-----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, Ot6sWydoItQ54eekBCVPbW9XbSTss4E+WByuuTv6X6wFv4mmzCvZKqAnKtJLkGVs qZGAN5EUaVLkd/6Juswfzg== 0000914039-01-500085.txt : 20010601 0000914039-01-500085.hdr.sgml : 20010601 ACCESSION NUMBER: 0000914039-01-500085 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010430 FILED AS OF DATE: 20010531 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUNO INC CENTRAL INDEX KEY: 0001019779 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] 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: 1651668 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 y49780e10-q.txt 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, 2001 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 -- 16,384,508 shares as of April 30, 2001 2 CUNO INCORPORATED
Page ---- Part I. Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Statements of Income - Three months ended April 30, 2001 and 2000 1 Consolidated Statements of Income - Six months ended April 30, 2001 and 2000 2 Consolidated Balance Sheets - April 30, 2001 and October 31, 2000 3 Consolidated Statements of Cash Flows - Six months ended April 30, 2001 and 2000 4 Notes to Unaudited Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 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, 2001 2000 ------------ ------------ Net sales $ 60,186 $ 58,910 Less costs and expenses: Cost of products sold 33,519 33,436 Selling, general and administrative expenses 16,386 15,742 Research, development and engineering 3,339 3,365 ------------ ------------ 53,244 52,543 ------------ ------------ Operating income 6,942 6,367 Nonoperating income (expense): Interest expense (121) (188) Interest and other income, net 266 12 ------------ ------------ 145 (176) ------------ ------------ Income before income taxes 7,087 6,191 Provision for income taxes 2,565 2,319 ------------ ------------ Net income $ 4,522 $ 3,872 ============ ============ Basic earnings per common share $ 0.28 $ 0.24 Diluted earnings per common share $ 0.27 $ 0.23 Basic shares outstanding 16,320,750 16,186,989 Diluted shares outstanding 16,688,637 16,623,908
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, 2001 2000 ------------ ------------ Net sales $ 118,772 $ 116,644 Less costs and expenses: Cost of products sold 67,043 66,845 Selling, general and administrative expenses 32,150 31,523 Research, development and engineering 6,602 6,500 ------------ ------------ 105,795 104,868 ------------ ------------ Operating income 12,977 11,776 Nonoperating income (expense): Interest expense (269) (429) Interest and other income, net 377 116 ------------ ------------ 108 (313) ------------ ------------ Income before income taxes 13,085 11,463 Provision for income taxes 4,735 4,333 ------------ ------------ Net income $ 8,350 $ 7,130 ============ ============ Basic earnings per common share $ 0.51 $ 0.44 Diluted earnings per common share $ 0.50 $ 0.43 Basic shares outstanding 16,297,418 16,174,704 Diluted shares outstanding 16,670,836 16,572,664
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, 2001 2000 --------- --------- ASSETS Current assets Cash and cash equivalents $ 15,564 $ 13,814 Accounts receivable, less allowances for doubtful accounts of $1,347 and $1,395, respectively 50,633 52,239 Inventories 25,660 24,087 Deferred income taxes 6,664 6,414 Prepaid expenses and other current assets 3,227 2,101 --------- --------- Total current assets 101,748 98,655 Noncurrent assets Deferred income taxes 1,341 1,168 Intangible assets, net 27,747 23,971 Other noncurrent assets 1,665 1,918 Property, plant and equipment, net 63,564 63,187 --------- --------- Total assets $ 196,065 $ 188,899 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank loans $ 13,220 $ 14,233 Accounts payable 18,999 17,978 Accrued payroll and related taxes 9,185 11,851 Other accrued expenses 9,039 7,675 Accrued income taxes 3,233 4,251 Current portion of long-term debt 721 746 --------- --------- Total current liabilities 54,397 56,734 Noncurrent liabilities Long-term debt, less current portion 2,951 3,422 Deferred income taxes 5,107 4,786 Retirement benefits 4,173 4,439 --------- --------- Total noncurrent liabilities 12,231 12,647 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, 16,384,508 and 16,279,198 shares issued and outstanding (excluding 747 shares in treasury) 16 16 Additional paid-in-capital 42,280 39,814 Unearned compensation (1,317) (1,120) Accumulated other comprehensive income (loss) -- Foreign currency translation adjustments (4,335) (3,546) Change in fair value of derivative financial instruments 89 -- --------- --------- (4,246) (3,546) Retained earnings 92,704 84,354 --------- --------- Total stockholders' equity 129,437 119,518 --------- --------- Total liabilities and stockholders' equity $ 196,065 $ 188,899 ========= =========
See notes to unaudited condensed consolidated financial statements. -3- 6 CUNO INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
SIX MONTHS ENDED APRIL 30, 2001 2000 -------- -------- OPERATING ACTIVITIES Net income $ 8,350 $ 7,130 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,489 4,328 Noncash compensation recognized under employee stock plans 463 483 Gains on sales of property, plant and equipment (40) (18) Pension costs in excess of funding (106) 455 Deferred income taxes (173) 445 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 995 2,264 Inventories (2,645) (376) Prepaid expenses and other current assets (903) (563) Accounts payable and accrued expenses 1,985 (333) Accrued income taxes (974) (236) -------- -------- Net cash provided by operating activities 11,441 13,579 INVESTING ACTIVITIES Proceeds from sales of property, plant and equipment 54 21 Proceeds from surrender of life insurance policies -- 569 Acquisitions of companies, net of cash acquired (4,489) (2,885) Capital expenditures (4,964) (5,271) -------- -------- Net cash used for investing activities (9,399) (7,566) FINANCING ACTIVITIES Proceeds from long term debt -- 3,800 Principal payments on long-term debt (845) (8,127) Net borrowings (repayments) under short-term bank loans 363 (184) Retirement of Common Stock -- (1,154) Proceeds from stock options exercised 401 142 -------- -------- Net cash provided by (used for) financing activities (81) (5,523) Effect of exchange rate changes on cash and cash equivalents (211) (114) -------- -------- Net change in cash and cash equivalents 1,750 376 Cash and cash equivalents -- beginning of period 13,814 6,186 -------- -------- Cash and cash equivalents -- end of period $ 15,564 $ 6,562 ======== ========
See notes to unaudited condensed consolidated financial statements. -4- 7 CUNO INCORPORATED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 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 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 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 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 the Company's Form 10-K for the year ended October 31, 2000. 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, 2001 2000 ---- ---- NUMERATOR: Net income $ 4,522,000 $ 3,872,000 ============ ============ DENOMINATORS: Weighted average shares outstanding 16,369,726 16,321,476 Issued but unearned performance shares (914) (68,165) Issued but unearned restricted shares (48,062) (66,322) ------------ ------------ DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,320,750 16,186,989 ============ ============ Weighted average shares outstanding 16,369,726 16,321,476 Effect of dilutive employee stock options 318,911 302,432 ------------ ------------ DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,688,637 16,623,908 ============ ============ Basic earnings per share $ 0.28 $ 0.24 Diluted earnings per share $ 0.27 $ 0.23
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, 2001 2000 ---- ---- NUMERATOR: Net income $ 8,350,000 $ 7,130,000 ============ ============ DENOMINATORS: Weighted average shares outstanding 16,348,146 16,315,722 Issued but unearned performance shares (1,067) (68,694) Issued but unearned restricted shares (49,661) (72,324) ------------ ------------ DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,297,418 16,174,704 ============ ============ Weighted average shares outstanding 16,348,146 16,315,722 Effect of dilutive employee stock options 322,690 256,942 ------------ ------------ DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,670,836 16,572,664 ============ ============ Basic earnings per share $ 0.51 $ 0.44 Diluted earnings per share $ 0.50 $ 0.43
NOTE 3 - INVENTORIES Inventories consist of the following (amounts in thousands):
APRIL 30, OCTOBER 31, 2001 2000 ------- ------- Raw materials $10,552 $10,814 Work-in-process 3,732 2,435 Finished goods 11,376 10,838 ------- ------- $25,660 $24,087 ======= =======
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, 2001 2000 2001 2000 ---- ---- ---- ---- Net income $ 4,522 $ 3,872 $ 8,350 $ 7,130 Other comprehensive income (loss): Change in fair value of derivative Financial instruments, net of deferred Income taxes of $64 89 -- 89 -- Foreign currency translation adjustments (1,894) (1,729) (789) (2,103) ------- ------- ------- ------- Total comprehensive income $ 2,717 $ 2,143 $ 7,650 $ 5,027 ======= ======= ======= =======
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, 2001 2000 2001 2000 ---- ---- ---- ---- NET SALES: Europe $11,508 $9,366 $20,373 $18,199 Japan 9,087 9,931 18,531 18,598 Asia/Pacific 6,462 6,491 12,699 12,653 Latin America 3,045 3,366 6,208 7,458 ------- ------- -------- -------- Subtotal - Foreign Sales 30,102 29,154 57,811 56,908 North America 38,867 38,181 76,989 75,766 Intercompany sales (8,783) (8,425) (16,028) (16,030) ------- ------- -------- -------- $60,186 $58,910 $118,772 $116,644 ======= ======= ======== ========
7 10
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2001 2000 2001 2000 ---- ---- ---- ---- OPERATING INCOME: North America $ 4,061 $ 3,830 $ 7,467 $ 7,284 Europe 622 156 923 202 Japan 842 999 1,723 1,489 Asia/Pacific 948 921 1,881 1,820 Latin America 469 461 983 981 -------- -------- -------- -------- Segment Total 6,942 6,367 12,977 11,776 -------- -------- -------- -------- Interest Expense (121) (188) (269) (429) Other, net 266 12 377 116 -------- -------- -------- -------- Income before income taxes $ 7,087 $ 6,191 $ 13,085 $ 11,463 ======== ======== ======== ========
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, 2001 2000 2001 2000 ----- ----- ----- ----- Interest income $ 179 $ 56 $ 387 $ 108 Exchange gains (losses) 109 (43) 34 (23) Gains on sales of property, plant, and equipment 1 18 40 18 Other, net (23) (19) (84) 13 ----- ----- ----- ----- $ 266 $ 12 $ 377 $ 116 ===== ===== ===== =====
NOTE 7 - NEWLY ISSUED ACCOUNTING STANDARD As of November 1, 2000, the Company adopted Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133). The adoption of Statement 133 did not effect the Company's financial statements since the accounting treatment for the financial instruments held at the time did not change. As a result of adoption of Statement 133, the Company recognizes all derivative financial instruments, such as interest rate swap contracts and foreign exchange contracts, in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders' equity as a component of comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that 8 11 relate to the hedged risk(s). Changes in fair values of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income net of deferred taxes. Changes in fair values of derivatives not qualifying as hedges are reported in income. 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 the Company's counsel and considering any applicable insurance or indemnifications, any liability which may ultimately be incurred is not expected to materially affect the consolidated financial position, cash flows or results of operations of the Company. 9 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED APRIL 30, 2001 VS. THREE MONTH PERIOD ENDED APRIL 30, 2000 NET SALES The Company had net sales of $60.2 million in the second quarter of fiscal 2001 representing a 2.2 percent increase over 2000's second quarter sales of $58.9 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 2000, net sales in the second quarter of 2001 would have been $3.0 million higher, or 7.3 percent greater overall. The following table displays the Company's sales by geographic segment (amounts in thousands):
THREE MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2001 2000 CHANGE CHANGE ------- ------- ------ ------ North America $32,951 $32,249 2.2% 2.2% Europe 9,515 7,871 20.9% 28.5% Japan 8,987 9,681 (7.2%) 4.6% Asia/Pacific 5,784 5,770 0.2% 12.1% Latin America 2,949 3,339 (11.7%) 5.4% ------- ------- ------ ---- Total sales $60,186 $58,910 2.2% 7.3% ======= ======= ====== ====
North American sales increased 2.2 percent in the second quarter of 2001 as compared to the same quarter in 2000. The Healthcare market was responsible for the majority of the growth in North America during the three months ended April 30, 2001. Sales in Europe increased 20.9 percent as compared to the same period in 2000, and were up 28.5 percent when expressed in local currency. All three markets displayed strong double-digit gains in sales. Sales in Japan were down 7.2 percent as compared to the same quarter last year, but were 4.6 percent higher when expressed in local currency. The increase in sales was primarily concentrated in the Healthcare market. Asia/Pacific sales were flat quarter over quarter, however sales increased 12.1 percent excluding changes in currency values. The majority of the increase in Asia/Pacific is due to sales growth throughout Australia and strong healthcare sales throughout Asia/Pacific. Second quarter Latin American sales decreased 11.7 percent as compared to the same period in 2000, but were up 5.4 percent when expressed in local currency. The increase in local currency sales was primarily concentrated in the Potable Water and Healthcare market. 10 13 The following table displays the Company's sales by market (amounts in thousands):
THREE MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2001 2000 CHANGE CHANGE ---- ---- ------ ------ Potable Water $25,909 $24,839 4.3% 6.7% Fluid Processing 18,148 19,189 (5.4%) 1.1% Healthcare 16,129 14,882 8.4% 16.4% ------- ------- ------ ---- Total sales $60,186 $58,910 2.2% 7.3% ======= ======= ====== ====
On a currency adjusted basis, all geographic operating segments achieved sales increases in the potable water market. This strength was primarily driven by increased overseas sales (up 21.8 percent) tempered by moderate sales growth in North America (up 3.7 percent) associated with OEM customers, direct marketing companies, and appliance manufacturers. Fluid processing sales were most affected by the slowing economies in the US and overseas. Healthcare sales continue to benefit from a continued focus by management on competitively favorable niches. GROSS PROFIT The Company's gross profit increased $1.2 million to $26.7 million in the second quarter of 2001 from $25.5 million in the second quarter of 2000. Gross profit as a percentage of net sales (gross margin) increased during that same period from 43.2 percent in 2000 to 44.3 percent in 2001. The primary factor that contributed to the improved gross margin in 2001 was increased healthcare sales which generally carry higher margins. OPERATING EXPENSES Selling, general and administrative expenses increased 4.1 percent reflecting the Company's focus on restraining discretionary spending. Expense categories within SG&A reflected nominal increases or decreases consistent with the Company's cost-management strategy. Research, development and engineering expenses were generally flat -- 5.7 percent of sales in the second quarter of fiscal 2000 compared to 5.5 percent of sales in the second quarter of fiscal 2001. This level of research and development reflects the Company's continued focus on the development of new products and technologies. OPERATING INCOME As a result of the above, operating income increased $0.6 million, or 9.0 percent, to $6.9 million or 11.5 percent of sales in the second quarter of fiscal 2001 compared to $6.4 million or 10.8 percent of sales in the second quarter of 2000. NON-OPERATING ACTIVITY Interest income increased by $0.1 million in the second quarter of 2001 compared to the second quarter of 2000 as the Company maintained higher levels of invested cash. See "Financial Position and Liquidity" below. Exchange gains (losses) improved by $0.2 million in 2001 over 2000 as well. As disclosed in Note 6 to the condensed consolidated financial statements, other income (expenses) was relatively minor in both periods as no material activity occurred in either one. 11 14 ]INCOME TAXES The Company's effective income tax rate for the second quarter of 2001 was 36.2 percent compared to 37.5 percent in the second quarter of 2000. The decrease primarily reflects the recognition of incremental tax credits, certain tax planning initiatives, and a change in the mix of income attributed to the various countries in which the Company does business. SIX MONTH PERIOD ENDED APRIL 30, 2001 VS. SIX MONTH PERIOD ENDED APRIL 30, 2000 - ------------------------------------------------------------------------------- NET SALES The Company had net sales of $118.8 million in the first six months of fiscal 2001 representing a 1.8 percent increase over 2000's comparable sales of $116.6 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 2000, net sales in the first six months of 2001 would have been $5.6 million higher, or 6.6 percent greater overall. The following table displays the Company's sales by geographic segment (amounts in thousands):
SIX MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2001 2000 CHANGE CHANGE ---- ---- ------ ------ North America $ 65,866 $ 64,376 2.3% 2.3% Europe 17,140 15,322 11.9% 22.3% Japan 18,325 18,216 0.6% 10.9% Asia/Pacific 11,443 11,500 (0.5%) 11.5% Latin America 5,998 7,230 (17.0%) (7.1%) -------- -------- ------ ----- Total sales $118,772 $116,644 1.8% 6.6% ======== ======== ====== =====
North American sales increased 2.3 percent in the first six months of 2001 as compared to the same period in 2000. The potable water market was responsible for nearly all of this growth. Sales in Europe increased 11.9 percent as compared to the same period in 2000, but were up 22.3 percent when expressed in local currency. All three markets displayed strong double-digit gains in sales. Sales in Japan were only 0.6 percent higher as compared to the same period last year, but 10.9 percent higher when expressed in local currency. Local currency sales increased in all three markets. Asia/Pacific sales decreased by 0.5 percent as compared to the same period last year but, excluding changes in currency values over the period, increased 11.5 percent. The majority of the increase in Asia/Pacific is due to expanding sales in both the potable water and healthcare segments throughout the Asian and Pacific markets. Sales in Latin America decreased 17.0 percent (7.1 percent in local currency). This decrease is primarily attributable to a large one-time contract completed and shipped in the first quarter of fiscal 2000. 12 15 The following table displays the Company's sales by market (amounts in thousands):
SIX MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2001 2000 CHANGE CHANGE ---- ---- ------ ------ Potable Water $ 51,107 $ 48,269 5.9% 8.0% Fluid Processing 36,955 38,694 (4.5%) 1.8% Healthcare 30,710 29,681 3.5% 10.8% -------- -------- ----- ----- Total sales $118,772 $116,644 1.8% 6.6% ======== ======== ===== =====
On a currency adjusted basis, all geographic operating segments achieved sales increases in the potable water market. This strength was primarily driven by increased overseas sales (up 18.9 percent) as well as increased sales in North America (up 5.9 percent) associated with OEM customers, direct marketing companies, and appliance manufacturers. Fluid processing sales were adversely affected by the slowing economies in the US and overseas as well as a large one-time contract completed and shipped in the first quarter of fiscal 2000. Healthcare sales continue to benefit from a continued focus by management on competitively favorable niches. GROSS PROFIT The Company's gross profit increased $1.9 million to $51.7 million in the first six months of 2001 from $49.8 million in the first six months of 2000. Gross profit as a percentage of net sales (gross margin) increased during that same period from 42.7 percent in 2000 to 43.6 percent in 2001. The primary factors that contributed to the improved gross margin in 2001 were a large one-time contract completed and shipped in the first quarter of 2000 which carried a low margin and increased healthcare sales in 2001 which generally carry a higher margin. OPERATING EXPENSES Selling, general and administrative expenses increased 2.0 percent in the first six months of 2001 compared to the prior period reflecting the Company's continued focus on restraining discretionary spending. Expense categories within SG&A reflected nominal increases or decreases consistent with the Company's cost-management strategy. Research, development and engineering expenses were 5.6 percent of sales in both the first six months of 2001 and 2000. This level of research and development reflects the Company's continued focus on the development of new products and technologies. OPERATING INCOME As a result of the above, operating income increased $1.2 million, or 10.2 percent, to $13.0 million or 10.9 percent of sales in the first six months of fiscal 2001 compared to $11.8 million or 10.1 percent of sales in the first six months of 2000. NON-OPERATING ACTIVITY Interest income increased by $0.3 million in the first six months of 2001 compared to the first six months of 2000 as the Company maintained higher levels of invested cash. See "Financial Position and Liquidity" below. As disclosed in Note 6 to the condensed consolidated financial statements, other 13 16 income (expenses) was relatively minor in both periods as no material activity occurred in either of the two periods. INCOME TAXES The Company's effective income tax rate for the first six months of 2001 was 36.2 percent compared to 37.8 percent in the first six months of 2000. The decrease primarily reflects the recognition of incremental tax credits, certain tax planning initiatives, and a change in the mix of income attributed to the various countries in which the Company does business. FINANCIAL POSITION AND LIQUIDITY The Company assesses its liquidity in terms of its ability to generate cash to fund operating and investing activities. Of particular importance 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, 2001 2000 ---- ---- OPERATING ACTIVITIES: Net cash provided by net income plus depreciation, Amortization and non-cash compensation $ 13,302 $ 11,941 Accounts receivable 995 2,264 Inventories (2,645) (376) Accounts payable and accrued expenses 1,985 (333) Net cash provided by operating activities 11,441 13,579 INVESTING ACTIVITIES: Proceeds from surrender of life insurance policies -- 569 Acquisitions of companies, net of cash acquired (4,489) (2,885) FINANCING ACTIVITIES: Net change in total debt (482) (4,511) 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. Net income plus depreciation, amortization and non-cash compensation of $13.3 million increased 11.4 percent in the first six months of 2001 as compared to the same period in 2000 reflecting the Company's increased sales volume, increased gross profit, and improved operating profit margin as discussed above. Accounts receivable continue to provide positive cash from operating activities despite the Company's rising sales volume, (albeit at a lower level in the first six months of 2001 vs. the comparable period in fiscal 2000). This results from a continued focus by the Company on improving the efficiency of international receivable 14 17 management. The increase in inventory over the six months ended April 30, 2001 primarily relates to the timing of certain sales shipments. This use of cash was offset by a corresponding source of cash in accounts payable and accrued expenses. In the second quarter of fiscal 2001, CUNO closed on two acquisitions - a product line in Australia and a distributor in Europe for a total of $4.5 million. These acquisitions do not have a material effect on the Company's historical financial statements or pro forma operating results. 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. The Company paid all outstanding borrowings under its revolving credit facility in fiscal 2000. No amounts have been outstanding under the revolving credit facility in fiscal 2001. 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 - ------------- MARKET RISK DISCLOSURES The Company's earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. The Company utilizes forward foreign exchange contracts to hedge certain firm sales commitments and anticipated, but not yet committed, intercompany sales (primarily parent company export sales to subsidiaries at pre-established U.S. dollar prices) and other specific and identified exposures. The terms of the forward foreign exchange contracts are generally matched to the underlying transaction being hedged, and are typically under 90 days. 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. The Company generally does not hedge overseas sales denominated in foreign currencies or translation exposures. The Company does not enter into financial instruments for speculation or trading purposes. There have been no material changes in the information reported in the Company's Form 10-K for the year ended October 31, 2000 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, 2000, 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 14, 2001. (b) The following individuals were nominated and elected to serve a term of three years as Directors: Mr. Mark G. Kachur Mr. David L. Swift (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. Mark G. Kachur 13,340,743 1,015,269 1,976,308 Mr. David L. Swift 14,348,950 7,062 1,976,308
2. A proposal for the appointment of Ernst & Young LLP as independent auditors was approved by a count of 14,392,501 votes for, 5,716 votes against, 22,547 votes abstaining, and 1,911,556 shares not voted. Item 6. Exhibits and 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 30, 2001 -------------------------- By /s/ Frederick C. Flynn, Jr. --------------------------- Frederick C. Flynn, Jr. Senior Vice President - Finance and Administration, Chief Financial Officer, and Assistant Secretary By /s/ William J. DeFrances William J. DeFrances Treasurer, Assistant Controller, and Assistant Secretary 17 -----END PRIVACY-ENHANCED MESSAGE-----