit on stock-based compensation 128 128
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 2001 16 (57) 42,602 (957) (5,800) 104,367 140,171
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 22,956 22,956
Other comprehensive income-
Foreign currency translation adjustments (309) (309)
Change in fair value of derivative
financial instruments, net of deferred
income taxes of $36 49 49
Gains related to derivative financial
instruments reclassified into earnings
from other comprehensive income, net
of $109 tax benefit (151) (151)
Minimum pension liability adjustment,
net of income taxes of $2,761 (4,483) (4,483)
--------
Comprehensive income 18,062
Amortization of unearned compensation 648 648
Shares awarded under employee stock plans,
net 519 (242) 277
Shares issued to employee benefit plans 717 717
Stock options exercised 1 1,664 1,665
Tax benefit on stock-based compensation 873 873
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 2002 $17 $(57) $46,375 $ (551) $(10,694) $127,323 $162,413
====================================================================================================================================
See accompanying Notes.
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED OCTOBER 31, 2002 2001 2000
===========================================================================================================================
OPERATING ACTIVITIES
Net income $ 22,956 $ 20,013 $ 17,447
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,266 9,052 8,866
Noncash compensation recognized under employee stock plans 840 921 890
Gain on sales of property, plant and equipment (1) (59) (17)
Pension costs (less than) in excess of funding (4,435) (347) 304
Deferred income taxes 3,805 (792) 2,658
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (2,031) 2,890 (4,160)
Inventories (2,250) (1,654) 3,511
Accounts payable and accrued expenses 546 90 3,698
Accrued income taxes 3,670 (474) 887
Prepaid expenses and other (2,246) (1,696) 439
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 29,120 27,944 34,523
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 129 104 72
Proceeds from surrender of life insurance policies -- -- 569
Acquisition of companies, net of cash acquired (700) (4,489) (2,885)
Capital expenditures (17,600) (11,028) (12,143)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (18,171) (15,413) (14,387)
FINANCING ACTIVITIES
Proceeds from long-term debt -- -- 5,200
Principal payments on long-term debt (929) (969) (12,159)
Net borrowings (repayments) under short-term bank loans 3,271 363 (4,144)
Retirement of Common Stock -- -- (1,154)
Acquisition of Treasury Stock -- (57) --
Proceeds from stock options exercised 1,664 496 254
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 4,006 (167) (12,003)
Effect of exchange rate changes on cash and cash equivalents 289 (550) (505)
- ---------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 15,244 11,814 7,628
Cash and cash equivalents at beginning of year 25,628 13,814 6,186
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 40,872 $ 25,628 $ 13,814
===========================================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 403 $ 572 $ 760
Income taxes 10,371 12,261 6,286
===========================================================================================================================
See accompanying Notes.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CUNO INCORPORATED
NOTE I - ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION:
CUNO Incorporated (the "Company," "CUNO," or "we") 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 potable water, healthcare, and fluid processing markets throughout
the world. In the normal course of business, we grant credit to customers for
which we do not require collateral. Credit losses are provided for and have been
within management's expectations.
CONSOLIDATION:
The accounts of CUNO and all of its subsidiaries are included in the
consolidated financial statements. All significant intercompany accounts and
transactions are eliminated in consolidation.
CASH EQUIVALENTS:
We consider all highly liquid investments with a maturity of three
months or less, when purchased, to be cash equivalents. Cash equivalents consist
of time deposits in financial institutions.
INVENTORIES:
Inventories are stated at the lower of cost or market. Inventories
in the United States are primarily valued by the last-in, first-out (LIFO) cost
method. The method used for all other inventories is first-in, first-out (FIFO).
Approximately 52 and 48 percent of worldwide inventories in 2002 and 2001,
respectively, are accounted for using the LIFO method. Inventories as of October
31 consisted of the following (in thousands):
===============================================
2002 2001
---- ----
Raw materials $11,701 $10,692
Work in process 3,112 2,868
Finished goods 11,360 11,030
- -----------------------------------------------
$26,173 $24,590
======================
===============================================
If all inventories were valued by the FIFO method, which
approximates replacement cost, inventories would have been $2,699,000 higher in
2002 and $2,900,000 higher in 2001.
INTANGIBLES:
Intangible assets as of October 31 consisted of the following (in
thousands):
================================================================================
2002 2001
---- ----
Goodwill $27,074 $26,336
Pension intangible asset 694 720
Other intangibles, less accumulated amortization
(2002 - $24,937; 2001 - $24,850) 990 669
- --------------------------------------------------------------------------------
$28,758 $27,725
======================
================================================================================
Goodwill, which is the excess of cost over the fair value of net
assets acquired, has historically been amortized on a straight-line basis over
periods ranging from 10 to 40 years. 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.
21
We began applying the new rules on accounting for existing goodwill
and other intangible assets on November 1, 2001. Reported results compared to
adjusted results as if the new statement was adopted effective November 1, 2000
follow (in thousands, except share amounts):
================================================================================
REPORTED ADJUSTED REPORTED ADJUSTED
2001 2001 2000 2000
-----------------------------------------------
Income before income taxes $30,797 $32,113 $27,595 $28,735
Net Income 20,013 21,273 17,447 18,531
Basic earnings per share $ 1.23 $ 1.30 $ 1.08 $ 1.14
Diluted earnings per share $ 1.20 $ 1.27 $ 1.05 $ 1.11
================================================================================
A reconciliation of reported net income to adjusted net income (amounts in
thousands) follows:
=========================================================================
2001 2000
---- ----
Reported net income $ 20,013 $ 17,447
Goodwill amortization 1,316 1,140
Tax effect of deductible goodwill (56) (56)
---------------------------
Adjusted net income $ 21,273 $ 18,531
===========================
=========================================================================
A summary of changes of the carrying amount of goodwill (amounts in
thousands) follows:
======================================================
Balance at October 31, 2001 $26,336
Business acquisitions 224
Foreign currency exchange rate changes 514
--------
Balance at October 31, 2002 $27,074
========
======================================================
Other intangibles, including patents, know-how and trademarks, are
stated at their appraised value on the acquisition date less accumulated
amortization, which is provided using the straight-line method over their
estimated useful lives ranging from 10 to 25 years. Amortization of other
intangibles is not material.
PROPERTIES AND DEPRECIATION:
Property, plant and equipment are recorded at cost. Buildings and
equipment are depreciated principally by the straight-line method over their
useful lives, ranging from 10 to 40 years for buildings and 3 to 20 years for
machinery and equipment. All repair and maintenance costs are expensed as
incurred.
IMPAIRMENT OF LONG-LIVED ASSETS:
We review the carrying values of intangibles and long-lived assets
on an annual basis. In addition, in the event that facts and circumstances
indicate that the carrying value of intangibles and long-lived assets or other
assets may be impaired during any other time, an evaluation is performed. Our
evaluations compare the estimated future undiscounted cash flows associated with
the asset to the asset's carrying amount. There were no impairment losses for
any period presented.
INCOME TAXES:
We use the liability method in measuring the provision for income
taxes and recognizing deferred income tax assets and liabilities in the balance
sheet. Deferred income tax assets and liabilities principally arise from
differences between the tax basis of an asset or liability and its reported
amount in the consolidated financial statements. Deferred income tax balances
are determined using provisions of currently enacted tax laws; the effects of
possible future changes in tax laws or rates are not anticipated.
Provisions are made for income taxes on undistributed earnings of
foreign subsidiaries which are expected to be remitted to the U.S. in the near
term. Upon distribution of those earnings in the form of dividends or otherwise,
we would be subject to both U.S. income taxes (subject to an adjustment for
foreign tax credits) and
22
withholding taxes payable to the various foreign countries. Determination of the
amount of any unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation.
TRANSLATION OF FOREIGN CURRENCIES:
For most international operations, local currencies are considered
their functional currencies. Revenue and expense accounts are translated at the
average exchange rate for the year while all assets and liability accounts are
translated at the end of year exchange rate. Resulting translation adjustments
are recorded as a separate component of accumulated other comprehensive income.
REVENUE RECOGNITION:
Revenue is recognized when the earning process is complete and the
risks and rewards of ownership have transferred to the customer, which is
considered to have occurred upon shipment of the finished product. Shipping and
handling costs associated with sales are charged to cost of sales.
RESEARCH AND DEVELOPMENT:
Costs associated with the development of new products and
improvements to existing products are charged to operations as incurred.
Research and development costs were $7,409,000, $7,343,000, and $6,508,000 in
2002, 2001 and 2000, respectively.
ADVERTISING:
Advertising costs are expensed as incurred and included in selling,
general and administrative expenses. Advertising expenses were $3,104,000,
$2,774,000, and $3,203,000 in 2002, 2001, and 2000, respectively.
EMPLOYEE STOCK OPTIONS:
We account for employee stock options under the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. Accounting for the issuance of stock
options under the provisions of APB Opinion No. 25 typically does not result in
compensation expense for the Company since the exercise price of options is
normally established at the market price of the Company's Common Stock on the
date granted.
OTHER INCOME:
Other income as reported in the accompanying Consolidated Statements
of Income for the years ended October 31 consisted of the following (amounts in
thousands):
================================================================================
2002 2001 2000
---- ---- ----
Interest income $ 603 $ 944 $ 364
Exchange (losses) gains (123) 46 5
Gains on sales of property, plant and equipment 1 59 17
Other expenses (179) (118) (23)
- --------------------------------------------------------------------------------
Total $ 302 $ 931 $ 363
==========================
================================================================================
23
EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share for the years ended October 31:
=================================================================================================
2002 2001 2000
---- ---- ----
NUMERATOR:
Net income $ 22,956,000 $ 20,013,000 $ 17,447,000
==============================================
DENOMINATORS:
Weighted average shares outstanding 16,511,616 16,367,826 16,326,697
Issued but unearned performance shares -- (762) (67,636)
Issued but unearned restricted shares (33,979) (58,501) (63,218)
- -------------------------------------------------------------------------------------------------
Denominator for basic earnings per share 16,477,637 16,308,563 16,195,843
==============================================
Weighted average shares outstanding 16,511,616 16,367,826 16,326,697
Effect of dilutive employee stock options 372,969 322,108 302,536
- -------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share 16,884,585 16,689,934 16,629,233
==============================================
Basic earnings per share $ 1.39 $ 1.23 $ 1.08
Diluted earnings per share $ 1.36 $ 1.20 $ 1.05
=================================================================================================
FOREIGN CURRENCY RISK AND DERIVATIVES:
A significant portion of revenues, earnings and net investments in
foreign affiliates are exposed to changes in foreign currency exchange rates. We
seek to manage our foreign exchange risk in part through operational means,
including managing expected local currency revenues in relation to local
currency costs and local currency assets in relation to local currency
liabilities. Foreign exchange risk is also managed through the use of derivative
financial instruments and foreign currency denominated debt. These financial
instruments serve to protect net income against the impact of the translation
into U.S. dollars of certain foreign exchange denominated transactions. We
utilize forward foreign exchange contracts to hedge specific exposures relating
primarily to export sales with pre-established U.S. dollar amounts at specified
dates. A forward foreign exchange contract obligates the Company to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates.
We recognize all derivative financial instruments, such as foreign
exchange contracts, in the consolidated financial statements at fair value
regardless of the purpose or intent for holding the instrument. Changes in the
fair value of derivative financial instruments are either recognized
periodically in income or in shareholders' equity as a component of accumulated
other comprehensive income depending on whether the derivative financial
instrument qualifies for hedge accounting, and if so, whether it qualifies as a
fair value hedge or cash flow hedge. Generally, changes in fair values of
derivatives accounted for as fair value hedges are recorded in income along with
the portions of the changes in the fair values of the hedged items that relate
to the hedged risk(s). Changes in fair values of derivatives accounted for as
cash flow hedges, to the extent they are effective as hedges, are recorded in
other comprehensive income net of deferred income taxes. There were no
ineffective hedges for any of the years presented. Changes in fair values of
derivatives not qualifying as hedges are reported in income.
USE OF ESTIMATES:
The preparation of the accompanying financial statements in
conformity with accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. Estimates are used when accounting for depreciation, amortization,
employee benefits, contingencies, and asset valuation allowances.
NEWLY ISSUED ACCOUNTING STANDARDS:
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
24
Assets to Be Disposed Of" and provides a single accounting model for long-lived
assets to be disposed of. We will adopt the statement in fiscal year 2003, which
begins November 1, 2002. We do not expect this standard to materially impact our
business or our results of operations.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year amounts
to conform to the current year presentation.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of October 31 is comprised of the
following (in thousands):
===============================================================
2002 2001
---- ----
Land and land improvements $ 6,056 $ 6,064
Buildings 35,028 30,326
Machinery and equipment 92,744 82,907
Construction in progress 16,682 15,086
- ---------------------------------------------------------------
150,510 134,383
Less accumulated depreciation 75,751 68,788
--------------------------
$ 74,759 $ 65,595
==========================
===============================================================
Depreciation expense was $7,945,000 in 2002, $7,898,000 in 2001, and
$7,649,000 in 2000.
NOTE 3 - DEBT
Debt amounted to $2,744,000 and $3,621,000 at October 31, 2002 and
2001, respectively, and primarily relates to debt instruments used to finance
certain capital expenditures and acquisitions, including certain debt which has
been discounted at 6.0 percent and is payable over five years. Principal
payments due after October 31, 2002 are: 2003 - $714,000; 2004 - $862,000; 2005
- - $139,000; 2006 - $135,000; 2007 - $131,000 and thereafter - $763,000.
Outstanding bank loans at October 31, 2002 and 2001 had weighted
average interest rates of 2.04 percent and 0.67 percent, respectively. The bank
loans and unused short-term lines of credit are payable upon demand and are
unsecured. There are no significant commitment fees related to the bank loans or
unused lines of credit.
We had available uncommitted, unused short-term lines of credit in
various countries totaling $29,827,000 at October 31, 2002. Borrowings under the
unused short-term lines of credit are subject to the bank's approval.
NOTE 4 - CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, par value $.001 per share, and 2,000,000 shares of
Preferred Stock, par value $.001 per share.
COMMON STOCK
Subject to preferences that may be applicable to any outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Holders of Common Stock are entitled to one vote per share
in all matters to be voted upon by shareholders. In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of the Company's
liabilities and the liquidation preferences of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive rights and no rights to convert their
Common Stock into any other securities, and there are no redemption provisions
with respect to such shares. All of the outstanding shares of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which we may issue in the future.
PREFERRED STOCK
The authorized class of Preferred Stock may be issued in series from
time to time with such designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions thereof as the Board of Directors
determines. The rights, priorities, preferences, qualifications, limitations and
restrictions of different series of Preferred Stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights,
25
conversion rights, redemption provisions, sinking fund provisions and other
matters. The Board of Directors may authorize the issuance of Preferred Stock
which ranks senior to the Common Stock with respect to the payment of dividends
and the distribution of assets upon liquidation. In addition, the Board is
authorized to fix the limitations and restrictions, if any, upon the payment of
dividends on Common Stock to be effective while any shares of Preferred Stock
are outstanding.
STOCKHOLDER RIGHTS PLAN
We have a Stockholder Rights Plan, pursuant to which a preferred
share purchase right (a "Right") is associated with, and trades with, each share
of Common Stock outstanding. Each Right, when it becomes exercisable, entitles
its holder to purchase from the Company one-hundredth of a share of Series A
Junior Participating Preferred Stock ("Series A Preferred Stock"), par value
$.001 per share, of the Company at a price of $60 per one-hundredth share,
subject to adjustment. The Rights are not exercisable until the earlier of (i)
the acquisition of 15% or more of the Company's Common Stock by a person or
group of affiliated persons (an "Acquiring Person"); or (ii) 10 days following
the commencement or announcement of an intention to make a tender or exchange
offer which would result in a person or group becoming an Acquiring Person. Each
holder of a Right will have the right to receive, upon exercise, the number of
shares of Common Stock or one-hundredths of a share of Series A Preferred Stock
having a value (immediately prior to such triggering event) equal to two times
the exercise price of such Right. In the event that the Company is acquired in a
merger or acquisition, as defined, each holder of a Right shall have the right
to receive, upon exercise, common shares of the acquiring company having a value
equal to two times the exercise price of the Right. The Rights expire on August
8, 2006.
NOTE 5 - OPERATING LEASES
We have certain lease agreements for various facilities and
equipment. Rent expense under operating leases was approximately $2,220,000 in
2002, $2,430,000 in 2001, and $2,694,000 in 2000.
Future minimum lease payments under noncancellable operating leases
with an initial term of one year or more at October 31, 2002 were as follows:
2003 - $2,151,000; 2004 - $1,917,000; 2005 - $1,470,000; 2006 -$1,310,000; and
2007 - $1,394,000.
NOTE 6 - BENEFIT PLANS
We have noncontributory defined benefit plans for most of our U.S.
employees. Pension benefits for the hourly employees covered by these plans are
expressed as a flat benefit rate times years of continuous service. Benefits for
salaried employees are based upon a percentage of the employee's average
compensation during the preceding ten years, reduced by 50 percent of the Social
Security Retirement Benefit. The Company funds amounts at least sufficient to
exceed the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974, plus such additional amounts as may be deemed
appropriate.
We also have contributory defined benefit pension plans covering our
employees in Japan. Benefits under these plans are based on years of service and
compensation in the period immediately preceding retirement. Funding is
predicated on minimum contributions as required by local laws and regulations
plus additional amounts, if any, as may be deemed appropriate.
The following table sets forth the funded status and amounts
recognized in the Consolidated Balance Sheets at October 31, 2002 and 2001 for
our U.S. and Japanese defined benefit pension plans (in thousands):
=====================================================================
2002 2001
---- ----
Projected benefit obligation $(41,118) $(38,806)
---------------------------
Market value of plan assets $ 27,776 $ 27,009
---------------------------
Projected benefit obligation
in excess of plan assets $(13,342) $(11,797)
Unrecognized net loss 13,270 7,426
Unrecognized prior service cost 414 423
Unrecognized transition obligation 147 215
Additional minimum liability (9,434) (2,196)
- ---------------------------------------------------------------------
Net pension liability $ (8,945) $ (5,929)
===========================
=====================================================================
26
The increase in the underfunded status of the pension plans in 2002
results primarily from decreases in the discount rate and expected long-term
rate of return on assets coupled with the effect on Plan assets of adverse
capital market performance.
Plan assets at October 31, 2002 are invested in publicly traded and
restricted mutual funds, various corporate and government bonds, guaranteed
income contracts and listed stocks, including common stock of the Company having
a market value of $1,554,000 (50,000 shares) at that date.
A summary of the various components of net periodic pension cost for
defined benefit plans and cost information for other plans for the three-year
period is shown below (in thousands):
================================================================================
2002 2001 2000
---- ---- ----
DEFINED BENEFIT PLANS:
Sevice cost $ 2,035 $ 1,794 $ 1,915
Interest cost 2,124 1,947 1,908
Expected return on plan assets (1,350) (1,750) (2,000)
Amortization of:
Prior service costs 158 199 241
Net transition asset 68 71 78
Actuarial losses (1,450) (917) (379)
- --------------------------------------------------------------------------------
Net pension expense $ 1,585 $ 1,344 $ 1,763
==========================================
================================================================================
A summary of the changes in the projected benefit obligation is
shown below (amounts in thousands):
=========================================================================
2002 2001
---- ----
Benefit obligation - beginning of year $ 38,806 $ 34,213
Service cost 2,035 1,794
Interest cost 2,124 1,947
Benefits and expenses paid (1,959) (1,520)
Actuarial assumption changes 78 4,645
Plan amendments -- (950)
Foreign currency exchange rate changes 34 (1,323)
- -------------------------------------------------------------------------
Benefit obligation - end of year $ 41,118 $ 38,806
===========================
=========================================================================
A summary of the changes in Plan assets is shown below (amounts in
thousands):
=========================================================================
2002 2001
---- ----
Plan assets - beginning of year $ 27,009 $ 30,185
Actual return on assets (3,088) (2,645)
Employer contributions 5,839 1,770
Benefits and expenses paid (1,959) (1,520)
Foreign currency exchange rate changes (25) (781)
- -------------------------------------------------------------------------
Plan assets - end of year $ 27,776 $ 27,009
===========================
=========================================================================
27
We made an incremental $4,000,000 contribution to our U.S. pension
plans in the first quarter of 2002 to bolster the funding and earnings
capabilities of the Plans. In addition, in November 2002 we made another
incremental contribution of $6,000,000 to our pension Plans. Assumptions used in
the accounting for the defined benefit plans as of October 31 were:
=========================================================================
2002 2001
---- ----
DOMESTIC PLANS
Weighted-average discount rate 7.00% 7.25%
Rates of increase in compensation levels 4.00% 4.50%
Expected long-term rate of return on assets 9.25% 9.75%
FOREIGN PLAN (JAPAN)
Weighted-average discount rate 2.50% 2.50%
Rates of increase in compensation levels 2.25% 2.75%
Expected long-term rate of return on assets 4.75% 5.00%
=========================================================================
Due to assumptions inherent in the actuarial computations, it is
reasonably possible that future actual expenses will differ from current
actuarial estimates.
We sponsor a defined contribution plan that provides all U.S.
employees of the Company an opportunity to accumulate funds for their
retirement. We currently match 50% of employee contributions up to 6% of
qualified wages. Company matching contributions charged to income amounted to
$799,000, $678,000, and $638,000, in 2002, 2001 and 2000, respectively. Company
matching contributions are made annually in shares of the Company's Common Stock
subsequent to the Plan's calendar year end.
NOTE 7 - INCOME TAXES
The components of income before income taxes and the provision for
income taxes are summarized as follows (in thousands):
================================================================================
2002 2001 2000
---- ---- ----
Income before income taxes
Domestic $ 26,132 $ 22,109 $ 19,675
Foreign 8,638 8,688 7,920
- --------------------------------------------------------------------------------
34,770 30,797 27,595
Income taxes (benefit)
Current
Domestic - Federal 4,438 7,159 3,108
- State and local 197 915 567
Foreign 4,254 3,767 3,815
Operating loss carryforwards -- (265) --
- --------------------------------------------------------------------------------
8,889 11,576 7,490
Deferred
Domestic - Federal 3,338 (645) 2,518
- State and local 344 (147) 449
Foreign (757) -- (309)
- --------------------------------------------------------------------------------
2,925 (792) 2,658
- --------------------------------------------------------------------------------
11,814 10,784 10,148
- --------------------------------------------------------------------------------
Net Income
Domestic 17,815 14,827 13,033
Foreign 5,141 5,186 4,414
- --------------------------------------------------------------------------------
$ 22,956 $ 20,013 $ 17,447
=========================================
================================================================================
28
A reconciliation of the statutory U.S. federal rate to the effective
income tax rate follows:
================================================================================
2002 2001 2000
---- ---- ----
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State and local taxes on income, net of domestic
federal income tax benefit 1.6 1.6 2.4
Impact of foreign subsidiaries on effective rate (0.5) 1.0 1.2
Benefit of operating loss carryforwards -- (0.9) --
Tax credits (0.8) (2.3) (2.7)
Prior year tax provision adjustments (1.5) (0.2) 0.4
Goodwill amortization with no tax benefit -- 1.0 1.2
All other 0.2 (0.2) (.7)
- --------------------------------------------------------------------------------
Effective income tax rate 34.0% 35.0% 36.8%
===========================
================================================================================
Significant components of our deferred income tax liabilities and
assets as of October 31 are as follows (in thousands):
================================================================================
2002 2001
---- ----
Deferred income tax liabilities:
Property, plant and equipment $ 6,067 $5,136
Deferred income tax assets:
Pension liability 1,297 1,986
Employee benefits 2,983 2,655
Net operating loss carryforwards 1,465 116
Other accruals 2,886 1,845
Inventories 1,409 1,334
Other 1,048 1,582
- --------------------------------------------------------------------------------
Total deferred income tax assets 11,088 9,518
Less: valuation allowance for deferred income tax assets 1,465 116
- --------------------------------------------------------------------------------
Deferred income tax assets, after valuation allowance 9,623 9,402
- --------------------------------------------------------------------------------
Net deferred income tax assets $ 3,556 $4,266
================
================================================================================
The valuation allowance for deferred income tax assets as of October
31, 2000 was $350,000. The increase in the valuation allowance during fiscal
2002 relates to additional net operating loss carryforwards generated in China,
Argentina, Germany, and the United Kingdom. Although realization of the net
deferred income tax asset of $9,623,000 is not assured, management believes it
is more likely than not that all of such net deferred income tax assets will be
realized. The amount of the net deferred income tax assets considered
realizable, however, could be reduced if estimates of future taxable income are
reduced.
A summary of our net operating loss carryforwards, calculated using
tax laws existing at October 31, 2002, follows:
AMOUNT COUNTRY EXPIRATION
------ ------- ----------
$184,000 Germany Indefinite
482,000 China 2007
622,000 Argentina 2004, 2007
177,000 United Kingdom Indefinite
29
NOTE 8 - ACQUISITIONS
In fiscal 2002, we completed a product line acquisition in Australia and a
distributor acquisition in Europe for total consideration of $700,000. The
amount of goodwill and other intangibles recorded in connection with these
acquisitions amounted to $250,000 and $244,000, respectively. In the second
quarter of fiscal 2001, we completed two acquisitions - a product line in
Australia and a distributor in Europe - for a total cost of $4,500,000. These
acquisitions did not have a material effect on the Company's historical
financial statements or its pro forma operating results. The amount of goodwill
recorded in connection with these acquisitions amounted to $4,300,000. In the
second quarter of fiscal 2000, we made a contingent consideration payment of
$2,900,000 million related to the previous acquisition of Chemical Engineering
Corporation (CEC). This payment was recorded as additional goodwill. There will
be no future contingency payments related to the CEC acquisition. The
acquisition of CEC included certain life insurance policies on key officers of
CEC. In the second quarter of fiscal 2000, CUNO elected to surrender these
policies for their cash surrender value upon settlement.
NOTE 9 - SEGMENT FINANCIAL DATA
For management reporting and control, the Company is divided into five
geographic operating segments as presented below. Each segment has general
autonomy over its business and local operations.
Operating segment data include the results of all subsidiaries, consistent
with the management reporting of these operations. Financial information by
geographic operating segment as of and for each of the years ended October 31 is
summarized below (amounts in thousands):
2002 2001 2000
---- ---- ----
NET SALES:
Europe $ 50,845 $ 42,337 $ 36,724
Japan 30,950 34,807 40,593
Asia/Pacific 28,861 25,427 25,322
Latin America 11,629 12,406 13,788
--------- --------- ---------
Subtotal - Foreign Sales 122,285 114,977 116,427
North America 172,432 160,824 157,846
Elimination of intercompany sales (36,516) (31,352) (31,199)
--------- --------- ---------
Consolidated $ 258,201 $ 244,449 $ 243,074
========= ========= =========
Each geographic operating segment primarily sells its products to external
customers within its country of domicile.
One of our customers accounted for approximately 13.2 percent of fiscal
2002 sales and 11.5 percent of fiscal 2001 sales. We believe that no other
customer accounts for more than ten percent of sales.
2002 2001 2000
---- ---- ----
OPERATING INCOME:
North America $ 23,032 $ 19,032 $ 17,503
Europe 3,523 2,465 1,330
Japan 2,365 3,380 3,504
Asia/Pacific 4,053 3,543 3,662
Latin America 1,912 1,991 1,928
-------- -------- --------
Segment total 34,885 30,411 27,927
-------- -------- --------
Interest expense (417) (545) (695)
Other income, net 302 931 363
-------- -------- --------
Income before income taxes $ 34,770 $ 30,797 $ 27,595
======== ======== ========
30
Segment operating income consists of net sales less operating expenses.
Interest expense and other income, net have not been allocated to segments.
2002 2001 2000
---- ---- ----
ASSETS:
North America $ 154,132 $ 143,902 $ 153,830
Europe 35,226 30,236 18,972
Japan 28,043 27,868 31,824
Asia/Pacific 15,368 12,601 11,923
Latin America 7,679 6,441 6,345
General Corporate 40,872 25,628 13,814
Eliminations and other (44,441) (40,633) (47,809)
--------- --------- ---------
Consolidated $ 236,879 $ 206,043 $ 188,899
========= ========= =========
General corporate assets (principally cash and investments) are not
allocated to segments.
Eliminations and other is primarily comprised of intercompany receivables
and investments in subsidiaries, both of which are eliminated in our
consolidated financial statements.
2002 2001 2000
---- ---- ----
CAPITAL EXPENDITURES:
North America $12,752 $ 7,842 $10,185
Europe 840 754 450
Japan 576 812 675
Asia/Pacific 864 975 511
Latin America 2,568 645 322
------- ------- -------
Consolidated $17,600 $11,028 $12,143
======= ======= =======
2002 2001 2000
---- ---- ----
DEPRECIATION AND AMORTIZATION:
North America $ 6,337 $ 6,878 $ 6,996
Europe 690 894 668
Japan 521 541 540
Asia/Pacific 543 428 460
Latin America 175 311 202
------- ------- -------
Consolidated $ 8,266 $ 9,052 $ 8,866
======= ======= =======
We sell our products in three principle markets. The Potable Water market
includes applications designed for residential, commercial, and food service
customers. The fluid processing market includes customers in industries as
diverse as chemical, petrochemical, oil & gas, paints and resins, and
electronics. The healthcare market customers include food & beverage providers
which require absolute clarity and stability of their products and
pharmaceutical and biotechnology companies which require cost-efficient
filtration and high levels of purity for production of sterile, contaminate free
drugs and diagnostic test kits.
31
Our sales by market are summarized for each of the years ended October 31
(amounts in thousands):
2002 2001 2000
---- ---- ----
NET SALES:
Potable Water $119,456 $107,263 $101,483
Fluid Processing 68,714 71,898 78,781
Healthcare 70,031 65,288 62,810
-------- -------- --------
Consolidated $258,201 $244,449 $243,074
======== ======== ========
NOTE 10 - STOCK OPTIONS AND AWARDS
We have a stock option and award plan which allows for granting a number
of stock incentive instruments, including nonqualified and incentive stock
options, restricted stock, performance shares and stock appreciation rights
which may be granted as part of a stock option or as a separate right to the
holders of any rights previously granted. The plan permits the granting of such
stock awards of up to 2,200,000 shares of Common Stock. Accordingly, such shares
have been authorized and reserved.
The options are exercisable at various dates and have varying expiration
dates. Approximately 288,000 shares of Common Stock are reserved for issuance to
key employees and nonemployee directors under the provisions of these option and
award plans as of October 31, 2002.
Awards of restricted shares totaled 7,250, 20,219, and 5,500 in 2002,
2001, and 2000, respectively. When rights or awards are granted, associated
compensation expense is accrued from the date of the grant to the date such
options or awards are exercisable. Shares earned under the plan are based on a
formula which may be adjusted at the discretion of the Company's Compensation
Committee.
A summary of stock option activity follows:
OPTIONS EXERCISE PRICE
------- --------------
Outstanding at October 31, 1999 675,358 7.94 - 21.50
--------- -------------
Options granted 211,250 19.75 - 30.06
Options exercised (16,350) 15.13 - 15.25
Options forfeited (20,500) 14.13 - 27.50
--------- -------------
Outstanding at October 31, 2000 849,758 7.94 - 30.06
--------- -------------
Options granted 204,410 25.05 - 30.00
Options exercised (34,722) 14.13 - 21.50
Options forfeited (11,250) 14.13 - 27.88
--------- -------------
Outstanding at October 31, 2001 1,008,196 7.94 - 30.06
--------- -------------
Options granted 221,253 29.15 - 37.19
Options exercised (162,725) 14.13 - 21.50
Options forfeited (13,750) 14.13 - 29.15
--------- -------------
Outstanding at October 31, 2002 1,052,974 7.94 - 37.19
========= =============
32
The weighted-average grant-date fair value of options granted was $14.60,
$12.93, and $5.69 in 2002, 2001, and 2000, respectively. The following table
summarizes information concerning currently outstanding options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------- ------------------------------
WEIGHTED-
RANGE OF AVERAGE WEIGHTED- WEIGHTED-
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------ ----------- ---- -------------- ----------- --------------
$ 5 - $15 195,686 4.32 $ 12.29 195,686 $ 12.29
15 - 20 415,625 5.70 17.72 330,375 17.20
20 - 25 6,000 5.71 21.31 5,250 21.45
25 - 30 392,413 8.53 28.43 9,500 28.49
30 - 35 17,750 9.25 32.69 375 30.06
35 - 40 25,500 9.46 36.21 -- --
--------- -------
1,052,974 541,186
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), which requires that the information be
determined as if we had accounted for our employee stock options under the
fair-value method of SFAS 123. The fair value for these options was estimated at
the date of grant using the Black-Scholes pricing model with the following
assumptions: risk-free interest rates ranging from 3.8% to 6.5%, no dividend
yield, expected volatility of the market price of Company Common Stock ranging
from 14% to 69%, and an expected option life of five years.
The risk-free interest rate is based on short-term treasury bill rates.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
Our pro forma information compared to as reported information follows
(dollars in thousands):
2002 2001 2000
---- ---- ----
Net Income: As reported $22,956 $20,013 $17,447
Pro forma 21,294 18,822 16,602
Basic earnings per share: As reported $ 1.39 $ 1.23 $ 1.08
Pro forma $ 1.29 $ 1.15 $ 1.03
Diluted earnings per share: As reported $ 1.36 $ 1.20 $ 1.05
Pro forma $ 1.26 $ 1.13 $ 1.00
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS
We used the following methods and assumptions in estimating our fair
value disclosures of financial instruments:
CASH AND CASH EQUIVALENTS:
The carrying amounts reported for cash and cash equivalents approximate
fair value.
LONG AND SHORT-TERM DEBT:
The carrying amounts of our borrowings under our short-term credit
agreements approximate their fair value. The fair values of the long-term debt
are estimated using discounted cash flow analysis, based on our incremental
borrowing rates for similar types of borrowing arrangements. The fair value of
our long-term debt approximates its carrying value because of the variable
interest rate of the majority of the debt.
33
The carrying amounts and fair values of our financial instruments follows
(dollars in thousands):
OCTOBER 31,
-----------
2002 2001
---- ----
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
Cash and cash equivalents $40,872 $40,872 $25,628 $25,628
Bank loans 16,374 16,374 13,266 13,266
Long-term debt 2,744 3,155 3,621 3,888
The carrying amounts of accounts receivable and accounts payable and
accrued expenses approximate fair value because of the short-term nature of
those transactions.
FOREIGN CURRENCY EXCHANGE CONTRACTS:
We utilize forward foreign exchange contracts to hedge specific or
anticipated exposures relating to intercompany payments (primarily parent
company export sales to subsidiaries at pre-established U.S. dollar prices) and
other specific and identified exposures. The terms of the forward foreign
exchange contracts are matched to the underlying transaction being hedged, and
are typically under one year. Because such contracts are directly associated
with identified transactions, they are an effective hedge against fluctuations
in the value of the foreign currency underlying the transaction.
At October 31, 2002, we held forward foreign exchange contracts with
notional amounts totaling $6,210,000 and forward foreign exchange contracts
designated as cash flow hedges with notional amounts totaling $4,950,000. The
fair market value (gain or loss) on these contracts was not significant as of
October 31, 2002.
At October 31, 2001, we held forward foreign exchange contracts with
notional amounts totaling $6,081,000 and forward foreign exchange contracts
designated as cash flow hedges with notional amounts totaling $4,050,000. The
fair market value (gain or loss) on these contracts was not significant as of
October 31, 2001.
NOTE 12 - CONTINGENCIES
We are, from time to time, subject to various legal actions, governmental
audits, and proceedings relating to various matters incidental to our 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 our consolidated
financial position, cash flows or results of operations.
NOTE 13 - INSURANCE
We maintain insurance coverage with such deductibles and self insurance as
we believe 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. As a
result of recent external events, the cost of insurance has risen substantially
and the availability of insurance has become more restrictive. We consider the
impact of these changes as we continually assess the best way to provide for our
insurance needs in the future.
34
NOTE 14 - QUARTERLY DATA (UNAUDITED)
A summary of our quarterly data follows (in thousands, except per-share
amounts):
2002 FIRST SECOND THIRD FOURTH TOTAL
- ---- ----- ------ ----- ------ -----
Net sales $ 58,637 $ 63,116 $ 68,932 $ 67,516 $258,201
Gross profit 26,170 28,191 31,012 30,378 115,751
Net income 4,519 5,414 6,629 6,394 22,956
Basic earnings per share $ 0.28 $ 0.33 $ 0.40 $ 0.39 $ 1.39
Diluted earnings per share $ 0.27 $ 0.32 $ 0.39 $ 0.38 $ 1.36
2001
- -----
Net sales $ 58,586 $ 60,186 $ 63,441 $ 62,236 $244,449
Gross profit 25,062 26,667 28,287 28,364 108,380
Net income 3,828 4,522 5,704 5,959 20,013
Basic earnings per share $ 0.24 $ 0.28 $ 0.35 $ 0.37 $ 1.23
Diluted earnings per share $ 0.23 $ 0.27 $ 0.34 $ 0.36 $ 1.20
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
necessarily equal the total for the year.
35