-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NOJYkMz1ZjZzavKfEH3X2JR3xKwIKY6bwMUJa4Z40bfUhfDk5ATkKT5X70FXYEBI h4EB2vRgNkxRDBj4fvffmw== /in/edgar/work/20000531/0000914039-00-000289/0000914039-00-000289.txt : 20000919 0000914039-00-000289.hdr.sgml : 20000919 ACCESSION NUMBER: 0000914039-00-000289 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000430 FILED AS OF DATE: 20000531 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUNO INC CENTRAL INDEX KEY: 0001019779 STANDARD INDUSTRIAL CLASSIFICATION: [3470 ] IRS NUMBER: 061159240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21109 FILM NUMBER: 647072 BUSINESS ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: MERIDEN STATE: CT ZIP: 06450 BUSINESS PHONE: 2032375541 MAIL ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: MERIDEN STATE: CT ZIP: 06450 10-Q 1 0001.txt FORM 10-Q 1 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, 2000 Commission file number 000-21109 ---------
CUNO INCORPORATED (Exact name of registrant as specified in its charter) Delaware 06-1159240 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 Research Parkway, Meriden, Connecticut 06450 - ------------------------------------------ ---------------------------- (Address of principal executive offices) (Zip Code) (203) 237-5541 - ------------------------------------------------------------------------------ Registrant's telephone number, including area code Not Applicable - ------------------------------------------------------------------------------ Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, .001 Par Value -- 16,329,930 shares as of April 30, 2000 2 CUNO INCORPORATED
Page Part I. Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Statements of Income - Three months ended April 30, 2000 and 1999 1 Consolidated Statements of Income - Six months ended April 30, 2000 and 1999 2 Consolidated Balance Sheets - April 30, 2000 and October 31, 1999 3 Consolidated Statements of Cash Flows - Six months ended April 30, 2000 and 1999 4 Notes to Unaudited Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17
3 CUNO Incorporated Consolidated Statements of Income (unaudited) (dollars in thousands, except share amounts)
Three Months Ended April 30, 2000 1999 ---------------- ----------------- Net sales $ 58,910 $ 54,027 Less costs and expenses: Cost of products sold 33,436 30,120 Selling, general and administrative expenses 15,742 15,457 Research, development and engineering 3,365 2,955 ---------------- ----------------- 52,543 48,532 ---------------- ----------------- Operating income 6,367 5,495 Nonoperating income (expense): Interest expense (188) (297) Other income, net 12 64 ---------------- ----------------- (176) (233) ---------------- ----------------- Income before income taxes 6,191 5,262 Provision for income taxes 2,319 1,947 ---------------- ----------------- Net income $ 3,872 $ 3,315 ================ ================= Basic earnings per common share $ 0.24 $ 0.21 Diluted earnings per common share $ 0.23 $ 0.20 Basic shares outstanding 16,186,989 16,066,882 Diluted shares outstanding 16,623,908 16,259,528
See notes to unaudited condensed consolidated financial statements. -1- 4 CUNO Incorporated Consolidated Statements of Income (unaudited) (dollars in thousands, except share amounts)
Six Months Ended April 30, 2000 1999 -------------- -------------------- Net sales $ 116,644 $ 104,653 Less costs and expenses: Cost of products sold 66,845 60,880 Selling, general and administrative expenses 31,523 29,777 Research, development and engineering 6,500 5,807 -------------- --------------- 104,868 96,464 -------------- --------------- Operating income 11,776 8,189 Nonoperating income (expense): Interest expense (429) (655) Other income, net 116 233 -------------- --------------- (313) (422) -------------- --------------- Income before income taxes 11,463 7,767 Provision for income taxes 4,333 2,864 -------------- --------------- Net income $ 7,130 $ 4,903 ============== =============== Basic earnings per common share $ 0.44 $ 0.31 Diluted earnings per common share $ 0.43 $ 0.30 Basic shares outstanding 16,174,704 16,034,545 Diluted shares outstanding 16,572,664 16,232,053
See notes to unaudited condensed consolidated financial statements. -2- 5 CUNO Incorporated Consolidated Balance Sheets (unaudited) (in thousands, except share amounts)
April 30, October 31, 2000 1999 ------------------ ------------------ Assets Current assets Cash and cash equivalents $ 6,562 $ 6,186 Accounts receivable, less allowances for doubtful accounts of $1,719 and $1,706, respectively 46,778 50,777 Inventories 28,609 29,246 Deferred income taxes 7,935 8,606 Prepaid expenses and other current assets 2,628 2,434 ------------------ ------------------ Total current assets 92,512 97,249 Noncurrent assets Deferred income taxes 1,436 1,598 Intangible assets, net 24,671 22,567 Other noncurrent assets 2,383 2,576 Property, plant and equipment, net 60,881 60,352 ------------------ ------------------ Total assets $ 181,883 $ 184,342 ================== ================== Liabilities and Stockholders' Equity Current liabilities Bank loans $ 18,274 $ 19,189 Accounts payable 17,019 16,716 Accrued payroll and related taxes 8,526 11,790 Other accrued expenses 8,462 8,002 Accrued income taxes 3,497 3,750 Current portion of long-term debt 1,605 2,493 ------------------ ------------------ Total current liabilities 57,383 61,940 Noncurrent liabilities Long-term debt, less current portion 5,204 8,761 Deferred income taxes 4,499 4,750 Retirement benefits 4,634 4,317 ------------------ ------------------ Total noncurrent liabilities 14,337 17,828 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, 16,329,930 and 16,342,952 shares issued and outstanding (excluding 4,328 shares in treasury) 16 16 Additional paid-in-capital 40,074 39,779 Unearned compensation (2,301) (2,568) Accumulated other comprehensive (loss) income -- foreign currency translation adjustments (1,663) 440 Retained earnings 74,037 66,907 ------------------ ------------------ Total stockholders' equity 110,163 104,574 ------------------ ------------------ Total liabilities and stockholders' equity $ 181,883 $ 184,342 ================== ==================
See notes to unaudited condensed consolidated financial statements. -3- 6 CUNO Incorporated Statements of Consolidated Cash Flows (unaudited) (dollars in thousands)
Six Months Ended April 30, 2000 1999 ---------------- ---------------- Operating activities Net income $ 7,130 $ 4,903 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,328 3,995 Noncash compensation recognized under employee stock plans 483 652 Gain on sale of property, plant and equipment (18) (1) Pension costs in excess of funding 455 391 Deferred income taxes 445 160 Changes in operating assets and liabilities: Accounts receivable 2,264 1,280 Inventories (376) (797) Prepaid expenses and other current assets (563) (744) Accounts payable and accrued expenses (333) (784) Accrued income taxes (236) 466 ---------------- ---------------- Net cash provided by operating activities 13,579 9,521 Investing activities Proceeds from sales of property, plant and equipment 21 - Capital expenditures (5,271) (5,644) Contingent consideration for prior acquisition (2,885) (1,000) Proceeds from surrender of life insurance policies 569 - ---------------- ---------------- Net cash used for investing activities (7,566) (6,644) Financing activities Proceeds from long-term debt 3,800 5,300 Principal payments on long-term debt (8,127) (10,696) Net (repayments) borrowings under short-term bank loans (184) 1,285 Retirement of Common Stock (1,154) - Proceeds from stock options exercised 142 118 ---------------- ---------------- Net cash used for financing activities (5,523) (3,993) Effect of exchange rate changes on cash and cash equivalents (114) 61 ---------------- ---------------- Net change in cash and cash equivalents 376 (1,055) Cash and cash equivalents -- beginning of period 6,186 4,433 ---------------- ---------------- Cash and cash equivalents -- end of period $ 6,562 $ 3,378 ================ ================
See notes to unaudited condensed consolidated financial statements. -4- 7 CUNO INCORPORATED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2000 NOTE 1 - BUSINESS AND BASIS OF PRESENTATION CUNO Incorporated (the "Company" or "CUNO") designs, manufactures and markets a comprehensive line of filtration products for the separation, clarification and purification of liquids and gases. The Company's products, which include proprietary depth filters and semi-permeable membrane filters, are sold in the healthcare, fluid processing and potable water markets throughout the world. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended April 30, 2000 are not necessarily indicative of the results that may be expected for the full year ending October 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended October 31, 1999. NOTE 2 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the three months ended:
APRIL 30, APRIL 30, 2000 1999 ---- ---- NUMERATOR: Net income $3,872,000 $3,315,000 ========== ========== DENOMINATORS: Weighted average shares outstanding 16,321,476 16,216,983 Issued but unearned performance shares (68,165) (123,790) Issued but unearned restricted shares (66,322) (26,311) -------- -------- DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,186,989 16,066,882 ========== ========== Weighted average shares outstanding 16,321,476 16,216,983 Effect of dilutive employee stock options 302,432 42,545 ---------- ---------- DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,623,908 16,259,528 ========== ========== Basic earnings per share $ 0.24 $ 0.21 Diluted earnings per share $ 0.23 $ 0.20
-5- 8 The following table sets forth the computation of basic and diluted earnings per share for the six months ended:
APRIL 30, APRIL 30, 2000 1999 ---- ---- NUMERATOR: Net income $7,130,000 $4,903,000 ========== ========== DENOMINATORS: Weighted average shares outstanding 16,315,722 16,191,218 Issued but unearned performance shares (68,694) (128,458) Issued but unearned restricted shares (72,324) (28,215) -------- -------- DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,174,704 16,034,545 ========== ========== Weighted average shares outstanding 16,315,722 16,191,218 Effect of dilutive employee stock options 256,942 40,835 ---------- ---------- DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,572,664 16,232,053 ========== ========== Basic earnings per share $ 0.44 $ 0.31 Diluted earnings per share $ 0.43 $ 0.30
NOTE 3 - INVENTORIES Inventories consist of the following (amounts in thousands):
APRIL 30, OCTOBER 31, 2000 1999 --------- --------- Raw materials $12,393 $12,399 Work-in-process 3,080 3,197 Finished goods 13,136 13,650 ------- -------- $28,609 $29,246 ======= =======
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 primary method used for all other inventories is first-in, first-out (FIFO). An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. -6- 9 ]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, 2000 1999 2000 1999 ---- ---- ---- ---- Net income $3,872 $3,315 $7,130 $4,903 Other comprehensive loss - foreign currency translation adjustments (1,729) (264) (2,103) (2,481) ------- ------ ------- ------- Total comprehensive income $2,143 $3,051 $5,027 $2,422 ======= ====== ======= =======
NOTE 5 - SEGMENT DATA For management reporting and control, the Company is divided into five geographic operating segments as presented below. Each segment has general operating autonomy over its markets. Operating segment data includes the results of all subsidiaries, consistent with the management reporting of these operations. Financial information by geographic operating segments is summarized below (amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2000 1999 2000 1999 ---- ---- ---- ---- NET SALES: North America $38,181 $36,833 $75,766 $69,463 Europe 9,366 10,663 18,199 20,654 Japan 9,931 7,502 18,598 14,351 Asia/Pacific 6,491 6,245 12,653 11,910 Latin America 3,366 2,554 7,458 5,483 Intercompany sales (8,425) (9,770) (16,030) (17,208) --------- --------- --------- -------- Consolidated $58,910 $54,027 $116,644 $104,653 ========= ========= ========= ========
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2000 1999 2000 1999 ---- ---- ---- ---- OPERATING INCOME: North America $ 3,830 $3,279 $7,284 $4,772 Europe 156 655 202 771 Japan 999 377 1,489 367 Asia/Pacific 921 799 1,820 1,525 Latin America 461 385 981 754 -------- -------- ------- ------- Segment total 6,367 5,495 11,776 8,189 -------- -------- ------- ------- Interest expense (188) (297) (429) (655) Other income, net 12 64 116 233 -------- -------- ------ ------- Income before income taxes $6,191 $5,262 $11,463 $7,767 ======== ======== ======= =======
Interest expense and other income (expense) have not been allocated to segments. -7- 10 NOTE 6 - OTHER INCOME, NET Other income, net consisted of the following (amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2000 1999 2000 1999 ---- ---- ---- ---- Interest income $56 $38 $108 $83 Exchange (losses) gains (43) 18 (23) 231 Gains on sale of property, plant, and equipment 18 -- 18 1 Other income (expenses) (19) 8 13 (82) ---- --- --- ---- $12 $64 $116 $233 === === ==== ====
-8- 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED APRIL 30, 2000 VS. THREE MONTH PERIOD ENDED APRIL 30, 1999 NET SALES The Company had net sales of $58.9 million in the second quarter of fiscal 2000 representing a 9.0 percent increase over 1999's second quarter sales of $54.0 million. The majority of this improvement can be attributed to an increase in the unit volume of worldwide sales. Currency values had an immaterial effect on consolidated overseas net sales (quarter over quarter) when translated from local currency into US dollars.
THREE MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2000 1999 CHANGE CHANGE ---- ---- ------ ------ North America $32,249 $30,793 4.7% 4.7% Europe 7,871 7,969 (1.2%) 11.7% Japan 9,681 7,316 32.3% 19.3% Asia/Pacific 5,770 5,459 5.7% 8.0% Latin America 3,339 2,490 34.1% 29.5% ---- ------ ------- ------ Total sales $58,910 $54,027 9.0% 9.2% ======= ======= ======= ======
North American sales increased 4.7 percent in the second quarter as compared to the same quarter in 1999. The potable water market was responsible for all of this growth as both the fluid processing and Healthcare markets in North America had lower sales quarter over quarter. The Water Group (which addresses the potable water market) continued to record strong sales with its series of new filters designed for OEM customers who serve various channels of distribution with final sales to US consumers. Sales in the North American Healthcare and fluid processing segment were down primarily due to reduced volume with a major diagnostic customer in the Healthcare industry and delays in certain projects in the fluid processing segment. Sales in Europe were down 1.2 percent as compared to the same period in 1999, but up 11.7 percent when expressed in local currency. All three market segments in this region posted double-digit gains, on a local currency basis, over the comparable period last year. Sales in Japan were 32.3 percent higher as compared to the same quarter last year, and 19.3 percent higher when expressed in local currency, primarily reflecting recovery in the industrial sector of the economy. Asia/Pacific sales increased by 5.7 percent as compared to the same quarter last year and, excluding changes in currency values over the period, increased 8.0 percent. The majority of the increase in Asia/Pacific is due to expanding sales in the potable water segment and the slowly recovering economy in Southeast Asia. Second quarter Latin American sales increased 34.1 percent as compared to the same period in 1999, and 29.5 percent when expressed in local currency. All three market segments in this region posted strong gains, on a local currency basis, over the comparable period last year. -9- 12 The following table displays the Company's sales by market (amounts in thousands):
THREE MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2000 1999 CHANGE CHANGE ---- ---- ------ ------ Potable Water $24,839 $21,170 17.3% 17.9% Fluid Processing 19,189 18,012 6.5% 5.9% Healthcare 14,882 14,845 0.2% 1.0% ------ ------ ---- ---- Total sales $58,910 $54,027 9.0% 9.2% ======= ======= ==== ====
On a currency adjusted basis, all geographic operating segments experienced sales increases in the potable water segment. The majority of this increase was driven by strong sales in North America associated with OEM customers, direct marketing companies, and appliance manufacturers. Other than in North America as previously described above, on a currency adjusted basis, all other geographic operating segments experienced sales increases in the fluid processing market. These increases reflect the strengthening worldwide demand in the electronics and oil & gas markets. Sales in the North American Healthcare segment were down primarily due to reduced volume with a large diagnostics customer. On a currency adjusted basis, Healthcare sales outside North America increased 18.9 percent reflecting sound business conditions and a continued focus by management on competitively favorable niches. GROSS PROFIT The Company's gross profit increased $1.6 million to $25.5 million in the second quarter of 2000 from $23.9 million in the second quarter of 1999. Gross profit as a percentage of net sales (gross margin) decreased during that same period from 44.3 percent in 1999 to 43.2 percent in 2000. The primary factor that contributed to the lower gross margin in 2000 was lower sales volume in the North American Healthcare market which generally carries a higher margin than most products in the other markets. OPERATING EXPENSES Selling, general and administrative expenses increased $0.3 million or 1.8 percent in the second quarter of 2000 as compared to the second quarter of 1999. Research, development and engineering expenses increased $0.4 million or 13.9 percent in the second quarter as compared to the prior year reflecting the Company's continued focus on the development of new products and technologies. All other expense categories reflected minor increases consistent with normal incentive and inflation-based increases. OPERATING INCOME As a result of the above, operating income increased $0.9 million, or 15.9 percent, to $6.4 million or 10.8 percent of sales in the second quarter of 2000 as compared to $5.5 million or 10.2 percent of sales in the second quarter of 1999. -10- 13 NONOPERATING ACTIVITY Interest expense was down slightly ($0.1 million) quarter over quarter as the level of debt outstanding decreased. See "Financial Position and Liquidity" below. As disclosed in Note 6 to the condensed consolidated financial statements, other income (expenses) was relatively flat quarter over quarter as no material activity occurred in either of the two quarters. INCOME TAXES The Company's effective income tax rate for the second quarter of 2000 was 37.5% compared to 37.0% in the second quarter of 1999. The increase primarily reflects a change in the mix of income attributed to the various countries in which the Company does business and their associated tax rates. SIX MONTH PERIOD ENDED APRIL 30, 2000 VS. SIX MONTH PERIOD ENDED APRIL 30, 1999 NET SALES The Company had net sales of $116.6 million in the first six months of fiscal 2000 representing an 11.5 percent increase over 1999's comparable sales of $104.7 million. The majority of this improvement can be attributed to an increase in the unit volume of worldwide sales. Had currency values been unchanged from the first six months of fiscal 1999, net sales for the first six months of 2000 would have been $2.1 million higher, or 13.3 percent greater overall than the comparable period in fiscal 1999.
SIX MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2000 1999 CHANGE CHANGE ---- ---- ------ ------ North America $64,376 $58,969 9.2% 9.2% Europe 15,322 15,699 (2.4%) 11.0% Japan 18,216 13,987 30.2% 16.9% Asia/Pacific 11,500 10,645 8.0% 8.6% Latin America 7,230 5,353 35.1% 57.8% --------- -------- ----- ----- Total sales $116,644 $104,653 11.5% 13.3% ======== ======== ===== =====
North American sales increased 9.2 percent in the first six months of 2000 as compared to the same period in 1999. The potable water market was responsible for all of this growth as sales were relatively flat in both the fluid processing and healthcare markets in North America. The Water Group (within the potable water market) continued to record strong sales with its series of new filters designed for various OEM customers who serve various channels of distribution with final sales to US consumers. Sales in Europe were down 2.4 percent as compared to the same period in 1999, but up 11.0 percent when expressed in local currency. All three market segments in this region posted gains, on a local currency basis, over the comparable period last year. Sales in Japan were 30.2 percent higher as compared to the same period last year, and 16.9 percent higher when expressed in local currency, reflecting double-digit sales growth in all three markets. Excluding changes in currency values over the period, Asia/Pacific sales increased by 8.6 percent as compared to the same period last year. The majority of the increase in Asia/Pacific is due to the slowly recovering economy in Southeast Asia and strong gains in both the fluid processing and potable water markets. Latin American sales increased 35.1 percent as compared to the same period in 1999, and 57.8 percent when expressed in local currency. This increase was driven in part by a large contract completed and shipped in the first quarter of 2000. In -11- 14 addition, all three market segments in this region posted gains, on a local currency basis, over the comparable period last year. The following table displays the Company's sales by market (amounts in thousands):
SIX MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2000 1999 CHANGE CHANGE ---- ---- ------ ------ Potable Water $48,269 $41,641 15.9% 17.1% Fluid Processing 38,694 35,067 10.3% 12.3% Healthcare 29,681 27,945 6.2% 9.1% -------- --------- ------ ----- Total sales $116,644 $104,653 11.5% 13.3% ======== ======== ===== =====
Although, on a currency adjusted basis, all geographic operating segments experienced sales increases in the potable water segment, the increase was primarily driven by strong sales in North America associated to OEM customers, direct marketing companies, and appliance manufacturers. Similarly, on a currency adjusted basis, all geographic operating segments experienced sales increases in the fluid processing market. These increases primarily reflect the strengthening worldwide demand in the electronics and oil & gas markets. On a currency adjusted basis, Healthcare sales outside North America increased 15.5 percent reflecting sound business conditions and a continued focus by management on competitively favorable niches. GROSS PROFIT The Company's gross profit increased $6.0 million to $49.8 million in the first six months of 2000 from $43.8 million in the first six months of 1999. Gross profit as a percentage of net sales (gross margin) increased during that same period from 41.8 percent in 1999 to 42.7 percent in 2000. Several factors contributed to the lower gross margin in 1999, chief among these were start-up costs associated with a new product in the Water Group, higher manufacturing costs in the US membrane operation associated with the introduction of a new manufacturing process, and pricing pressure on certain products sold in Japan (all in the first quarter of 1999). Comparatively, these 1999 reductions were offset by lower sales volume in the North American Healthcare market in the second quarter of 2000 which generally carry a higher margin than most products in the other markets. OPERATING EXPENSES Selling, general and administrative expenses increased $1.7 million or 5.9 percent in the first six months of 2000 as compared to the first six months of 1999. Research, development and engineering expenses increased $0.7 million or 11.9 percent in the first six months of 2000 as compared to the comparable period in the prior year reflecting the Company's continued focus on the development of new products and technologies. Selling expenses increased $1.1 million or 6.4 percent due primarily to sales force additions and normal incentive and inflation-based wage increases. All other expense categories reflected minor increases consistent with normal incentive and inflation-based increases. OPERATING INCOME As a result of the above, operating income increased $3.6 million, or 43.8 percent, to $11.8 million or 10.1 percent of sales in the first six months of 2000 as compared to $8.2 million or 7.8 percent of sales in the first six months of 1999. -12- 15 NONOPERATING ACTIVITY Interest expense was down slightly ($0.2 million) period over period as the level of debt outstanding decreased. See "Financial Position and Liquidity" below. As disclosed in Note 6 to the condensed consolidated financial statements, other income (expenses) was relatively flat quarter over quarter as no material activity occurred in either of the two quarters. INCOME TAXES The Company's effective income tax rate for the first six months of 2000 was 37.8% compared to 36.9% in the first six months of 1999. The increase primarily reflects a change in the mix of income attributed to the various countries in which the Company does business and their associated tax rates. FINANCIAL POSITION AND LIQUIDITY The Company assesses its liquidity in terms of its ability to generate cash to fund operating and investing activities. Of particular importance to the management of liquidity are cash flows generated by operating activities, capital expenditure levels, and adequate bank financing alternatives. The Company manages its worldwide cash requirements considering the cost effectiveness of the funds available from the many subsidiaries through which it conducts its business. Management believes that its existing cash position and available sources of liquidity are sufficient to meet current and anticipated requirements for the foreseeable future. Set forth below is selected key cash flow data (in thousands of dollars):
Source/(Use) of Cash SIX MONTHS ENDED APRIL 30, 2000 1999 ---- ---- OPERATING ACTIVITIES: Net cash provided by net income plus depreciation, amortization and non-cash compensation $ 11,941 $ 9,550 Accounts receivable 2,264 1,280 Net cash provided by operating activities 13,579 9,521 INVESTING ACTIVITIES: Capital expenditures (5,271) (5,644) Contingent consideration for prior acquisition (2,885) (1,000) Proceeds from surrender value of life insurance policies 569 -- FINANCING ACTIVITIES: Net change in total debt (4,511) (4,111) Retirement of Common Stock (1,154) --
The net cash provided by net income plus depreciation, amortization and non-cash compensation is an important measurement of cash generated from the earnings process before significant non-cash charges. Net income plus depreciation, amortization and non-cash compensation of $11.9 million increased 25 percent in the first six months of 2000 as compared to the same period in 1999 reflecting the Company's increased sales volume and improved operating profit margin as discussed above. The net -13- 16 cash source of $2.3 million generated from accounts receivable reflects the Company's strong management of worldwide receivables, and compares favorably to the general increase in sales levels. Capital expenditures amounted to $5.3 million in the first six months of 2000 and were primarily comprised of building additions and purchases of machinery and equipment for the expansion of manufacturing capabilities. In the second quarter of fiscal 2000, the Company made a contingent consideration payment of $2.9 million related to the 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 2000, CUNO elected to surrender these policies for their cash surrender value upon settlement. Due largely to the Company's continued strong cash flows from operating activities ($13.6 million) in the first six months of 2000 and despite capital expenditures and contingent acquisition payments totaling $8.2 million, the Company was able to reduce its long-term debt and bank loans by $4.5 million. During the first quarter of 2000, a significant portion of the Company's outstanding performance shares vested. In connection therewith, the Company utilized $1.2 million in cash to pay applicable employee withholding taxes on the common shares earned in return for shares of the Company's Common Stock then retired. OTHER MATTERS COMPLIANCE WITH YEAR 2000 In prior reports, the Company discussed the nature and progress of its plans to become Year 2000 ready. In 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. EUROPEAN ECONOMIC AND MONETARY UNION On January 1, 1999, the Euro became the official currency of the European Economic and Monetary Union (the "Union"). Companies in the Union may begin conducting their business operations in the new currency, however, the previous local currencies in those countries may also continue to be used as legal tender through January 1, 2002. The Company has implemented its program to accommodate the new currency. Software used by the Company at its European facilities is capable of handling multi-currencies, including the Euro. As such, the Company is able to accept customer or supplier orders in either the new Euro or the previous local currency. The Company continues to address the Euro's impact on its operations (e.g. banking, payroll processing, pricing, currency hedging requirements, etc.) The estimated costs of any remaining required system modifications and other operational changes are not expected to be material to the Company. -14- 17 MARKET RISK DISCLOSURES There have been no material changes in the information reported in the Company's Form 10-K for the year ended October 31, 1999 under the "Market Risk Disclosures" section of Management's Discussion and Analysis of Financial Condition and Results of Operations. FORWARD LOOKING INFORMATION The Company wants to provide stockholders and investors with more meaningful and useful information and therefore, this quarterly report describes the Company's belief regarding business conditions and the outlook for the Company, which reflects currently available information. These forward looking statements are subject to risks and uncertainties which, as described in Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended October 31, 1999, could cause the Company's actual results or performance to differ materially from those expressed herein. The Company assumes no obligation to update the information contained in this quarterly report. -15- 18 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Corporation held its annual meeting of Stockholders on March 23, 2000. (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 13,826,896 137,141 2,357,209 Dr. Charles L. Cooney 13,826,896 137,141 2,357,209 Mr. John M. Galvin 13,785,217 178,820 2,357,209
2. A proposal for the appointment of Ernst & Young LLP as independent auditors was approved by a count of 13,948,463 votes for, 7,870 votes against, 7,704 votes abstaining, and 2,357,209 shares not voted. Item 6. Exhibits and Reports on Form 8-K (a) Documents filed as part of this report. Exhibit 27. Financial Data Schedule (submitted electronically herewith) (b) Reports on Form 8-K No reports were filed on Form 8-K during the quarter for which this 10-Q is filed. -16- 19 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 31, 2000 ------------------------------ By /s/ Frederick C. Flynn, Jr. -------------------------------- Frederick C. Flynn, Jr. Senior Vice President - Finance and Administration, Chief Financial Officer, Treasurer and Assistant Secretary By /s/ Timothy B. Carney -------------------------------- Timothy B. Carney Vice President, Controller, and Assistant Secretary -17- EX-27 2 0002.txt EXHIBIT 27
5 0001019779 CUNO, INC 1,000 US DOLLARS 3-MOS OCT-31-2000 FEB-01-2000 APR-30-2000 1 6,562 0 48,497 1,719 28,609 92,512 120,514 59,633 181,883 57,383 5,204 0 0 16 110,147 181,883 58,910 58,910 33,436 33,436 19,107 71 188 6,191 2,319 3,872 0 0 0 3,872 .24 .23
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