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, 2003 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
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Registrant's telephone number, including area code
Not Applicable
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.001 Par Value -- 16,690,059 shares as of April 30, 2003
CUNO INCORPORATED
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Three months ended April 30, 2003 and 2002 1
Consolidated Statements of Income - Six months ended April 30, 2003 and 2002 2
Consolidated Balance Sheets - April 30, 2003 and October 31, 2002 3
Consolidated Statements of Cash Flows - Six months ended April 30, 2003 and 2002 4
Notes to Unaudited Condensed Consolidated Financial Statements 5-10
Independent Accountants' Review Report 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23-30
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
THREE MONTHS ENDED
APRIL 30,
2003 2002
------------ ------------
Net sales $ 69,305 $ 63,116
Less costs and expenses:
Cost of products sold 38,027 34,925
Selling, general and administrative 18,238 16,150
Research, development and engineering 3,372 3,696
------------ ------------
59,637 54,771
------------ ------------
Operating income 9,668 8,345
Nonoperating income (expense):
Interest expense (134) (111)
Interest and other income, net 90 27
------------ ------------
(44) (84)
------------ ------------
Income before income taxes 9,624 8,261
Income taxes 3,320 2,847
------------ ------------
Net income $ 6,304 $ 5,414
============ ============
Basic earnings per common share $ 0.38 $ 0.33
Diluted earnings per common share $ 0.37 $ 0.32
Basic shares outstanding 16,638,881 16,480,817
Diluted shares outstanding 17,014,779 16,962,435
See accompanying notes.
-1-
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
SIX MONTHS ENDED
APRIL 30,
2003 2002
------------ ------------
Net sales $ 135,742 $ 121,753
Less costs and expenses:
Cost of products sold 74,710 67,392
Selling, general and administrative expenses 36,027 32,038
Research, development and engineering 7,042 7,121
------------ ------------
117,779 106,551
------------ ------------
Operating income 17,963 15,202
Nonoperating income (expense):
Interest expense (281) (241)
Interest and other income, net 181 198
------------ ------------
(100) (43)
------------ ------------
Income before income taxes 17,863 15,159
Provision for income taxes 6,171 5,226
------------ ------------
Net income $ 11,692 $ 9,933
============ ============
Basic earnings per common share $ 0.70 $ 0.61
Diluted earnings per common share $ 0.69 $ 0.59
Basic shares outstanding 16,601,152 16,415,606
Diluted shares outstanding 16,956,848 16,852,399
See accompanying notes.
-2-
CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
APRIL 30, OCTOBER 31,
2003 2002
--------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 37,662 $ 40,872
Accounts receivable, less allowances for
doubtful accounts of $1,416 and $1,406, respectively 55,880 50,862
Inventories, net 29,475 26,173
Deferred income taxes 8,051 7,998
Prepaid expenses and other current assets 5,595 4,233
--------- ---------
Total current assets 136,663 130,138
Noncurrent assets
Deferred income taxes 1,528 1,482
Intangible assets, net 30,233 28,758
Prepaid pension costs 2,478 -
Other noncurrent assets 1,133 1,742
Property, plant and equipment, net 79,156 74,759
--------- ---------
Total assets $ 251,191 $ 236,879
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 663 $ 714
Bank loans 11,478 16,374
Accounts payable 19,178 16,256
Accrued payroll and related taxes 11,928 13,633
Other accrued expenses 11,020 10,093
Accrued income taxes 3,195 497
--------- ---------
Total current liabilities 57,462 57,567
Noncurrent liabilities
Long-term debt, less current portion 216 2,030
Deferred income taxes 5,702 5,924
Retirement benefits 5,568 8,945
--------- ---------
Total noncurrent liabilities 11,486 16,899
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,
16,690,059 and 16,566,625 shares issued and outstanding 17 17
Treasury Stock, at cost (2,747 shares) (57) (57)
Additional paid-in-capital 48,915 46,375
Unearned compensation (616) (551)
Accumulated other comprehensive loss --
Foreign currency translation adjustments 207 (5,533)
Minimum pension liability (5,153) (5,153)
Change in fair value of derivative financial instruments (85) (8)
--------- ---------
(5,031) (10,694)
Retained earnings 139,015 127,323
--------- ---------
Total stockholders' equity 182,243 162,413
--------- ---------
Total liabilities and stockholders' equity $ 251,191 $ 236,879
========= =========
See accompanying notes.
-3-
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED
APRIL 30,
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income $ 11,692 $ 9,933
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,802 3,913
Noncash compensation recognized under employee stock plans 271 402
Gains on sales of property, plant and equipment (7) (15)
Pension funding in excess of expense (5,979) (4,373)
Deferred income taxes (148) 1,403
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (2,819) (2,732)
Inventories (1,308) 5
Prepaid expenses and other current assets (1,062) (655)
Accounts payable and accrued expenses 1,593 1,716
Accrued income taxes 2,623 (1,328)
-------- --------
Net cash provided by operating activities 9,658 8,269
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 19 74
Acquisition of companies, net of cash acquired (149) (503)
Capital expenditures (7,095) (7,645)
-------- --------
Net cash used for investing activities (7,225) (8,074)
FINANCING ACTIVITIES
Principal payments on long-term debt (2,069) (921)
Net repayments under short-term bank loans (5,295) (1,242)
Proceeds from stock options exercised 762 1,184
-------- --------
Net cash used for financing activities (6,602) (979)
Effect of exchange rate changes on cash and cash equivalents 959 196
-------- --------
Net change in cash and cash equivalents (3,210) (588)
Cash and cash equivalents -- beginning of period 40,872 25,628
-------- --------
Cash and cash equivalents -- end of period $ 37,662 $ 25,040
======== ========
See accompanying notes
-4-
CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2003
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
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.
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 of the financial position and results of
operations for the interim periods set forth herein 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, 2002.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and disclosures made in the accompanying notes to the financial
statements. Actual results could differ from those estimates.
NOTE 2 - INVENTORIES
Inventories consist of the following (amounts in thousands):
APRIL 30, OCTOBER 31,
2003 2002
-------- ----------
Raw materials $ 13,610 $ 11,701
Work-in-process 3,705 3,112
Finished goods 12,160 11,360
-------- --------
$ 29,475 $ 26,173
======== ========
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.
Because these are subject to many factors beyond management's control, interim
results are subject to the final year-end LIFO inventory valuation.
5
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per common share for the three months ended:
APRIL 30, APRIL 30,
2003 2002
----------- -----------
NUMERATOR:
Net income $ 6,304,000 $ 5,414,000
=========== ===========
DENOMINATORS:
Weighted average shares outstanding 16,660,341 16,520,621
Issued but unearned restricted shares (21,460) (39,804)
----------- -----------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,638,881 16,480,817
=========== ===========
Weighted average shares outstanding 16,660,341 16,520,621
Effect of dilutive employee stock options 354,438 441,814
----------- -----------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 17,014,779 16,962,435
=========== ===========
Basic earnings per share $ 0.38 $ 0.33
Diluted earnings per share $ 0.37 $ 0.32
The following table sets forth the computation of basic and diluted
earnings per common share for the six months ended:
APRIL 30, APRIL 30,
2003 2002
----------- -----------
NUMERATOR:
Net income $11,692,000 $ 9,933,000
=========== ===========
DENOMINATORS:
Weighted average shares outstanding 16,624,447 16,457,231
Issued but unearned restricted shares (23,295) (41,625)
----------- -----------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,601,152 16,415,606
=========== ===========
Weighted average shares outstanding 16,624,447 16,457,231
Effect of dilutive employee stock options 332,401 395,168
----------- -----------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,956,848 16,852,399
=========== ===========
Basic earnings per share $ 0.70 $ 0.61
Diluted earnings per share $ 0.69 $ 0.59
During the first six months of 2003, 68,699 stock options were
exercised (net of shares used to pay individual taxes) providing $762,000 in net
cash proceeds to the Company. During the first six months of 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. In addition, 29,811 shares were
used to provide employer matching contributions to our 401(k) plan in 2003.
These shares had a fair market value of approximately $1.0 million which is
included in Additional paid-in-capital.
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,
2003 2002 2003 2002
---- ---- ---- ----
Net income $6,304 $5,414 $11,692 $ 9,933
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 $18, $8, $103 and $44 (25) (15) (156) 82
Losses (gains) related to derivative
financial instruments reclassified into
earnings from other comprehensive
income, net of deferred income taxes of
$13, $7, $58 and $25 17 (12) 79 (45)
Foreign currency translation adjustments 3,521 1,131 5,740 152
------ ------ ------- -------
Total comprehensive income $9,817 $6,518 $17,355 $10,484
====== ====== ======= =======
The overall weakness in the US dollar, compared to the currencies in
which we conduct a large part of our business in, produced the foreign currency
translation adjustment amounts above.
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. The management for each of our segments
operate independent sales and manufacturing organizations that function within
an overall corporate framework of strategic initiatives and performance targets.
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,
2003 2002 2003 2002
---- ---- ---- ----
NET SALES:
Europe $15,627 $12,106 $ 28,713 $ 22,937
Japan 8,659 7,616 16,745 14,538
Asia/Pacific 8,904 6,919 17,662 13,162
Latin America 2,833 3,091 5,197 6,355
------- ------- -------- --------
Subtotal - Foreign sales 36,023 29,732 68,317 56,992
North America 43,973 42,473 86,875 81,580
Intercompany sales (10,691) (9,089) (19,450) (16,819)
------- ------- -------- --------
$69,305 $63,116 $135,742 $121,753
======= ======= ======== ========
7
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2003 2002 2003 2002
---- ---- ---- ----
OPERATING INCOME:
North America $6,098 $5,526 $11,329 $ 9,923
Europe 1,414 774 2,210 1,301
Japan 745 646 1,487 1,052
Asia/Pacific 1,148 912 2,340 1,818
Latin America 263 487 597 1,108
------ ------ ------- -------
Segment total 9,668 8,345 17,963 15,202
------ ------ ------- -------
Interest expense (134) (111) (281) (241)
Other, net 90 27 181 198
------ ------ ------- -------
Income before income taxes $9,624 $8,261 $17,863 $15,159
====== ====== ======= =======
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,
2003 2002 2003 2002
---- ---- ---- ----
Interest income $ 133 $ 133 $ 274 $ 331
Exchange losses (39) (88) (77) (41)
Gains on sales of property,
plant, and equipment 4 10 7 15
Other, net (8) (28) (23) (107)
------ ------ ------- -------
$ 90 $ 27 $ 181 $ 198
====== ====== ======= =======
NOTE 7 - NEWLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS
146, "Accounting for Costs Associated with Exit or Disposal Activities", which
addresses issues regarding the recognition, measurement and reporting of costs
associated with exit and disposal activities, including restructuring
activities. This statement requires that costs associated with exit or disposal
activities be recognized when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 is effective for all exit or
disposal activities initiated after December 31, 2002. We will assess the impact
of this Statement when or if an exit plan for an activity exists.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" (FAS 148). This statement amends SFAS No. 123 "Accounting for
Stock Based Compensation" (FAS 123) to provide alternative methods of
voluntarily transitioning to the fair value based method of accounting for
stock-based employee compensation. FAS 148 also amends the disclosure
requirements of FAS 123 to require disclosure of the method used to account for
stock-based employee compensation and the effect of the method on reported
results in both annual and interim financial statements. We adopted the
disclosure provisions of this Statement beginning with the quarter ended April
30, 2003. The annual impact of
8
a change to a fair value model has been previously disclosed in the Company's
Annual Report on Form 10-K. We are currently studying this new accounting
standard.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (the Interpretation). The Interpretation
requires companies to recognize, at inception of the guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee and also
requires a guarantor to make significant new disclosures, even when the
likelihood of making any payments under the guarantee is remote. The
Interpretation provides specific guidance identifying the characteristics of
contracts that are subject to its guidance in its entirety from those only
subject to the initial recognition and measurement provisions. The recognition
and measurement provisions of the Interpretation are effective on a prospective
basis for guarantees issued or modified after December 31, 2002. The disclosure
requirements of the Interpretation are effective for interim and annual period
financial statements ending after December 15, 2002. There are no additional
disclosures related to the adoption of this standard and we will apply the
Interpretation prospectively if guarantees are entered into in the future.
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.
NOTE 9 - STOCK OPTIONS AND AWARDS
We currently account for our stock option awards under the recognition
and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. No option-based employee
compensation cost is reflected in net income, as all options granted under our
plans had exercise prices equal to the market value of the underlying common
stock on the date of grant. Restricted share grants awarded to employees are
included in earnings as an expense over the vesting period of the award.
9
The following table illustrates the effect on net income and earnings
per share if we had applied the fair value recognition provisions of FAS 123 to
stock-based employee compensation (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $6,304 $5,414 $11,692 $9,933
Add: Stock-based compensation expense included in reported
net income, net of income taxes 83 131 176 261
Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of
income taxes 528 528 1,080 1,039
------ ------ ------- -------
Pro forma net income $5,859 $5,017 $10,788 $9,155
====== ====== ======= ======
Earnings per share:
Basic - as reported $ 0.38 $ 0.33 $ 0.70 $ 0.61
Basic - pro forma $ 0.35 $ 0.30 $ 0.65 $ 0.56
Diluted - as reported $ 0.37 $ 0.32 $ 0.69 $ 0.59
Diluted - pro forma $ 0.34 $ 0.30 $ 0.64 $ 0.54
NOTE 10 - BENEFIT PLANS
The pension assumptions used to determine our October 31, 2002 plan
liabilities and the fiscal 2003 pension expense were as follows:
US PLANS JAPAN PLANS
-------- -----------
Weighted-average discount rate 7.00% 2.50%
Rates of increases in compensation levels 4.00% 2.25%
Expected long-term rate of return on assets 9.25% 4.75%
We determine our assumptions based on current economic and market data,
as well as expectations of future economic and market data. Included in our
analysis are company-specific considerations, such as current and future
investment allocations, participant demographics, and employee compensation
strategies.
Pension expense for fiscal 2003 is determined at the beginning of the
fiscal year and expensed ratably throughout the year. The total pension expense
to be recognized in 2003 will amount to approximately $1.7 million ($1.6 million
in fiscal 2002). We made an incremental cash contribution of $6.0 million in the
first quarter of fiscal 2003 and generally make normal cash contributions to the
Plans in an amount equivalent to the annual expense.
10
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Stockholders and Board of Directors
CUNO Incorporated
We have reviewed the accompanying condensed consolidated balance sheet of CUNO
Incorporated as of April 30, 2003, and the related condensed consolidated
statements of income for the three-month and six-month periods ended April 30,
2003 and 2002 and the condensed consolidated statements of cash flows for the
six-month periods ended April 30, 2003 and 2002. These financial statements are
the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of CUNO
Incorporated as of October 31, 2002, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
presented herewith) and in our report dated December 5, 2002, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of October 31, 2002, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Hartford, Connecticut
May 20, 2003
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations ("MD&A") is provided as a supplement to the accompanying unaudited
interim condensed consolidated financial statements and footnotes to help
provide an understanding of our financial position, changes in our financial
position and results of our operations. Our MD&A is organized as follows:
- COMPANY OVERVIEW. This section provides a general description of
our business.
- COMPANY RISK FACTORS. This section describes the material risks
inherent in our business that investors should be aware of.
- CAUTION CONCERNING FORWARD-LOOKING STATEMENTS. This section
discusses how certain forward-looking statements made by us
throughout the MD&A and elsewhere in this report are based on
management's present expectations about future events and are
inherently susceptible to uncertainty and changes in
circumstances.
- CRITICAL ACCOUNTING POLICIES. This section discusses those
accounting policies that are both considered important to our
financial statements and require significant judgment and
estimates on the part of management in their application.
- RESULTS OF OPERATIONS. This section provides an analysis of our
results of operations for the three and six months ended April 30,
2003 and 2002. In addition, a brief description is provided of
transactions and events that impact the comparability of these
results.
- FINANCIAL POSITION AND LIQUIDITY. This section provides an
analysis of our cash position and cash flows, as well as a
discussion of our financing arrangements.
Other information is presented in Items 3, 4 and elsewhere as follows:
- QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. This
section discusses information about the various market risks we
are exposed to as of the end of the latest fiscal period
presented.
- CONTROLS AND PROCEDURES. This section discusses the conclusions of
our executive officer and principal financial officer about the
effectiveness of our disclosure controls and procedures.
- OTHER INFORMATION. This section describes material developments in
the business or markets in which we compete, as well as any other
information important to our stakeholders.
COMPANY OVERVIEW
CUNO is a world leader in the designing, manufacturing and marketing of
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 used in the potable
water, fluid processing, and healthcare markets. These products, most of which
are disposable, effectively remove contaminants that range in size from
molecules to sand particles. Our sales are balanced between domestic
(approximately 55%) and international markets (approximately 45%). Our objective
is to provide high value-added products and premium customer service. Our
proprietary manufacturing processes result in products that lower customers'
operating expenses and improve the quality of customers' end products by
providing longer lasting, higher quality and more efficient filtration products.
12
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 US dollar in comparison
to local currencies in the countries in which we operate outside the US. 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. The Company's success depends in
part upon our ability to protect our technology and proprietary products under
US 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.
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 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, performance, quality, knowledge, reputation,
technology, distribution capabilities, service and price.
KEY CUSTOMERS AND SUPPLIERS
We have multi-year contracts and arrangements in place with several of
our major customers and suppliers. These contracts and arrangements help us
effectively plan and manage our operations. Since the markets for our products
are dynamic, these contracts and arrangements are continually evolving as we are
sensitive to the changing needs of our customers and the ongoing performance of
our suppliers. There is no assurance, however, that these contracts and
arrangements will be renewed, will not be terminated prematurely or revised to
take into consideration the evolving nature of our relationships with our
customers and suppliers.
13
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
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 Incorporated (the "Company", "CUNO", or
"we") 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, credit risk, 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; continuing beneficial relationships with customers; 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.
CRITICAL ACCOUNTING POLICIES
In December 2001 the U.S. Securities and Exchange Commission ("SEC")
issued Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" ("FRR 60"), encouraging companies
to provide additional disclosure and commentary on their most critical
accounting policies. In FRR 60, the SEC defined the most critical accounting
policies as the ones that are most important to the portrayal of a company's
financial condition and operating results, and require management to make its
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
Based on this definition, our most critical accounting policies include:
accounting for depreciation, amortization, employee benefits, income taxes,
contingencies, stock based compensation and asset valuation allowances
(including those for bad debts and for deferred income tax assets). We also have
other key accounting policies, such as our policy for revenue recognition. The
methods, estimates and judgments we use in applying these most critical
accounting policies have a significant impact on the results we report in our
financial statements.
Depreciation and amortization - We depreciate our property, plant and
equipment using the straight-line method over the estimated useful life of the
asset. These periods range as follows:
Land improvements 10 - 20 years
Buildings and additions 30 - 40 years
Machinery and equipment 5 - 20 years
Computers and related equipment 3 - 5 years
We amortize our patents and other amortizable intangible assets over
their estimated useful lives. The straight line method of amortization is used
unless another method is more appropriate and reliable in reflecting the pattern
in which the asset provides economic benefits. These periods generally range
from 10 - 25 years.
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 at 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.
14
Employee benefits - We account for our pension plans in accordance with
SFAS No. 87, "Employer's Accounting for Pensions". In applying this accounting
practice, assumptions are made regarding the valuation of benefit obligations
and the performance of plan assets.
The primary assumptions are as follows:
- Weighted average discount rate - this rate is used to estimate the
current value of future benefits. This rate is adjusted based on
movements in long-term interest rates.
- Expected long-term rate of return on assets - this rate is used to
estimate future growth in investments and investment earnings. The
expected return is based upon a combination of historical market
performance and anticipated future returns for a portfolio
reflecting the mix of equity, debt and other investments
indicative of our plan assets.
- Rates of increase in compensation levels - this rate is used to
estimate projected annual pay increases, which are used to
determine the wage base used to project employees' pension
benefits at retirement.
We determine these assumptions based on consultations with our outside
actuaries and investment advisors. Any variance in the above assumptions could
have a significant impact on future recognized pension costs, assets and
obligations.
Contingencies, claims, assessments -- From time to time, we are
involved with contingencies, claims, and assessments. We use both in-house and
outside legal counsel to assess the probability of loss. The Company establishes
an accrual when the claims and litigation represent a probable loss and the cost
can be reasonably estimated. There can be no assurance that the ultimate
resolution of these contingencies, claims, and assessments will not differ
materially from our estimates.
Allowance for Bad Debts -- We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. Our allowance for doubtful accounts is based on our
assessment of the collectibility of specific customer accounts, the aging of
accounts receivable, our history of bad debts, and the general condition of the
industry and geographic locations in which we operate. If a major customer's
credit worthiness deteriorates, or our customers' actual defaults exceed our
historical experience, our estimates could change and impact our reported
results.
Income Taxes - We estimate and use our expected annual effective income
tax rate to accrue income taxes on an interim basis. We update these estimates
quarterly. We record valuation allowances to reduce our deferred income tax
assets to an amount that we believe is more likely than not to be realized. We
consider estimated future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance. If we were
to determine that we will not realize all or part of our deferred income tax
assets in the future, we would make an adjustment to the carrying value of the
deferred income tax asset, which would be reflected as an income tax expense.
Conversely, if we were to determine that we will realize a deferred income tax
asset, which currently has a valuation allowance, we would reverse the valuation
allowance which would be reflected as an income tax benefit in our financial
statements.
Stock Based Compensation - We currently account for our stock option
awards under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. No
stock-based employee compensation cost pertaining to stock options is reflected
in net income, as all options granted under our plans had exercise prices equal
to the market value of the underlying common stock on the date of grant.
Restricted share grants awarded to employees are included in earnings as an
expense over the vesting period of the award.
15
Revenue Recognition -- We recognize revenue in accordance with SEC
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 requires that four basic criteria be met before revenue can
be recognized: 1) there is evidence that an arrangement exists; 2) delivery has
occurred; 3) the fee is fixed or determinable; and 4) collectibility is
reasonably assured. We recognize revenue upon determination that all criteria
for revenue recognition have been met, which is considered to have occurred upon
shipment of the finished product.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED APRIL 30, 2003 VS. THREE MONTH PERIOD ENDED APRIL 30,
2002
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
uncertainty in the North American economy, including conditions in certain
markets in which we compete, impacted our consolidated results and is likely to
continue to present challenges to our business near term.
NET SALES
Net sales were $69.3 million in the second quarter of fiscal 2003
representing a 9.8 percent increase over 2002 second quarter sales of $63.1
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 2002, net sales in the second quarter of 2003 would have been $2.8
million lower, or 5.3 percent greater overall.
The following table displays our sales by geographic segment (dollar
amounts in thousands):
THREE MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2003 2002 CHANGE CHANGE
---- ---- ------ -------
North America $36,993 $36,858 0.4% 0.4%
Europe 12,935 9,603 34.7% 9.5%
Japan 8,587 7,538 13.9% 3.1%
Asia/Pacific 8,136 6,189 31.5% 19.4%
Latin America 2,654 2,928 (9.4%) 29.3%
------- ------- ---- ----
Total sales $69,305 $63,116 9.8% 5.3%
======= ======= ==== ====
North American sales were relatively flat in the second quarter of 2003
as compared to the same quarter in 2002. An overall sluggish economy and
particular weakness in some of the residential markets were factors in these
results. European sales increased 9.5 percent in local currency as compared to
the same period in 2002. Healthcare sales, particularly in the
bio-pharmaceutical market, continued their overall strength. Sales in Japan were
up 3.1 percent in local currency primarily reflecting a moderate increase in
sales to the fluid processing market. Asia/Pacific sales were up 19.4 percent
excluding changes in currency values. The increase in Asia/Pacific sales was due
primarily to a broad strength in the Australian markets (particularly wine and
potable water) as well as strength in the Asian Potable Water and Healthcare
markets. Second quarter 2003 Latin American sales increased 29.3 percent due in
part to some large, one-time shipments and strength in the Healthcare market.
16
The following table displays our sales by market (dollar amounts in
thousands):
THREE MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2003 2002 CHANGE CHANGE
---- ---- ------ -------
Potable Water $31,314 $29,541 6.0% 4.6%
Fluid Processing 18,447 16,499 11.8% 4.9%
Healthcare 19,544 17,076 14.5% 6.8%
------- ------- ---- ---
Total sales $69,305 $63,116 9.8% 5.3%
======= ======= ==== ===
The weak economies in the US and certain international markets
(primarily Japan and Latin America) have impacted all of our markets. The Fluid
Processing sales increase of 4.9 percent reflects improved conditions in certain
end markets. The increase in the Potable Water market was broad geographically,
driven largely by strong overseas sales (up 22.7 percent in local currency).
Healthcare sales increased 6.8 percent in local currency and continue to benefit
from a continued focus by management on competitively favorable product lines
and market niches.
GROSS PROFIT
Gross profit increased $3.1 million to $31.3 million in the second
quarter of 2003 from $28.2 million in the second quarter of 2002. Gross profit
as a percentage of net sales (gross margin) increased during that same period
from 44.7 percent in 2002 to 45.1 percent in 2003. Although we are under
pressure to maintain competitive prices with our customers, we pursue various
supply-chain management initiatives designed to lower our production costs. In
addition, we have ongoing programs to modernize our manufacturing facilities to
gain more efficiencies.
OPERATING EXPENSES
Selling, general and administrative expenses ("SG&A") were up 12.9
percent in the second quarter of 2003 as compared to the same period in 2002.
SG&A expenses were 26.3 percent of sales in the second quarter of fiscal 2003
compared to 25.6 percent of sales in the second quarter of fiscal 2002. Because
of CUNO's international operations, the weaker US dollar served to increase the
consolidated US dollar-reported SG&A expense.
Research, development and engineering expenses ("RD&E"), which are
incurred primarily in the US, decreased 8.8 percent from 3.7 million to $3.4
million in the second quarter of 2003. In 2003, we received approximately $0.5
million in RD&E cost reimbursements from various new customers. Adjusting for
these one-time items, RD&E would have increased 3.7 percent - this reflects our
continued focus on the development of new products and technologies. As a
percentage of sales, RD&E expenses were 5.5 percent of sales (adjusted for
reimbursements above) in the second quarter of fiscal 2003 compared to 5.9
percent of sales in the second quarter of fiscal 2002.
OPERATING INCOME
As a result of the above, operating income increased $1.3 million, or
15.9 percent, to $9.7 million or 13.9 percent of sales in the second quarter of
fiscal 2003 compared to $8.3 million or 13.2 percent of sales in the second
quarter of 2002.
NON-OPERATING ACTIVITY
Interest expense was relatively flat in the second quarter of 2003
compared to the second quarter of 2002. See "Financial Position and Liquidity"
below for further discussion of the Company's cash and debt structure.
17
Interest income was flat due to lower average interest rates in the second
quarter of 2003, offset by higher average investment levels.
INCOME TAXES
The Company's effective income tax rate for both the second quarter of
2003 and the second quarter of 2002 was 34.5 percent. Overall, our tax rate is
impacted by the change in the mix of income attributed to the various countries
in which we do business.
SIX MONTH PERIOD ENDED APRIL 30, 2003 VS. SIX MONTH PERIOD ENDED APRIL 30, 2002
NET SALES
Net sales were $135.7 million in the first six months of fiscal 2003
representing an 11.5 percent increase over 2002 sales of $121.8 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
2002, net sales in the first six months of 2003 would have been $4.4 million
lower, or 7.9 percent greater overall.
The following table displays our sales by geographic segment (dollar
amounts in thousands):
SIX MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2003 2002 CHANGE CHANGE
---- ---- ------ -------
North America $ 73,887 $ 71,035 4.0% 4.0%
Europe 24,056 18,265 31.7% 9.8%
Japan 16,566 14,385 15.2% 6.7%
Asia/Pacific 16,367 11,930 37.2% 26.1%
Latin America 4,866 6,138 (20.7%) 14.4%
-------- -------- ----- ----
Total sales $135,742 $121,753 11.5% 7.9%
======== ======== ===== ====
North American sales increased 4.0 percent in the first six months of
2003 as compared to the same period in 2002. Moderately stronger Potable Water
and Fluid Processing market sales were responsible for the growth in North
America during this time period. Strong growth in sales to OEM customers, direct
marketing companies and appliance manufacturers were offset by weakness in the
residential markets. European sales increased 9.8 percent in local currency as
compared to the same period in 2002. Healthcare sales were particularly strong
during this period reflecting greater demand in the pharmaceutical industry.
Sales in Japan were up 6.7 percent in local currency primarily reflecting an
increase in sales to the Fluid Processing market. Asia/Pacific sales were up
26.1 percent excluding changes in currency values. The increase in Asia/Pacific
sales was due primarily to strong sales to the Australian wine industry as well
as strength in the Asian Potable Water and Healthcare markets. Latin American
sales increased 14.4 percent due in large part to the timing of certain large
shipments.
The following table displays our sales by market (dollar amounts in
thousands):
SIX MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2003 2002 CHANGE CHANGE
---- ---- ------ -------
Potable Water $ 61,695 $ 56,661 8.9% 7.8%
Fluid Processing 36,075 31,648 14.0% 8.1%
Healthcare 37,972 33,444 13.5% 7.8%
-------- -------- ---- ---
Total sales $135,742 $121,753 11.5% 7.9%
======== ======== ==== ===
18
The weak economies in the US and certain international markets
(primarily Japan) have impacted all of our markets to some extent. The Fluid
Processing sales increase of 14.0 percent reflects improved conditions in
certain end markets. The strength in the Potable Water market was broad
geographically, driven largely by strong overseas sales (up 21.6 percent in
local currency). Healthcare sales increased and continue to benefit from a
continued focus by management on competitively favorable product lines and
market niches.
GROSS PROFIT
Gross profit increased $6.7 million to $61.0 million in the first six
months of 2003 from $54.4 million in the first six months of 2002. Gross profit
as a percentage of net sales (gross margin) increased during that same period
from 44.6 percent in 2002 to 45.0 percent in 2003. Although we are under
pressure to maintain competitive prices with our customers, we pursue various
supply-chain management initiatives designed to lower our production costs. In
addition, we have ongoing programs to modernize our manufacturing facilities to
gain more efficiencies.
OPERATING EXPENSES
Selling, general and administrative expenses (SG&A) were up 12.5
percent in the first half of 2003 compared to the same period in 2002. SG&A
expenses were 26.5 percent of sales in the first six months of fiscal 2003
compared to 26.3 percent of sales in the first six months of fiscal 2002.
Because of CUNO's international operations, the weaker US dollar served to
increase the consolidated US dollar-reported SG&A expense.
Research, development and engineering expenses ("RD&E"), which are
incurred primarily in the US, decreased 1.1 percent from $7.1 million to $7.0
million in the first six months of 2003. In 2003, we received approximately $0.5
million in RD&E cost reimbursements from various new customers. Adjusting for
these one-time items, RD&E would have increased 5.4 percent - this reflects our
continued focus on the development of new products and technologies. As a
percentage of sales, RD&E expenses were 5.5 percent of sales (adjusted for
reimbursements above) in the first six months of fiscal 2003 compared to 5.8
percent of sales in the first six months of fiscal 2002.
OPERATING INCOME
As a result of the above, operating income increased $2.8 million, or
18.2 percent, to $18.0 million or 13.2 percent of sales in the first six months
of fiscal 2003 compared to $15.2 million or 12.5 percent of sales in the first
six months of 2002.
NON-OPERATING ACTIVITY
Interest expense was relatively flat in the first six months of 2003
compared to the first six months of 2002. 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 the first quarter of
2003, partially offset by higher average investment levels.
INCOME TAXES
The Company's effective income tax rate for the first six months of
both 2003 and 2002 was 34.5 percent. Our tax rate is impacted by the change in
the mix of income attributed to the various countries in which we do business.
19
FINANCIAL POSITION AND LIQUIDITY
We assess liquidity in terms of the Company's ability to generate cash
to fund our continuing 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 ($37.7 million at April 30, 2003) and available sources of liquidity
(approximately $29.8 million of available, 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 nor do we have any investments in
special purpose entities (SPEs).
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.
Likewise, we continue to invest in capital expenditures in order to
expand and modernize manufacturing facilities around the globe. We currently
have plans to expand manufacturing lines in Brazil, China, and France 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,
2003 2002
---- ----
OPERATING ACTIVITIES:
Pension funding in excess of expense $(5,979) $ (4,373)
Inventories (1,308) 5
Net cash provided by operating activities 9,658 8,269
INVESTING ACTIVITIES:
Capital expenditures (7,095) (7,645)
Net cash used for investing activities (7,225) (8,074)
FINANCING ACTIVITIES:
Net change in total debt (7,364) (2,163)
Proceeds from stock options exercised 762 1,184
Net cash used for financing activities (6,602) (979)
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 $6.0 million contribution to our US
pension plans in the first quarter of 2003 and 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 increase of cash of $1.3
million in inventories is primarily in response to the overall increase in sales
volumes around the world.
20
Capital expenditures in 2003 primarily relate to the continued focus on
expanding and modernizing manufacturing facilities around the globe. More
specifically, these expenditures primarily relate to new manufacturing lines in
Brazil and the US. The new manufacturing lines and processes being installed in
the US will benefit the Water Group, Fluid Processing, and Healthcare
operations.
During the first six months of 2003, we made certain scheduled payments
on long-term debt, as well as prepaid approximately $1.4 million in long term
debt. In addition, certain other short term debt instruments were paid down.
During the first six months of 2003, 68,699 stock options were exercised (net of
shares used to pay individual taxes) providing $0.8 million in net cash proceeds
to the Company. During the first six months of 2002, 106,923 stock options were
exercised (net of shares used to pay individual taxes) providing $1.2 million in
net cash proceeds to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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.
There have been no material changes in the information reported in the
Company's Form 10-K for the year ended October 31, 2002 under the "Market Risk
Disclosures" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
21
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 TOTAL
----------- ---- ---- ---- ---- ---- ---------- -----
Bank loans $16,374 $ -- $ -- $ -- $ -- $ -- $16,374
Long-term debt 714 862 139 135 131 763 2,744
Operating leases 2,151 1,917 1,470 1,310 1,394 -- 8,242
---------------------------------------------------------------------------
Total $19,239 $2,779 $1,609 $1,445 $1,525 $763 $27,360
See 2003 changes in bank loans and long-term debt detailed on the
Consolidated Statements of Cash Flows for the six months ended April 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Our chief executive officer and chief financial officer performed
an evaluation of our disclosure controls and procedures as of April 30, 2003
(the "Evaluation Date"). Based on that evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective to ensure that the information required to be
disclosed in the reports that we file under the Securities Exchange Act of 1934
is recorded, processed, summarized, and reported within the time periods
specified in the SEC's rules and forms.
(b) There have been no significant changes in our internal controls
since the Evaluation Date. We are not aware of any significant change in any
other factors that could significantly affect our internal controls subsequent
to the Evaluation Date.
OTHER INFORMATION
ARGENTINE PESO DEVALUATION
A significant devaluation in the Argentine peso took place in the 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" above.
COST OF INSURANCE
Partly as a result of the September 11, 2001 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.
22
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We held our annual meeting of Stockholders on March 6, 2003.
(b) The following individuals were nominated and elected to serve a term of
three years as Directors:
Mr. Joel B. Alvord.
Dr. Charles L. Cooney
Mr. John M. Galvin
(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. Joel B. Alvord 14,760,451 263,909 1,598,236
Dr. Charles L. Cooney 14,703,747 320,613 1,598,236
Mr. John M. Galvin 14,678,793 345,567 1,598,236
2. A proposal for the approval of the Second Amendment to the
1996 Stock Incentive Plan was approved by a count of 9,367,741
votes for, 4,304,144 votes against, 29,675 votes abstaining,
and 2,921,036 shares not voted.
3. A proposal for the approval of the Second Amendment to the
Non-Employee Directors' Stock Option Plan was approved by a
count of 10,207,083 votes for, 3,461,796 votes against, 32,681
votes abstaining, and 2,921,036 shares not voted.
4. A proposal for the approval of the performance goals in the
Executive Management Incentive Plan was approved by a count of
14,551,012 votes for, 437,363 votes against, 35,985 votes
abstaining, and 1,598,236 shares not voted.
5. A proposal for the appointment of Ernst & Young LLP as
independent auditors was approved by a count of 13,723,552
votes for, 1,283,827 votes against, 16,981 votes abstaining,
1,598,236 shares not voted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
Exhibit 15 -- Acknowledgement of Ernst & Young LLP
Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
23
(b) Reports on From 8-K
We filed a Report on Form 8-K, dated February 20, 2003, under "Item 5. Other
Events," reporting our financial results for the first quarter ended January 31,
2003.
24
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 21, 2003
By /s/Mark G. Kachur
--------------------
Mark G. Kachur
Chairman of the Board of Directors,
President and Chief Executive Officer
By /s/ Frederick C. Flynn, Jr.
---------------------------
Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer,
Controller, and Assistant Secretary
25
CERTIFICATIONS
I, Mark G. Kachur, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CUNO Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 21, 2003
/s/ Mark G. Kachur
------------------
Mark G. Kachur
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
26
CERTIFICATIONS
I, Frederick C. Flynn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CUNO Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 21, 2003
/s/ Frederick C. Flynn, Jr.
---------------------------
Frederick C. Flynn, Jr.
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
27